SEC File No. 70-
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM U-l
DECLARATION
UNDER
THE PUBLIC UTILITY HOLDING COMPANY ACT OF 1935 ("Act")
PENNSYLVANIA ELECTRIC COMPANY ("Penelec")
2800 Pottsville Pike
Reading, Pennsylvania 19605
(Name of company filing this statement and address
of principal executive office)
GPU, INC. ("GPU")
(Name of top registered holding company parent of applicant)
Terrance G. Howson, Douglas E. Davidson, Esq.
Vice President and Treasurer Berlack, Israels & Liberman LLP
Mary A. Nalewako, Secretary 120 West 45th Street
Michael J. Connolly, New York, New York 10036
Assistant General Counsel
GPU Service, Inc.
300 Madison Avenue
Morristown, New Jersey 07962
Scott L. Guibord, Secretary Robert C. Gerlach, Esq.
Pennsylvania Electric Company Ballard Spahr Andrews &
2800 Pottsville Pike Ingersoll, LLP
Reading, Pennsylvania 19605 1735 Market Street - 51st Floor
Philadelphia, Pennsylvania
19103-7599
(Names and addresses of agents for service)
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ITEM 1. DESCRIPTION OF PROPOSED TRANSACTIONS.
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A. Penelec owns a 20% undivided interest in the Seneca Pumped
Storage Generating Station ("Seneca"), a 435 MW pumped storage hydroelectric
generating facility located near Warren, Pennsylvania. The remaining 80% is
owned by Cleveland Electric Illuminating Company ("CEI"). CEI is a public
utility company providing retail electric service in northeastern Ohio and is a
subsidiary of FirstEnergy Corp. ("FirstEnergy"), an exempt holding company under
the Act. HCAR No. 35-26772 (Nov. 5, 1997). Penelec is also the operator of
Seneca. The Federal Energy Regulatory Commission ("FERC") has issued a license
for Seneca (Project No. 2280) under Part 1 of the Federal Power Act ("FPA").
B. In October 1997, GPU announced its intention to begin the process
of divesting up to all of its fossil fuel and hydroelectric generation
facilities, including Penelec's 20% interest in Seneca (the "Seneca Interest"),
through an auction process. Upon completion of the auction process last October,
Penelec entered into a Purchase and Sale Agreement ("PSA") dated as of October
30, 1998, to sell the Seneca Interest to FE Acquisition Corp., a wholly-owned,
special purpose subsidiary of FirstEnergy and an Ohio corporation ("FEAC"), for
$43 million, subject to certain adjustments as discussed in paragraph D
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below(1). FEAC has advised Penelec that it intends to assign all
of its rights, obligations and interests under the PSA to CEI.
C. The closing of the sale of the Seneca Interest is subject
to (i) the receipt of various federal and state regulatory approvals, (ii)
the expiration or early termination of the applicable waiting period under
the Hart-Scott-Rodino Antitrust Improvements Act of 1976 ("HSR Act") and
(iii) the satisfaction of other customary closing conditions including the
transfer or reissuance to CEI of all material state and local permits, delivery
of legal opinions, and the like.
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(1) On October 29, 1998, Penelec, together with GPU's other electric utility
subsidiaries, Jersey Central Power & Light Company ("JCP&L") and Metropolitan
Edison Company ("Met-Ed") also entered into agreements to sell 23 fossil fuel
and hydroelectric generating plants, together with certain associated
facilities, equipment, assets and development properties to Sithe Energies, Inc.
("Sithe") for an aggregate purchase price of $1.68 billion, subject to certain
adjustments. Sithe, a privately-held Delaware corporation, currently operates 29
power plants in the United States and Canada. Additionally, in August 1998,
Penelec, together with New York State Electric & Gas Corporation, an
unaffiliated New York public utility, entered into agreements to sell their
respective 50% undivided ownership interests in the 1,884 MW Homer City Station
to EME Homer City Generation L.P., a subsidiary of Edison Mission Energy which
is, in turn, a subsidiary of Edison International (the parent company of
Southern California Edison Company, a public utility operating in central and
southern California) for approximately $1.8 billion. Further, Penelec, JCP&L and
Met-Ed entered into an agreement to sell the Three Mile Island Unit 1 nuclear
generating station to AmerGen Energy Company, LLC ("AmerGen") for a total
purchase price of $100 million, subject to certain adjustments. AmerGen is a
Delaware limited liability company whose ultimate owners are PECO Energy
Company, an electric and gas utility operating in Southeastern Pennsylvania and
British Energy, an electric utility operating in Great Britain.
