SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM U-1
APPLICATION OR DECLARATION
UNDER
THE PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
MONONGAHELA POWER COMPANY
(d/b/a Allegheny Power)
1310 Fairmont Avenue
Fairmont, West Virginia 26554
(Name of company or companies filing this statement and address of
principal executive office)
ALLEGHENY ENERGY, INC.
(Name of top registered holding company parent of each applicant or declarant)
Thomas K. Henderson, Esq.
Vice President and General Counsel
Allegheny Energy, Inc.
10435 Downsville Pike
Hagerstown, Maryland 21740
(Name and address of agent for service)
The Commission is requested to mail signed copies of all orders,
notices and communications to:
Thomas K. Henderson, Esq.
Vice President and General Counsel
Allegheny Energy, Inc.
10435 Downsville Pike
Hagerstown, Maryland 21740
Terence A. Burke, Esq.
Deputy General Counsel
Allegheny Energy, Inc.
10435 Downsville Pike
Hagerstown, Maryland 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, Maryland 21740
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ITEM 1. DESCRIPTION OF THE PROPOSED TRANSACTION
Monongahela Power Company ("Monongahela"), a wholly owned combination
gas and electric utility subsidiary of Allegheny Energy, Inc. ("Allegheny
Energy"), a registered holding company under the Public Utility Holding Company
Act of 1935, as amended (the "1935 Act"), requests authority to solicit proxies
from the holders of its shares of cumulative preferred stock, par value $100 per
share ("Preferred Stock").
A. Introduction
Monongahela proposes to solicit proxies from the holders of its
outstanding shares of Preferred Stock (the "Proxy Solicitation") for use at a
special meeting of its stockholders (the "Special Meeting") to consider a
proposed amendment to its Articles of Incorporation (the "Articles") that would
eliminate in its entirety paragraph (a) of subdivision (11) of Section 1.5 of
the Articles, a provision restricting the amount of unsecured debt issuable by
Monongahela ("Proposed Amendment"). If the Proposed Amendment is adopted,
Monongahela proposes to make a special cash payment to each preferred
stockholder who voted his or her shares of Preferred Stock in favor of the
Proposed Amendment.
In File No. 70-9625, Allegheny Energy and Monongahela have requested
authorization to acquire Mountaineer Gas Company, a West Virginia corporation
and expect to obtain an order on or before August 1, 2000. At the time of
financing that acquisition, Monongahela would like the flexibility afforded by
eliminating the provision of its Articles that restricts the incurrence of
unsecured debt.
Monongahela accordingly requests that the Securities and Exchange
Commission (the "Commission") issue a public notice of the proposed transaction
and order authorizing the Proxy Solicitation (the "Proxy Solicitation Order") on
July 20, 2000, thereby affording Monongahela sufficient time to solicit proxies
in advance of the Special Meeting. Monongahela further requests that as soon as
practicable after the Proxy Solicitation Order, but in any event not later than
August 30, 2000, the Commission issue an order authorizing the Proposed
Amendment and Cash Payment (as defined herein).
B. Background
As discussed below, the purpose of the Proxy Solicitation is to
eliminate the provision in Monongahela's Articles restricting the ability of
Monongahela to incur unsecured indebtedness. Monongahela considers this
restriction a significant impediment to its ability to adapt to an increasingly
competitive market for electricity, maintain financial flexibility and minimize
its financing costs. Monongahela believes that the competitive advantages,
financing flexibility and cost benefits resulting from the elimination of this
provision outweigh the one-time cost of the Proxy Solicitation.
C. Proposed Transactions: Proxy Solicitation and Proposed Amendment
1. Terms of Proxy Solicitation and Proposed Amendment
Monongahela has outstanding 5,891,000 shares of common stock, par value
$50 per share ("Common Stock"), all of which are held by Allegheny Energy.
Monongahela has outstanding 740,000 shares of Preferred Stock, issued in five
series (each, a "Series"),* all of which are traded over-the-counter, except for
the 4.40% Series and the 4.50% Series C, which are traded on the American Stock
Exchange. The Common Stock and the Preferred
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* The five Series of Preferred Stock consist of the 4.40% Series, of which
90,000 shares are outstanding; the 4.80% Series B, of which 40,000 shares
are outstanding; the 4.50% Series C, of which 60,000 shares are
outstanding; the 6.28% Series D, of which 50,000 shares are outstanding;
and the 7.73% Series L, of which 500,000 shares are outstanding.
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Stock of each Series are entitled to one vote per share on the matters described
herein and constitute Monongahela's only outstanding securities entitled to vote
on the Proposed Amendment. Monongahela has no other class of equity securities
outstanding.
