-
File No. 70-9625
(Mountaineer Gas Acquisition)
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 1
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
1310 Fairmont Avenue
Fairmont, West Virginia 26554
Anthony Wilson, Esq.
Senior Attorney
Allegheny Energy Service Company
10435 Downsville Pike
Hagerstown, MD 21740
<PAGE>
1. Applicants hereby amends the application replacing
Items 1 through 7 with the following:
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. Allegheny and Monongahela Power . . . . . . 4
C. Post Transaction Management and Operation . . . . . 4
D. Financing . . . . . . . . . . . . . . . . . . . . . 6
Item 2. Fees, Commissions and Expenses . . . . . . . . .. . 7
Item 3. Applicable Statutory Provisions . . . . . . . . . 7
A. Section 3(a)(2). . . . . . . . . . . . . . . . . .. 7
B. Section 6, 7 & 12(b) . . . . . . . . . . . . . . 8
C. Sections 9 & 10 . . . . . . . . . . . . . . . . .. 9
D. Section 10(c)(2). . . . . . . . . . . . . . . . . 9
E. Section 11(b) . . . . . . . . . . . . . . . . . 11
F. Section 13(b) . . . . . . . . . . . . . . . . . 16
G. Rule 54 Compliance . . . . . . . . . . . . . . . 16
Item 4. Regulatory Approvals . . . . . . . . . . . . . . . 17
Item 5. Procedure . . . . . . . . . . . . . . . . . . . . 17
Item 6. Exhibits and Financial Statements . . . . . . . . 18
A. Exhibits . . . . . . . . . . . . . . . . . . . . 18
B. Financial Statements . . . . . . . . . . . . . .. 18
Item 7. Information as to Environmental Effects . . . . .. 19
<PAGE>
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 indirectly acquire 100% of the outstanding securities of
Mountaineer Gas Company ("Mountaineer Gas") headquartered in
Charleston, West Virginia ("Transaction"). Upon completion
of the Transaction, Monongahela Power will own 100% of the
outstanding securities of Mountaineer Gas, a public utility
company. As a holder of more than a 10% interest in a
public utility company, Monongahela Power will be defined as
a holding company as defined under the Act. Specifically, a
"holding company" is defined in section 2(a)(7) of the Act
to include any company that directly or indirectly owns 10%
or more of the outstanding voting securities of a public
utility company.
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"). ECA is exempt from
registration under section 3(a)(1) of the Act and by Rule 2
under the Act. 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 securities. The purchase price is subject to
adjustment after closing based upon the closing date balance
sheet. The Transaction will be accounted for as a purchase.
The purchase price is comparable to that paid in other
similar transactions. 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
<F1> In Holding Company Act Release ("Holding Co. Act Release")
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., Holding
Co. Act Release No.35-27121, Order Authorizing Retention of
Assets (December 23, 1999).
<PAGE>
Mountaineer Gas Services, an unregulated gas production
company, which owns an interest in approximately 375 wells
and has gas storage facilities under contract. Mountaineer
Gas Services is primarily engaged in providing energy
procurement and marketing services to Mountaineer Gas. 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.
2. Allegheny and Monongahela Power
Allegheny is a diversified energy company,
headquartered in Hagerstown, Maryland. Allegheny has three
regulated public utilities: Monongahela Power, a combination
utility which provides electric and gas service to in part
of West Virginia and Ohio; West Penn Power Company which
provide electric service in Pennsylvania; and The Potomac
Edison Company which provides electric service in Maryland,
West Virginia, and Virginia. Collectively the Allegheny
system utilities do business as Allegheny Power. 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
Ventures, Inc. a non-utility subsidiary of Allegheny,
actively invests in and develops energy-related and
telecommunications projects. Allegheny Supply owns,
operates and markets competitive retail and wholesale
electric generation. Additionally, Allegheny Supply manages
and operates electric generation owned by the regulated
utilities d/b/a Allegheny Power.
Monongahela Power provides electric service to
approximately 351,000 West Virginia customers and
approximately 28,000 Ohio customers.<F2> 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 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 Mountaineer Gas
will continue to operate with Mountaineer Gas' existing
employees. Employees will be given credit for prior service
under all employee benefit plans or, for union employees, to
<F2>Monongahela Power's sister operating company, Potomac Edison,
provides electric service to approximately 100,000 West Virginia
customers.