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On the closing date (the "Closing Date"), Penelec will transfer to
CEI the Seneca Interest, which also includes Penelec's 20% undivided ownership
interest in certain inventory, machinery, permits and other assets relating to
Seneca, all as more fully described in the PSA, to CEI. Pursuant to an
Assignment and Assumption Agreement, CEI will in general assume without recourse
certain of Penelec's liabilities, including those related to: (i) contracts,
licenses and agreements concerning the Seneca Interest arising from and after
the Closing Date, and (ii) environmental liabilities relating to the release of
hazardous substances at Seneca.
D. As of December 31, 1998, the Seneca Interest had a net book value
of approximately $10.6 million.(2) The purchase price for the Seneca Interest
was determined through a competitive auction process and related arms-length
negotiations. On the Closing Date, the purchase price will be adjusted to
reflect certain items, including: (i) any inventory change from June 30, 1998,
(ii) the payment of rent, certain taxes and other items customarily adjusted and
(iii) Penelec's capital expenditures if such expenditures were either mandated
by a governmental authority or approved by CEI, unless such expenditures do not
exceed the aggregate of $2 million.
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(2) The cost of construction of the Seneca Interest was approximately $12.7
million.
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E. The Seneca site is owned by the United States Army Corps of
Engineers and the United States Forest Service, Department of the Interior, and
is used by the owners of Seneca under a license issued by the FERC under Part 1
of the FPA (License No. 2280). Penelec and CEI will be filing an application
with the FERC to transfer Penelec's co-license for Seneca to CEI. Following the
Closing Date, Penelec will continue to own and operate certain transmission and
distribution facilities which are located on the Seneca site pursuant to a
Sub-License Agreement between CEI and Penelec. Penelec will also grant to CEI
the right to own and operate certain equipment which is associated with Seneca
and which is located off the Seneca site within an adjacent Penelec substation.
F. GPU Generation, Inc., a Penelec affiliate and a wholly-owned
subsidiary of GPU, currently operates Seneca but will cease to do so on the
Closing Date. The PSA provides that CEI is obligated to make offers of
employment to Penelec's union employees associated with Seneca to fill CEI's
union staffing level requirements and to assume the applicable collective
bargaining agreement. CEI is also obligated to make reasonable efforts to employ
non-union personnel associated with the operation of Seneca.
G. Rule 53 Analysis.
(a) As described below, GPU meets all of the conditions of Rule
53 under the Act, except for Rule 53(a)(1). By
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Order dated November 5, 1997 (HCAR No. 35-26773) (the "November 5
Order"), the Commission authorized GPU to increase to 100% of its "average
consolidated retained earnings," as defined in Rule 53, the aggregate amount
which it may invest in EWGs and FUCOs. At December 31, 1998, GPU's average
consolidated retained earnings was approximately $2.183 billion, and GPU's
aggregate investment in EWGs and FUCOs was approximately $1.204 billion.
Accordingly, under the November 5 Order, GPU may invest up to an additional $979
million in EWGs and FUCOs as of December 31, 1998.
(i) GPU maintains books and records to identify investments in, and
earnings from, each EWG and FUCO in which it directly or indirectly holds
an interest.
(A) For each United States EWG in which GPU directly or
indirectly holds an interest:
(1) the books and records for such EWG will be kept in
conformity with United States generally accepted
accounting principles ("GAAP");
(2) the financial statements will be prepared in
accordance with GAAP; and
(3) GPU directly or through its subsidiaries undertakes to
provide the Commission access to such books and
records and financial statements as the Commission may
request.
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(B) For each FUCO or foreign EWG which is a majority-owned
subsidiary of GPU:
(1) the books and records for such subsidiary will be kept
in accordance with GAAP;
(2) the financial statements for such subsidiary will be
prepared in accordance with GAAP; and
(3) GPU directly or through its subsidiaries undertakes to
provide the Commission access to such books and
records and financial statements, or copies thereof in
English, as the Commission may request.
(C) For each FUCO or foreign EWG in which GPU owns 50% or less
of the voting securities, GPU directly or through its
subsidiaries will proceed in good faith, to the extent
reasonable under the circumstances, to cause:
(1) such entity to maintain books and records in
accordance with GAAP;
(2) the financial statements of such entity to be
prepared in accordance with GAAP; and
(3) access by the Commission to such books and records
and financial statements (or copies thereof) in
English as the Commission
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may request and, in any event, will provide the
Commission on request copies of such materials as are
made available to GPU and its subsidiaries. If and to
the extent that such entity's books, records or
financial statements are not maintained in accordance
with GAAP, GPU will, upon request of the Commission,
describe and quantify each material variation
therefrom as and to the extent required by
subparagraphs (a) (2) (iii) (A) and (a) (2) (iii) (B)
of Rule 53.