Paragraph (a) of subdivision (11) of Section 1.5 of the Articles (the
"Unsecured Debt Limitation") currently provides that, so long as any shares of
Preferred Stock of any Series are outstanding, without the consent of the
holders of at least a majority of the outstanding Preferred Stock of all Series,
Monongahela shall not issue any unsecured notes, debentures or other securities
representing unsecured indebtedness (collectively, "unsecured debt") or assume
any such unsecured securities (other than for purposes of refunding or renewing
outstanding unsecured securities or redeeming or otherwise retiring all
outstanding shares of Preferred Stock) if, immediately after such issuance or
assumption:
o the total principal amount of all unsecured debt issued or assumed
by Monongahela and then outstanding would exceed 20% of the
aggregate of (x) the total principal amount of all bonds or other
securities representing secured indebtedness issued or assumed by
Monongahela and then outstanding and (y) the stated capital and
surplus of Monongahela as stated on Monongahela's books; or
o the total principal amount of all unsecured debt issued or assumed
by Monongahela and then outstanding having maturities of less than
ten years would exceed 10% of the aggregate of (x) and (y) in the
preceding paragraph.
The Proposed Amendment would eliminate the Unsecured Debt Limitation by deleting
it in its entirety from the Articles and thereby enable Monongahela to incur
unsecured debt without a stockholder vote.
If the Proposed Amendment is adopted, Monongahela proposes to make a
special cash payment of $1.00 per share (each, a "Cash Payment") to each
Preferred Stockholder of any Series whose shares of Preferred Stock are properly
voted at the Special Meeting (in person by ballot or by proxy) in favor of the
Proposed Amendment. Monongahela will disburse Cash Payments out of its general
funds, promptly after adoption of the Proposed Amendment.
Adoption of an amendment to the Articles, including the Proposed
Amendment, requires the affirmative vote at the Special Meeting (in person by
ballot or by proxy) of the holders of not less than two-thirds of the
outstanding shares of each of (i) the Preferred Stock of all Series, voting
together as one class, and (ii) the Common Stock. Allegheny Energy intends to
vote its shares of Common Stock in favor of the Proposed Amendment. Abstentions
and broker non-votes in respect of the Proposed Amendment will have the effect
of votes against the Proposed Amendment.
Monongahela has retained Georgeson Shareholder Securities Corp.
("Georgeson") to assist in connection with the Proxy Solicitation, for which
Georgeson will be paid a reasonable and customary fee and will be reimbursed for
reasonable out-of-pocket expenses.
2. Benefits of Proposed Amendment
a. General
Regulatory, legislative, technological and market developments are
leading to a more competitive environment in the electric utility industry,
including in the markets served by Monongahela. Starting on January 1, 2001, all
customers in Ohio will be able to choose their electricity supplier. This marks
the beginning of a five-year transition to market rates. Similarly, in March
2000, the West Virginia legislature approved a plan that will allow competition
among electric suppliers, although the implementation of the plan is subject to
further action by the legislature.
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As competition intensifies, flexibility and cost reduction will be even
more crucial to success. Because the electric utility industry is extremely
capital intensive, control and minimization of financing costs are of particular
importance. In response to the competitive forces and regulatory changes faced
by Monongahela, Monongahela has from time to time considered, and expects to
continue to consider, various strategies designed to enhance its competitive
position and to increase its ability to adapt to and anticipate changes in its
utility business.
Monongahela believes that adoption of the Proposed Amendment to
eliminate the Unsecured Debt Limitation is key to meeting the objectives of
flexibility and capital cost reduction. Historically, Monongahela's debt
financing generally has been accomplished through the issuance of long-term
first mortgage bonds, a modest amount of unsecured or short-term debt and
long-term pollution control bonds. First mortgage bonds represent secured
indebtedness because they place a first priority lien on substantially all of
Monongahela's assets. Monongahela's indenture with respect to its first mortgage
bonds contains certain restrictive covenants with respect to, among other
things, the disposition of assets and the ability to issue additional first
mortgage bonds. Pollution control bonds also represent secured debt, and are
available only for very limited purposes. In contrast, unsecured debt financing
(including short-term debt, which often is the lowest-cost form of debt
available to Monongahela) generally imposes fewer restrictions on Monongahela
than first mortgage bonds and is much more widely available than pollution
control bonds.
Inasmuch as the Unsecured Debt Limitation contained in the Articles
limits Monongahela's flexibility in planning and financing its business
activities, Monongahela believes it ultimately will be placed at a competitive
disadvantage if the Unsecured Debt Limitation is not eliminated. The industry's
new competitors generally are not subject to the type of financing restrictions
the Articles impose on Monongahela. In addition, some potential utility
competitors have no comparable provision in their charters restricting the
issuance of unsecured debt. In recent years, several other utilities with the
same or similar charter restrictions have successfully eliminated such
provisions by soliciting their shareholders to approve similar amendments to
their charters.