<PAGE>
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 Energy Service Corporation has entered
into a Gas Sales and Purchase Agreement with ECA ("Gas
Agreement"). The Gas Agreement provides for an annual
contract volume of up to 3.99 million Dth at indexed prices.
Under the Gas Agreement, which will be assigned to Allegheny
Supply, gas may be used for electric 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 not already receiving electricity from Monongahela
Power; 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,<F3>
with service centers in Beckley, Charleston, Elkins,
Huntington, Oak Hill, Palestine, Hugheston, Hinton, and
Wheeling.
The acquisition 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. 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."<F4> 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.
<F3> The total area of counties within which service is
provided totals 19,500 square miles.
<F4> See Consolidated Natural Gas Co., Holding Co. Act Release
No. 26512 (Apr. 30, 1996).
<PAGE>
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
Allegheny seeks authorization to issue up to $162
million in long term debt securities. Additionally,
Allegheny seeks authorization to make a capital contribution
of up to $165 million to Monongahela Power. The
contribution will funded by the requested debt securities
issuance and $3 million in general funds. The contribution
will be made in a combination of cash, guarantees, or loans.
Monongahela Power seeks authority to issue up to $165
million in long term debt securities for the purpose of
acquiring Mountaineer Gas. Additionally, Monongahela Power
seeks authorization to issue loans and guarantees to
Mountaineer Gas in an aggregate amount up to $100 million.
The amount of loans and guarantees issued is contingent upon
the amount of Mountaineer Gas' debt assumed in the
Transaction. Monongahela Power has filed a concurrent-
financing request with the Ohio Public Utility Commission.
The West Virginia PSC does not require financing
authorization requests. As proposed, the Transaction
financing structure (wherein Allegheny and Monongahela Power
jointly finance the acquisition) results in a more favorable
debt to common equity ratio for Monongahela Power than would
result from financing the entire Transaction purchase price
with new Monongahela Power debt. This is true whether only
the current Transaction is considered or if the upcoming
required restructuring of the electric generation assets
that both the Ohio PUC and the West Virginia PSC have
approved is also considered. Specifically, in a separate
to-be-filed application which will impact the debt / common
equity ratio, Monongahela Power will be requesting
Commission authority to transfer its generation assets and
related liabilities to Allegheny Supply in a manner
consistent with the methodology used by Potomac Edison and
West Penn Power. See Order Approving Transfer of West Penn
Assets, Holding Co. Act Release No. 27101 (November 12,
1999), and see Notice, In re Potomac Edison's Request to
Transfer Assets, Holding Co. Act Release No. 27180 (June 5,
2000).
Current projections show that under the proposed
financing structure Monongahela Power's debt/common equity
ratio would change from the pre-Transaction level of
approximately 54% debt / 46% common equity to post
Transaction level of approximately 55% debt / 45% common
equity - well within the Commission required levels of
approximately 70% debt / 30% common equity. Thereafter, it
<PAGE>
is estimated that after the electric deregulation
restructuring Monongahela Power's debt to common equity
ratio will be reduced to approximately 62% debt / 38% common
equity - still within the Commission's required levels. If
the entire Transaction purchase price were financed with new
Monongahela Power debt, similar debt/common equity ratio
projections would be 65% debt / 35% common equity after the
Transaction and 75% debt / 25% common equity after
restructuring.
Monongahela Power has received approval from the Ohio
PUC to issue securities in connection with this
Transaction. No authorization of the financing is required
in West Virginia. In obtaining Ohio's approval Allegheny
and Monongahela Power have made representations based upon
the financing of the Transaction as set forth in this
application. Additionally, the West Virginia PSC has issued
an order approving the acquisition of Mountaineer Gas.
Allegheny and Monongahela Power representations in that
proceeding were also based upon the financing of the
Transaction as set forth in this application.
Finally, upon completion of the Transaction,
Mountaineer Gas seeks authority to issue, and Monongahela
Power seeks authority to guarantee, up to $100 million in
short-term debt securities. The short-term debt securities
will be in the form of commercial paper and bank borrowings.
The short-term debt securities will be used primarily for
financing ongoing operations. The interest rates, fees, and
expenses for all financing for which authorization is
requested shall be comparable to those obtainable by
comparable utilities issuing comparable securities with the
same or similar terms and maturities. 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, other than
Monongahela Power , 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 3(a), 6(a), 7, 9(a), 10, 11(b),
12(b), and 13(b) of the Act and Rules 45, 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.