(ii) No more than 2% of GPU's domestic public utility subsidiary
employees will render any services, directly or indirectly, to any EWG or
FUCO in which GPU directly or indirectly holds an interest.
(iii) Copies of this Declaration on Form U-1 are being provided to
the New Jersey Board of Public Utilities and the Pennsylvania Public
Utility Commission, the only federal, state or local regulatory agencies
having jurisdiction over the retail rates of GPU's electric utility
subsidiaries(3). In addition, GPU will submit to each such commission
copies of any amendments to this Declaration and any Rule 24
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(3) Penelec is also subject to retail rate regulation by the New York Public
Service Commission with respect to retail service to approximately 3,700
customers in Waverly, New York served by Waverly Electric Power & Light
Company, a Penelec subsidiary. Waverly Electric's revenues are immaterial,
accounting for less than 1% of Penelec's total operating revenues.
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certificates required hereunder, as well as a copy of Item 9 of
GPU's Form U5S and Exhibits H and I thereof (commencing with the Form U5S
to be filed for the calendar year in which the authorization herein
requested is granted).
(iv) None of the provisions of paragraph (b) of Rule 53 render
paragraph (a) of that Rule unavailable for the proposed transaction.
(A) Neither GPU nor any subsidiary of GPU having a book value
exceeding 10% of GPU's consolidated retained earnings is
the subject of any pending bankruptcy or similar
proceeding.
(B) GPU's average consolidated retained earnings for the four
most recent quarterly periods (approximately $2.183
billion) represented an increase of approximately $22.4
million (or approximately 1.0%) in the average consolidated
retained earnings for the previous four quarterly periods
(approximately $2.160 billion).
(C) GPU did not incur operating losses from direct or indirect
investments in EWGs and FUCOs in 1998 in excess of 5% of
GPU's December 31, 1998 consolidated retained earnings.
As described above, GPU meets all the conditions of Rule 53(a),
except for clause (1). With respect to clause (1),
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the Commission determined in the November 5 Order that GPU's
financing of investments in EWGs and FUCOs in an amount greater than 50% of
GPU's average consolidated retained earnings as otherwise permitted by Rule
53(a)(1) would not have either of the adverse effects set forth in Rule 53(c).
Moreover, even if the effect of the capitalization and earnings of
subsidiary EWGs and FUCOs were considered, there is no basis for the Commission
to withhold or deny approval for the transaction proposed in this Declaration.
The transaction would not, by itself, or even considered in conjunction with the
effect of the capitalization and earnings of GPU's subsidiary EWGs and FUCOs,
have a material adverse effect on the financial integrity of the GPU system, or
an adverse impact on GPU's public utility subsidiaries, their customers, or the
ability of State commissions to protect such public utility customers.
The November 5 Order was predicated, in part, upon the assessment of
GPU's overall financial condition which took into account, among other factors,
GPU's consolidated capitalization ratio and the recent growth trend in GPU's
retained earnings. As of June 30, 1997, the most recent quarterly period for
which financial statement information was evaluated in the November 5 Order,
GPU's consolidated capitalization consisted of 49.2% equity and 50.8% debt. As
stated in the November 5 Order, GPU's June 30, 1997 pro forma capitalization,
reflecting the November
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6, 1997 acquisition of PowerNet Victoria, was 39.3% equity and
60.7% debt.
GPU's December 31, 1998 consolidated capitalization consists of
45.4% equity and 54.6% debt. Thus, since the date of the November 5 Order, there
has been no adverse change in GPU's consolidated capitalization ratio, which
remains within acceptable ranges and limits as evidenced by the credit ratings
of GPU's electric utility subsidiaries.(4)
GPU's consolidated retained earnings grew on average approximately
4.5% per year from 1992 through 1998. Earnings attributable to GPU's investments
in EWGs and FUCOs have contributed positively to consolidated earnings,
excluding the impact of the windfall profits tax on the Midlands Electricity plc
investment.(5)
Accordingly, since the date of the November 5 Order, the
capitalization and earnings attributable to GPU's investments in EWGs and FUCOs
have not had any adverse impact on GPU's financial integrity.
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(4) The first mortgage bonds of Penelec, JCP&L and Met-Ed are rated A+ by
Standard & Poors Corporation, and A2, Baa1 and A3, respectively, by
Moody's Investor Services, Inc.