Although Monongahela sells relatively low-cost power, it must continue
to explore new ways of reducing costs and enhancing operating and financing
flexibility. Monongahela believes that the adoption of the Proposed Amendment
will be in its competitive interest and in the best long-term interests of its
shareholders.
b. Financial Flexibility
If the Proposed Amendment is adopted, Monongahela will have increased
flexibility (i) to choose among different types of debt financing and (ii) to
finance projects using the most cost-effective means. Monongahela believes that
various financing alternatives using unsecured debt will increase in importance
as an option in financing its construction program and refinancing its first
mortgage bonds. Monongahela also believes that flexibility in the use of
unsecured debt, including short-term debt, is necessary for it to take full
advantage of changing conditions in the securities markets. If the Proposed
Amendment is adopted, Monongahela may increase the amount of unsecured debt to
more than 20% of its total capitalization.
In addition, although Monongahela's earnings currently are sufficient
to meet the earnings coverage tests that must be satisfied before issuing
additional first mortgage bonds and preferred stock, there is no guarantee that
this will be true in the future. Other utilities have been unable to issue first
mortgage bonds during certain periods because of restrictive covenants in their
mortgages. If Monongahela were unable to issue first mortgage bonds or preferred
stock in the future, and unable to issue additional unsecured debt as a result
of the Unsecured Debt Limitation, Monongahela's financing options would be
limited to more costly alternatives.
Monongahela believes that the prudent use of unsecured debt in excess
of the Unsecured Debt Limitation is vital to the effective financial management
of its business. Not only is unsecured short-term debt generally one of the
least expensive forms of capital, it also provides flexibility in meeting
seasonal and business cycle fluctuations in cash requirements, acts as a bridge
between issues of permanent capital and can be used when unfavorable conditions
prevail in the market for long-term capital.
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The Proposed Amendment will not necessarily increase the amount of debt
incurred by Monongahela, but will allow Monongahela to change its mix of debt
types. The actual amount of debt incurred by Monongahela is and will remain a
function of many factors, including rating agency considerations, cash flow
expectations and interest market conditions. If the Proposed Amendment is
adopted, Monongahela anticipates that it will change its mix of debt securities
toward more issuances on an unsecured basis to cover its capital needs and to
fund future maturities as needed. As a regulated utility, Monongahela's capital
structure will continue to be subject to the approval of the Public Utilities
Commission of Ohio and the SEC under the 1935 Act.
c. Lower Financing Costs
As mentioned above, Monongahela's short-term debt issuances generally
represent one of its lowest-cost forms of financing. Monongahela is reassessing
its historically modest use of short-term debt. By increasing its use of
short-term debt, Monongahela may be able to lower its cost structure, thereby
making its products more competitive and reducing its business risks. With the
Unsecured Debt Limitation in place, however, the availability and corresponding
benefits of short-term debt are restricted. Although short-term debt may expose
the borrower to more volatility in interest rates, Monongahela believes that the
cost of short-term debt seldom exceeds the cost of other forms of capital
available at the same time.
D. Compliance with Rule 54
Rule 54 provides that the Commission, in determining whether to approve
certain transactions by such registered holding company or its subsidiaries
other than with respect to EWGs and foreign utility companies ("FUCOs"), will
not consider the effect of the capitalization or earnings of any subsidiary
which is an EWG or FUCO upon the registered holding company system if the
provisions of Rule 53(a), (b) and (c) are satisfied. At March 31, 2000,
Allegheny Energy's average consolidated retained earnings were approximately
$865.0 million and Allegheny Energy's aggregate investment in EWGs and FUCOs was
approximately $4.2 million. Accordingly, Allegheny Energy may invest up to
approximately $432.5 million or an additional $428.3 million (50% of Retained
Earnings less existing investment) in EWGs and FUCOs as of March 31, 2000. When
the Transaction is consummated, for purposes of compliance with Rule 54,
Allegheny Energy'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 Energy further states that for purposes of Rule 54, that the
conditions specified in Rule 53(a) are satisfied and that none of the conditions
set forth in rule 53(b) exist or will exist as a result of the proposed
Transaction. The conditions will be unaffected by this Transaction. As a result,
the Commission will not consider the effect on an Allegheny Energy subsidiary
that is an EWG or FUCO, as each is defined in sections 32 and 33 of the Act,
respectively, in determining whether to approve the proposed transactions.