A. Section 3(a)(2)
Under section 3(a)(2), the Commission can exempt a
holding company and its subsidiaries from any provision or
provisions of the Act that would apply to such companies if
it finds that "such holding company is predominantly a
public-utility company whose operations as such do not
extend beyond the state in which it is organized and states
<PAGE>
contiguous thereto . . ." unless it finds the exemption
"detrimental to the public interest or the interest of
investors or consumers." For the reasons set forth below,
the standards of section 3(a)(2) are satisfied with respect
to Monongahela Power and the requested exemption should be
granted.
By its terms, section 3(a)(2) has no specific numerical
test to determine when a company is "predominantly" a
utility rather than a holding company. In making this
determination, the Commission has often used numerical
indicators to compare the utility operations of the holding
company, as a separate entity, and the utility operations of
its subsidiaries, with the greatest emphasis placed on the
relative gross revenues of the companies in question. When
applying these criteria, the Commission has generally
granted exemptions where the ratio of the subsidiaries'
gross utility revenues to those of its parent was not more
than approximately 25%<F5> In this matter, as of December
31, 1999, Mountaineer Gas' operating revenues were
approximately 22.5% of Monongahela Power's operating
revenues and 7% of Allegheny Power's operating revenues.
For these reasons, applying the test in this case, the
Commission should find that Monongahela Power is
predominantly a utility rather than a holding company within
the meaning of section 3(a)(2). However, as a subsidiary of
a registered company, Monongahela Power, together with its
affiliates, shall be subject to the full requirements of
the Act.
B. Sections 6, 7 & 12(b)
Allegheny's and Monongahela Power's request to issue
debt securities are governed by sections 6(a) and 7 of the
Act. Allegheny's request for authority to make capital
contributions to Monongahela Power is governed by Rule
45(b)(4) under the Act. Allegheny's proposed loans to
Monongahela Power, and Monongahela Power's proposed loan to
Mountaineer Gas, together with the requested guarantee
authority are governed by section 12(b) of the Act.
Currently, the request by Mountaineer Gas to issue short-
term debt securities is not exempt under Rule 52 as West
Virginia does not exercise jurisdiction over such financing
requests. However, should the West Virginia PSC authorize
the financing as part of its order approving the acquisition
the transaction would then be exempt under Rule 52. Section
6(b) applies to the short-term debt securities issuance, the
loans and guarantees are subject to section 12(b).
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).
<F5> See, e.g., Houston Industries., Inc., Holding Co. Act
Release No. 26744 (July 24, 1997)(24.3%); Union Electric
Co., 40 SEC 1072 (1964).; Ohio Edison Co., Holding Co. Act
Release No. 21019 (Apr. 26, 1979) (16.9%); Delmarva Power &
Light Co., Holding Co. Act Release No. 19717 (Oct. 19,
1976) (25.8%); and Washington Gas Light Co., Holding Co. Act
Release No. 1964 (Mar. 5, 1940) (23.7%). And see Union
Electric Co., 5 SEC 252 (1939) (35.7%); and Wisconsin
Electric Power Co., Holding Co. Act Release No. 8741 (Dec.
20, 1948) (54.7%) where in The Commission denied exemptions.
<PAGE>
C. 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.
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;<F6> 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.
D. Section 10(c)(2)
The Transaction will tend toward the economical and
efficient development of an integrated public utility
system, thereby serving the public interest, as required by
Section 10(c)(2) of the Act. Benefits and related costs of
this Transaction occur as a result of the integration of the
two utilities, Mountaineer Gas and Monongahela Power.
The Transaction will produce economies and efficiencies
more than sufficient to satisfy the standards of Section
10(c)(2), described above. Although some of the anticipated
economies and efficiencies will be fully realizable only in
the longer term, they are properly considered in determining
<F6> No Section 8 issues are raised by this application
<PAGE>
whether the standards of Section 10(c)(2) have been met.<F6>
Some potential benefits cannot be precisely estimated;
nevertheless they too are entitled to be considered:
"[S]pecific dollar forecasts of future savings are not
necessarily required; a demonstrated potential for economies
will suffice even when these are not precisely
quantifiable."<F7>
As in Energy East,<F8> New Century Energies,<F9> and WPL
Holdings,<F10> here 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 will result in substantial savings
and efficiencies.<F11> 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.<F12> 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; Materials and Supplies
- $300,000; and, Property Taxes - $100,000.<F13> These savings
are offset in the first year by the costs to achieve the
acquisition. This consists of costs such as investment
bankers' fees, attorney and accountant fees, and severance
and other employee reduction-related costs. In addition to
the benefits described above, there are other general
benefits which, while presently difficult to quantify, are
nonetheless substantial. These other benefits include
<F6> See American Electric Power Co., 46 SEC 1299, 1320-1321
(1978).
