Amendment No. 1 to
SEC File No. 70-8403
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM U-1
APPLICATION
UNDER
THE PUBLIC UTILITY HOLDING COMPANY ACT OF 1935 ("Act")
PENNSYLVANIA ELECTRIC COMPANY ("PENELEC")
1001 Broad Street
Johnstown, Pennsylvania 15907
(Name of company filing this statement and address
of principal executive office)
GENERAL PUBLIC UTILITIES CORPORATION ("GPU")
(Name of top registered holding company parent of applicant)
Don W. Myers, Vice President and Douglas E. Davidson, Esq.
Treasurer Berlack, Israels & Liberman
M. A. Nalewako, Secretary 120 West 45th Street
GPU Service Corporation New York, New York 10036
100 Interpace Parkway
Parsippany, New Jersey 07054
William C. Matthews, Esq., Robert C. Gerlach, Esq.
Secretary Ballard Spahr Andrews &
Pennsylvania Electric Company Ingersoll
1001 Broad Street 1735 Market Street
Johnstown, Pennsylvania 15907 Philadelphia, Pennsylvania 19103
(Names and addresses of agents for service)
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Penelec hereby amends its Application on Form U-1, docketed
in SEC File No. 70-8403, as follows:
1. By amending paragraphs A through I of Item 1 thereof to
read in their entirety as follows:
A. Penelec proposes to organize a special
purpose subsidiary ("Penelec Capital") as either a
limited liability company under the Delaware Limited
Liability Company Act (the "LLC Act") or a limited
partnership under the Pennsylvania or Delaware Revised
Uniform Limited Partnership Act. Penelec may also
organize a second special purpose wholly-owned
subsidiary under the Delaware General Corporation Law
("Investment Sub") for the sole purpose of either (i)
if Penelec Capital is organized as a limited liability
company, acquiring and holding a second class of
Penelec Capital common interests so as to comply with
the requirement under the LLC Act that a limited
liability company have at least two members or (ii) if
Penelec Capital is organized as a limited partnership,
acting as the general partner of Penelec Capital.
Penelec Capital will then issue and sell from time to
time in one or more series through June 30, 1996 up to
$125 million aggregate stated value of preferred
limited liability company interests or limited
partnership interests, in the form of Monthly Income
Preferred Securities, $25 per share stated value
("MIPS").
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B. Penelec and Investment Sub will acquire all
of the common interests or, alternatively, Penelec or
Investment Sub will acquire all of the general
partnership interests, as the case may be, of Penelec
Capital for up to $35 million (the aggregate of such
investment being herein referred to in either case as
the "Equity Contribution"). Penelec will enter into a
loan agreement with Penelec Capital under which Penelec
Capital will loan to Penelec (individually, a "Loan"
and collectively, the "Loans") both the Equity
Contribution and the proceeds from the sale of the MIPS
from time to time, and Penelec will issue to Penelec
Capital its unsecured promissory notes (individually, a
"Note" and collectively, the "Notes") or subordinated
debentures (individually, a "Subordinated Debenture"
and collectively, the "Subordinated Debentures")
evidencing such borrowings.
C. Penelec will also unconditionally guarantee
(individually, a "Guaranty" and collectively, the
"Guaranties") (i) payment of dividends or distributions
on the MIPS, if and to the extent Penelec Capital has
declared dividends or distributions out of funds
legally available therefor, (ii) payments to the MIPS
holders of amounts due upon liquidation of Penelec
Capital or redemption of the MIPS, and (iii) certain
additional amounts that may be payable in respect of
the MIPS.
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D. Each Note or Subordinated Debenture will have
an initial term of up to 30 years, and may be extended
by Penelec for up to an additional 20 years, subject to
certain specified conditions. Prior to maturity,
Penelec will pay only interest on the Notes or
Subordinated Debentures at a rate equal to the dividend
or distribution rate on the related series of MIPS.
Such interest payments will constitute Penelec
Capital's only income and will be used by it to pay
monthly dividends or distributions on the MIPS and
dividends or distributions on the common interests or
the general partnership interests of Penelec Capital.
Dividend payments or distributions on the MIPS will be
made monthly, will be cumulative and must be made to
the extent that Penelec Capital has legally available
funds and cash sufficient for such purposes. However,
Penelec will have the right to defer payment of
interest on its Notes or Subordinated Debentures for up
to five years, provided that if dividends or
distributions on the MIPS are not paid for eighteen
consecutive months, then the MIPS holders will have the
right to appoint a trustee to enforce Penelec Capital's
rights under the Notes or Subordinated Debentures and
the Guaranties. Penelec Capital will have the parallel
right to defer dividend payments or distributions on
the related series of MIPS for up to five years.