ITEM 2. FEES, COMMISSIONS AND EXPENSES
Other than the Cash Payments described in Item 1, the fees, commissions
and expenses (each, a "Fee") to be incurred, directly or indirectly, by
Monongahela in connection with the proposed transactions, are estimated as
follows:
Outside counsel fees $ 50,000
Proxy solicitor fees 60,000
Paying agent 15,000
Printing, mailing and miscellaneous fees 5,000
Total $130,000
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ITEM 3. APPLICABLE STATUTORY PROVISIONS
Section 12(e) of the 1935 Act and Rules 62 and 65 thereunder are
applicable to the Proxy Solicitation. Section 12(e) of the 1935 Act and Rule 65
thereunder are and Section 6(a)(2) may be deemed applicable to the Cash
Payments. Section 6(a)(2) of the 1935 Act is applicable to the Proposed
Amendment.
ITEM 4. REGULATORY APPROVAL
Other than the jurisdiction of the Commission under the 1935 Act and
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), no state
or federal regulatory agency has jurisdiction over the proposed transactions.
Monongahela will comply fully with all requirements of the Exchange Act
and the rules and regulations thereunder applicable to the Proxy Solicitation,
and acknowledges that any Commission authorization granted under the 1935 Act is
conditioned upon such compliance. The Proxy Solicitation is exempt from certain
provisions of Regulation 14A under the Exchange Act.
ITEM 5. PROCEDURE
As stated in Item 1, the Special Meeting is scheduled to take place on
or about August 30, 2000. Monongahela needs to secure the affirmative vote of
two-thirds of its Preferred Stockholders to secure passage of the Proposed
Amendment.
In order to afford Monongahela sufficient time in advance of the
Special Meeting to solicit proxies and to maximize the prospect for adoption of
the Proposed Amendment at the Special Meeting, Monongahela requests that the
Commission issue and publish not later than July 20, 2000 the requisite notice
under Rule 23 with respect to the filing of this Declaration, together with an
order under Section 12(e) and Rule 62 permitting Monongahela to solicit proxies
pursuant to the Proxy Solicitation.
Monongahela further requests that the Proxy Solicitation Order specify
a date not later than July 30, 2000 as the date after which the Commission may
issue an order granting and permitting to become effective the other
transactions for which authorization is sought herein, namely, the Proposed
Amendment and the Cash Payments. Monongahela requests that the Commission issue
this second order not later than August 25, 2000 (i.e., three business days
before the date of the Special Meeting).
Monongahela waives any recommended decision by a hearing officer of or
by any other responsible officer of the Commission and waives the 30-day waiting
period between the issuance of the Commission's order and the date it is to
become effective, since it is desired that the Commission's order, when issued,
become effective forthwith. Monongahela consents to the Staff of the Division of
Investment Management assisting in the preparation of the Commission's decision
and/or orders in this matter, unless the Staff opposes the matters covered by
this Declaration.
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ITEM 6. EXHIBITS AND FINANCIAL STATEMENTS
(a) Exhibits:
A-1 Charter of Monongahela as amended (filed as Exhibit (a)(3)(i) to
Form 10-Q (File No. 1-05164) on November 9, 1995 and hereby
incorporated by reference).
A-2 Code of Regulations of Monongahela (filed as Exhibit (a)(3)(ii)
to Form 10-Q (File No. 1-05164) on November 9, 1995 and hereby
incorporated by reference).
B-1 Draft Proxy Statement.
B-2 Draft Notice of Special Meeting.
B-3 Form of Proxy.
F Preliminary opinion of counsel (to be filed by amendment).
H Form of notice and order permitting proxy solicitation.
(b) Financial Statements:
Financial statements of Monongahela are being omitted since they are
not considered necessary to the proper disposition of the transactions
contemplated herein. Certain financial statements of Monongahela for the years
1998 and 1999 are included in Monongahela's Form 10-K for the year ended
December 31, 1999 on file with the Commission (File No. 1-05164) and unaudited
financial statements for the quarter ended March 31, 2000 are included in
Monongahela's Form 10-Q on file with the Commission (File No. 1-05164).
ITEM 7. INFORMATION AS TO ENVIRONMENTAL EFFECTS
Monongahela believes that the proposed transactions will not have any
environmental effects which would require an environmental impact statement
under Section 102(2)(C) of the National Environmental Policy Act. No other
federal agency has prepared or is preparing an environmental impact statement
with respect to the proposed transactions.
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SIGNATURES
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.
MONONGAHELA POWER COMPANY
By: /s/ Terence A. Burke
-------------------------
Deputy General Counsel
Date: July 13, 2000
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