<F7> Centerior Energy Corp., Holding Co. Act Release No. 24073
(April 29, 1986).
<F8> See Holding Co. Act Release No. 27128 (February 2, 2000).
<F9> Holding Co. Act Release No. 26748, (Aug. 1, 1997).
<F10> See, e.g., WPL Holdings, Inc., Holding Co. Act Release No.
26856 (Apr. 14, 1998), aff'd sub nom., Madison Gas and
Electric Company v. SEC, 168 F.3d 1337 (D.C. Cir. 1999).
<F11> See Exhibit D-6, Allegheny Power Acquisition of
Mountaineer Gas Company Cost Study ("Cost Study"). Note,
due to the recentness of the acquisition, the cost study
does not take into account savings, if any, achieved
relating to the acquisition of West Virginia Power's Gas
Division.
<F12> Id.
<F13> Id., at pages 5 - 9.
<PAGE>
competitive rates and services, increased size and
stability, diversification of service territory, fuel and
non-fuel purchasing economies, coordination of
diversification programs, complementary operational
functions and complementary management.
The expected savings, when projected over a five to ten
years period amount to approximately $40 million ($10
million for five periods ($50 million) offset by an initial
acquisition cost of $10 million). The savings levels are
comparable to the savings claimed in a number of recent
acquisitions approved by this Commission. Specifically, the
Commission approved the savings claimed by: Energy East;<F14>
New Centuries Energies (projected savings of $769 million
over 10 years);<F15> Kansas Power and Light Co.,<F16> (expected
savings of $140 million over five years); IE Industries,<F17>
(expected savings of $91 million over ten years); Midwest
Resources<F18> (estimated savings of $25 million over five
years).
Additionally, 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.
E. 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.<F19> Section
<F14> Holding Co. Act Release No. 27128 (February 2, 2000).
<F15> Holding Co. Act Release No. 26748, (Aug. 1, 1997).
<F16> Holding Co. Act Release No. 25465 (Feb. 5, 1992).
<F17> Holding Co. Act Release No. 25325 (June 3, 1991).
<F18> Holding Co. Act Release No. 25159 (Sept. 26, 1990).
<F19> 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.
<PAGE>
(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.
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.
The combined system will meet the standard set forth in
Section 2(a)(29)(B) and, therefore, will satisfy the
requirements of Sections 10(c)(1) and (2) and should be
approved by the Commission. Commission precedent and
current technological realities indicate that the Allegheny
gas utility system will operate as a coordinated system
confined in its operation to a single area or region because
it will derive natural gas from a common source of supply.
None of the Act, the Commission's orders and rulings or no-
action letters of the Commission's staff provide a
definition as to what constitutes a "common source of
supply." The Commission has not traditionally required that
the pipeline facilities of an integrated system be
interconnected, and instead has looked to such issues as
from whom the distribution companies within the system
receive much, although not all, of their gas supply. The
Commission also has considered purchases of gas from a
common pipeline as well as from different pipeline's when
the gas originates from the same gas field in determining a
common source of supply. Since the time of most of these
decisions, the state of the art in the industry has
developed to allow efficient operation of systems whose gas
supplies derive from many sources.
Upon completion of the Transaction, Monongahela
Power's West Virginia Gas Division and Mountaineer Gas'
operations will form an integrated utility system in
accordance with the requirements of Section 2(a)(29)(B).
The two operations are physically connected through the
Columbia Gas Transmission, Columbia Gulf Transmission, and
<PAGE>
Tennessee Gas pipelines. Through these systems, Monongahela
Power's West Virginia Gas Division and Mountaineer Gas
derive gas from common sources of supply in the Gulf Coast
Basin and the Appalachia Basin. Monongahela Power's West
Virginia Gas Division and Mountaineer Gas may also derive
gas from common sources through two exclusively West
Virginia pipelines - the Cranberry Pipeline and the Gas
Transport Pipeline. The gas utility operations of
Monongahela Power's West Virginia Gas Division and
Mountaineer Gas are limited to West Virginia.