(5) As discussed in the November 5 Order, GPU incurred a loss for 1997 from
its investments in EWGs and FUCOs as a result of the windfall profits tax
imposed on Midlands Electricity, plc.
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Reference is made to Exhibit G filed herewith which sets forth GPU's
consolidated capitalization at December 31, 1998 and after giving effect to the
transaction proposed herein. As set forth in such exhibit, the proposed
transaction will not have a material impact on GPU's capitalization or earnings.
ITEM 2. FEES, COMMISSIONS AND EXPENSES.
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The estimated fees, commission and expenses to be incurred in
connection herewith will be filed by amendment.
ITEM 3. APPLICABLE STATUTORY PROVISIONS.
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The sale of the Seneca Interest is subject to Section 12(d)
of the Act and Rule 44 thereunder.
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ITEM 4. REGULATORY APPROVALS
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A. The Pennsylvania Public Utility Commission ("PaPUC") has
approved the sale of all of Penelec's generation assets (including the Seneca
Interest) in an Order dated October 16, 1998 (attached as an exhibit hereto). In
accordance with that order, Penelec will request that the PaPUC issue a
Certificate of Public Convenience and Necessity approving such sale. Penelec
will file an application with the FERC seeking authorization to transfer
Penelec's hydroelectric license for Seneca to CEI. Penelec and CEI will also
file requisite notification and report forms pursuant to the HSR Act with
respect to the sale of the Seneca Interest with the Federal Trade Commission and
the Department of Justice.
B. No other state commission has jurisdiction with respect to
the subject transaction and, assuming that your Commission authorizes and
approves all aspects of the sale of the Seneca Interest (including the
accounting therefor), no other federal commission has jurisdiction with respect
thereto.
ITEM 5. PROCEDURE.
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It is requested that the Commission issue an order with
respect to the transaction proposed herein at the earliest practicable date, but
in any event not later than April 30, 1999. It is further requested that (i)
there not be a recommended decision by an Administrative Law Judge or other
responsible
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officer of the Commission, (ii) the Office of Public Utility
Regulation be permitted to assist in the preparation of the Commission's
decision, and (iii) there be no waiting period between the issuance of the
Commission's order and the date on which it is to become effective.
ITEM 6. EXHIBITS AND FINANCIAL STATEMENTS.
A - Not Applicable.
B-1 - Purchase and Sale Agreement between Penelec and
FEAC -- to be filed by amendment.
B-2 - Interconnection Agreement among Penelec, FEAC
and CEI -- to be filed by amendment.
C - Not Applicable.
D-1 - Order of PaPUC dated October 16, 1998 approving
the sale of Penelec's generation assets -- to be
filed by amendment.
D-2 PaPUC Certificate of Public Convenience -- to be
filed by amendment.
D-3 Application for License Transfer filed by Penelec
with the FERC -- to be filed by amendment.
E - Map of interconnection relationship of
properties of Penelec with properties of CEI (to
be filed under Form SE) -- to be filed by
amendment.
F-l - Opinion of Berlack, Israels & Liberman LLP --
to be filed by amendment.
F-2 - Opinion of Ballard Spahr Andrews & Ingersoll,
LLP -- to be filed by amendment.
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G - GPU Actual and Pro Forma Capitalization ratios
as at December 31, 1998 -- to be filed by
amendment.
(b) Financial Statements:
1-A - Penelec Consolidated Balance Sheets, actual and
pro forma, as at December 31, 1998, and
Consolidated Statements of Income, actual and pro
forma, and Statement of Retained Earnings, for the
year ended December 31, 1998; pro forma journal
entries -- to be filed by amendment.
1-B - GPU Consolidated Balance Sheets, actual and pro
forma, as at December 31, 1998, and Consolidated
Statements of Income, actual and pro forma, and
Statement of Retained Earnings, for the year ended
December 31, 1998; pro forma journal entries -- to
be filed by amendment.
2 - Reference is made to Financial Statements
included in 1 above.
3 - None.
4 - None, except as set forth in the Notes to
Financial Statements.
ITEM 7. INFORMATION AS TO ENVIRONMENTAL EFFECTS.
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The issuance of an order by your Commission with respect to
the proposed sale of the Seneca Interest is not a major Federal action
significantly affecting the quality of the human environment.
No Federal agency has prepared or is preparing an
environmental impact statement with respect to the subject transaction.
Reference is made to Item 4 hereof regarding regulatory approvals with respect
to the proposed sale of the Seneca Interest.
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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:
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T. G. Howson,
Vice President and Treasurer
Dated: March 2, 1999
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