Penelec and Penelec Capital, as the case may be, may be
required to pay interest on any deferred interest,
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dividends or distributions, to the extent permitted by
applicable law. The dividend or distribution rates,
payment dates, redemption and other similar provisions
of each MIPS series will be identical to the interest
rates, payment dates, redemption and other provisions
of the Note or Subordinated Debenture issued by Penelec
with respect thereto.
E. Each Note or Subordinated Debenture and
related Guaranty will be subordinate to all other
existing and future indebtedness for borrowed money of
Penelec and will have no cross-default provisions with
respect to other Penelec indebtedness -- i.e., a
default under any other outstanding Penelec
indebtedness will not result in a default under the
Note or Subordinated Debenture or the Guaranty.
However, Penelec may not declare and pay dividends on
its outstanding Cumulative Preferred Stock or Common
Stock unless all payments then due (whether or not
previously deferred) under the Notes or Subordinated
Debentures and the Guaranties have been made.
F. It is expected that Penelec's interest
payments on the Notes or Subordinated Debentures will
be deductible for income tax purposes and that Penelec
Capital will be treated as a partnership for federal
income tax purposes. Consequently, MIPS holders and
Penelec (and Investment Sub) will be deemed to have
received partnership distributions in respect of their
dividends or distributions from Penelec Capital and
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will not be entitled to any "dividend received
deduction" under the Internal Revenue Code.
The MIPS may be redeemable at the option of
Penelec Capital (with the consent of Penelec) at a
price equal to their stated value plus any accrued and
unpaid dividends, (i) at any time after five years
from their date of issuance, or (ii) in the event that
(w) Penelec Capital is required by applicable tax laws
to withhold or deduct certain amounts in connection
with dividends, distributions or other payments, or (x)
Penelec Capital is subject to federal income tax with
respect to interest received on the Notes or
Subordinated Debentures or is otherwise not treated as
a partnership for federal income tax purposes, or (y)
it is determined that the interest payments by Penelec
on the Notes or Subordinated Debentures are not
deductible for federal income tax purposes, or (z)
Penelec Capital becomes subject to regulation as an
"investment company" under the Investment Company Act
of 1940. Upon occurrence of any of the events set
forth in clause (ii) of the immediately preceding
sentence, Penelec may also have the right to dissolve
Penelec Capital and exchange the MIPS for Subordinated
Debentures or, if the Loans are evidenced by
Subordinated Debentures, to distribute the Subordinated
Debentures to the MIPS holders.
In the event that Penelec Capital is required
by applicable tax laws to withhold or deduct certain
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amounts in connection with dividends, distributions or
other payments, Penelec Capital may also have the
obligation, if the MIPS are not redeemed or exchanged
as aforesaid, to "gross up" such payments so that the
MIPS holders will receive the same payment after such
withholding or deduction as they would have received if
no such withholding or deduction were required. In
such latter event, the Guaranties would also cover any
such "gross up" obligations.
G. In the event of any voluntary or involuntary
liquidation, dissolution or winding up of Penelec
Capital, the holders of the MIPS will be entitled to
receive, out of the assets of Penelec Capital available
for distribution to the holders of its limited
liability company interests or its partners, before any
distribution of assets to the holders of the common
limited liability company interests or the general
partner of Penelec Capital, an amount equal to the
stated value of the MIPS plus any accrued and unpaid
dividends.
H. The constituent instruments of Penelec
Capital, including its Limited Liability Company
Agreement or Limited Partnership Agreement, as the case
may be, will provide, among other things, that Penelec
Capital's activities will be limited to the issuance
and sale of MIPS from time to time and the lending to
Penelec of (i) the proceeds thereof, and (ii) the
Equity Contribution. Accordingly, it is not proposed
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that Penelec Capital's constituent instruments include
any interest or dividend coverage or capitalization
ratio restrictions on its ability to issue and sell
MIPS as each such issuance will be supported by a
Penelec Note or Subordinated Debenture and a Guaranty,
and such restrictions would therefore not be relevant
or necessary for Penelec Capital to maintain an
appropriate capital structure. Moreover, the issuance
of Notes or Subordinated Debentures by Penelec will be
subject to the restriction in Article VI, Section 8(B)
of Penelec's Restated Articles of Incorporation which
limits, without the consent of the holders of a
majority of Penelec's outstanding Cumulative Preferred
Stock, the amount of unsecured indebtedness which
Penelec may have outstanding at any one time to 20% of
the aggregate of the total outstanding principal amount
of all bonds and other securities representing secured
indebtedness issued or assumed by Penelec plus
Penelec's capital stock, premiums thereon, and surplus
of Penelec as stated on its books of account.