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.<F20> 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.<F21>
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."<F22> 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, the Commission has approved a
number of convergence mergers, clarifying that the Act "does
not prohibit ownership of combination gas and electric
systems."<F23>
<F20> SEC v. New England System, 384 U.S. at 178, n. 7.
<F21> Id.
<F22> The Regulation of Public-Utility Holding Companies,
Division of Investment Management, Securities and Exchange
Commission (June 1995) ("1995 Report") at 74.
<F23> See New Century Energies, Inc., Holding Co. Act Release
No. 26748, File No. 70-8787 (Aug. 1, 1997). See, e.g., WPL
Holdings, Inc., Holding Co. Act Release 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., Holding
Co. Act Release No. 26934, File No. 70-8427 (Nov. 2, 1998);
Conectiv Inc., Holding Co. Act Release No. 26832, File No.
70-9069 (Feb. 25, 1998).
<PAGE>
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.<F24>
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 . . . .<F25>
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 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.<F26>
<F24> See New Century Energies, Inc., Holding Co. Act Release
No. 26748, File No. 70-8787, text and nn. 59-60 (Aug. 1,
1997). See also CINergy Corp., Holding Co. Act Release No.
26934, File No. 70-8427 (Nov. 2, 1998); WPL Holdings, Inc.,
Holding Co. Act Release No. 26856 (Apr. 14, 1998).
<F25> See New Century Energies, Inc., Holding Co. Act Release
No. 26748.
<F26> 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).
<PAGE>
In HCAR No.35-27121, the Commission held that
Monongahela Power satisfied the Commission's integration
requirements.<F27> 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:
(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 PSC and the Ohio
Public Utility Commission.
For the foregoing reasons, the Commission should find
that the standards of Clause A are satisfied. 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.
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 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.
<F27> Holding Co. Act Release No. 35-27121 (December 23, 1999).
<PAGE>
After the Transaction is completed, the Director of
Operations for Mountaineer Gas will be located in
Charleston, West Virginia. Management will remain
geographically close to the service area as Mountaineer Gas
provides service virtually across the state. Currently, the
management and executives of Mountaineer Gas are located in
Denver, Colorado. 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 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, as noted the
West Virginia PSC has 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.
F. 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
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.
G. Rule 54 Compliance
<PAGE>
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 exempt wholesale generators ("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
December 31, 1999, Allegheny's average consolidated retained
earnings was approximately $897million, and Allegheny's
aggregate investment in EWGs and FUCOs was approximately
$4.2 million. Accordingly, Allegheny may invest up to
approximately $448.5 million or an additional $444.3 million
(50% of Retained Earnings less existing investment) in EWGs
and FUCOs as of December 31, 1999. 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.
A joint stipulation agreement relating to post transaction
operation of Mountaineer Gas has been executed by Allegheny
Power, Eastern Systems Corporation, Independent Oil & Gas
Association (IOGA), Weirton Steel Corporation, the West
Virginia PSC Consumer Advocate Division, and the West
Virginia Public Service Commission Staff. The joint
stipulation agreement will have minimal impact on the
efficiencies that will be realized as a result of the
integration of Mountaineer Gas and Allegheny Power. On May
11, 2000, the West Virginia PSC approved the stipulation and
proposed acquisition.<F28>
A filing has been made with the Department of Justice
under Hart-Scott-Rodino. The Justice Department requested,
and Allegheny and Mountaineer Gas furnished, additional
information on the transaction. The thirty-day period for
action has now expired. A filing has or will be made with
the Federal Communications Commission for transfer of
related communication licenses incidental to operation of
the utility assets being acquired. Other than the above
agencies, no other state or federal commission, other than
this Commission, 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
<F28> See Exhibit D-2 Order of the West Virginia Public Service
Commission.
<PAGE>
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
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)
D-6 Allegheny Power Acquisition of
Mountaineer Gas Company Cost Study (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).
<PAGE>
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.
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
/s/ THOMAS K. HENDERSON
By _____________________________
Thomas K. Henderson
MONONGAHELA POWER COMPANY
/s/ THOMAS K. HENDERSON
By _____________________________
Thomas K. Henderson
Dated: June 29, 2000
_______________________________