Penelec Capital's constituent instruments
will further state that its common limited liability
company interests or general partnership interests are
not transferrable, that its business and affairs will
be managed and controlled directly by Penelec or by
Investment Sub, and that Penelec or Investment Sub, as
the case may be, will be responsible for all
liabilities and obligations of Penelec Capital.
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I. Penelec believes that the proposed MIPS
program will provide substantial benefits over
traditional perpetual preferred stock issuances by
Penelec. While Penelec expects that the MIPS will
carry a somewhat higher "dividend" rate than a
perpetual preferred issue, the expected tax
deductibility of interest payments on the Notes or
Subordinated Debentures will afford Penelec with
increased cash flow and net income, and then ultimately
lower customer rates. At the same time, Penelec
understands that the financial markets will view the
financing Penelec obtains through the MIPS program as
having essentially the same equity characteristics as
would be the case if Penelec were to issue traditional
perpetual preferred stock. Penelec also understands
that the rating agencies will view the financing
Penelec obtains through the MIPS program as having
equity characteristics somewhere between sinking fund
preferred stock and traditional perpetual preferred
stock. Indeed, based on an assumed dividend rate of
about 7.75% for a Penelec perpetual preferred issue and
an assumed 8.25% dividend rate for the MIPS, Penelec
believes that, over the 30 year life of a $125 million
MIPS issue, it could achieve approximately $44 million
of savings, on a net present value basis. The MIPS
will be carried in the capitalization section of
Penelec's consolidated balance sheet. The Notes or
Subordinated Debentures, so long as they remain inter-
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company obligations, will not appear on Penelec's
consolidated balance sheet.
2. By adding the following sentence at the end of
paragraph K of Item 1 thereof:
Penelec will not use any of the net proceeds of
the Loans to acquire, either directly or indirectly,
any interest in any EWG or FUCO.
3. By amending Item 3 thereof to read in its entirety as
follows:
A. The acquisition by Penelec of shares of the
capital stock or partnership interests of Penelec
Capital and shares of the capital stock of Investment
Sub, the acquisition by Investment Sub of shares of the
capital stock or partnership interests of Penelec
Capital and the acquisition by Penelec Capital of the
Notes or Subordinated Debentures and the Guaranties are
subject to Sections 9(a), 10 and 12(b) of the Act and
Rule 45 thereunder.
B. The issuance and sale of the MIPS by Penelec
Capital, and the contingent exchange of the MIPS for
Subordinated Debentures, are subject to Sections 6(a)
and 7 of the Act and Rules 50 and 54 thereunder.
It is requested that the proposed issuance
and sale of the MIPS by Penelec Capital, and the
contingent exchange of the MIPS for Subordinated
Debentures, be exempted, pursuant to the provisions of
paragraph (a)(5) of Rule 50 under the Act, from the
competitive bidding requirements of Rule 50. Penelec
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Capital intends to issue and sell the MIPS through a
group of underwriters and/or selling agents in one or
more negotiated transactions. The MIPS are a
specialized and relatively new type of security and
competitive bidding would be impractical as MIPS must
be sold through investment banking firms having
experience with the security in order to successfully
market the MIPS. Moreover, the MIPS would be exchanged
for Subordinated Debentures only under the limited
circumstances described in paragraph F of Item 1,
without any additional underwriting compensation being
paid by Penelec Capital or Penelec or any additional
consideration being paid by the MIPS holders. Under
these circumstances, it is believed that compliance
with the competitive bidding requirements of Rule 50
with respect to the proposed issuance and sale of the
MIPS, and the contingent exchange of the MIPS for
Subordinated Debentures, would not be in the public
interest or necessary for the protection of investors
or consumers.
Accordingly, Penelec requests that the
Commission in its public notice regarding the proposed
transactions authorize Penelec to begin negotiations
with prospective underwriters and/or selling agents
with respect to the sale of the MIPS.
C. Penelec believes that the issuance of its
Notes or Subordinated Debentures and its Guaranties to
Penelec Capital will be exempt from the declaration
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requirements of the Act by virtue of Rule 45(b)(1)
thereunder.
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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.
PENNSYLVANIA ELECTRIC COMPANY
By: ________________________________
Don W. Myers, Vice President and
Treasurer
Date: April 12, 1994
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