<PAGE>
File No. 70-
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM U-1
APPLICATION OR DECLARATION
UNDER
THE PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
ALLEGHENY GENERATING COMPANY
10435 DOWNSVILLE PIKE
HAGERSTOWN, MD 21740
(Name of company or companies filing this statement and addresses of
principal executive offices)
Allegheny Power System, Inc.
(Name of top registered holding company parent of each applicant or
declarant)
Thomas K. Henderson, Esq.
Vice President
Allegheny Power Service Corporation
10435 Downsville Pike
Hagerstown, MD 21740
(Name and address of agent for service)
<PAGE>
ITEM 1. DESCRIPTION OF TRANSACTION
Allegheny Generating Company ("AGC") is a wholly owned subsidiary
of Monongahela Power Company ("Monongahela"), The Potomac Edison Company
("Potomac Edison") and West Penn Power Company ("West Penn", together with
Monongahela and Potomac Edison, the "Operating Subsidiaries"). The Operating
Subsidiaries, in turn, are wholly-owned subsidiaries of Allegheny Power
System, Inc. (APS), a registered public utility holding company. AGC requests
authority to pay dividends with respect to its common stock, from time to time
through December 31, 2001, out of capital or unearned surplus, to the extent
permitted under applicable corporate law and any applicable financing
agreements to which AGC is a party which restrict distributions to
shareholders. Due to the nature of being a single asset company with
declining capital needs, AGC's retained earnings are currently insufficient to
pay common stock dividends. AGC seeks authority to pay such dividends out of
capital or unearned surplus.
BACKGROUND
AGC was incorporated in 1981 under the laws of Virginia. It is
jointly owned by the Operating Subsidiaries as follows: Monongahela, 27%;
Potomac Edison, 28%; and West Penn, 45%. AGC has no employees, and its only
assets are a 40% undivided interest in a 2100-megawatt ("MW") pumped-storage
hydroelectric station located in Bath County, Virginia, which was placed in
commercial operation in December 1985, and its connecting transmission
facilities. The remaining 60% undivided interest in the Bath County Station
is owned by Virginia Electric and Power Company, the nonaffiliated operator of
the station.
AGC's 840 MW share of capacity of that station is sold exclusively
to the three Operating Subsidiaries pursuant to a power agreement. AGC's
rates are set by a formula filed with and previously accepted by the Federal
Energy Regulatory Commission (the "FERC"). AGC's revenues are determined
under a "cost of service formula" wholesale rate schedule approved by the
FERC. Under this arrangement, AGC recovers in revenues all of its operation
and maintenance expenses, depreciation, taxes, and a return on its investment.
Therefore, if all other factors remain equal, revenues are expected to
continue to decrease each year due to a normal continuing reduction in AGC's
net investment in the Bath County Station and its connecting transmission
facilities upon which the return on investment is determined. The net
investment (primarily net plant less deferred income taxes) decreases each
year by the amount that provisions for depreciation and deferred income taxes
exceed net plant additions. Although AGC has made certain capital
expenditures on the Station, AGC has no plans for construction of any other
major facilities.
Current earnings by AGC continue to be determined as they have
since the Bath County Project commenced operation in 1985, in accordance with
<PAGE>
a FERC approved cost of service formula. Available cash flow from operations
is applied first to the minimal capital expenditure requirements for its
existing single asset, and next to the pay down of debt and to the payment of
dividends in a proportion that maintains debt at about 55% and equity at about
45% of capital.
The current and proposed dividend payment policy is unchanged from that
which has been followed since operations commenced in 1985. Prior to 1985, no
dividends were paid but retained earnings accrued as a result of recording
allowance for funds used during construction (AFUDC) in accordance with the
FERC uniform system of accounts.
AGC's circumstances are unique in that it is a company with only one
asset, a depreciating asset on which shareholders are entitled to a return of
principal. Prior to 1996, the payment of dividends in excess of current
earnings was made possible out of retained earnings from AFUDC accumulated
during construction, 1982 - 1985.
As of June 30, 1996, AGC reported total assets of $700,681,000,
$27,060,000 net income, $210,016,000 capital investment by the three Operating
Subsidiaries and $242,934,000 million in long-term debt which includes
debentures, medium-term notes, commercial paper, and notes payable to
affiliates. Its capitalization ratios are 54% debt and 46% equity. The
following chart shows the amount of earnings and depreciation received and the
amount of dividends paid out by AGC in the past five years.
1995 1994 1993 1992 1991
Earnings 27,224 29,717 27,182 30,724 32,929
Depreciation 17,018 16,852 16,899 16,827 16,778
Earnings Plus
Depreciation 44,242 46,569 44,081 47,551 49,707
Dividend Payment 35,800 35,500 34,200 39,787 43,000
As illustrated by the above chart, AGC's earnings and depreciation exceed what
it pays out in dividends. Paying dividends out of capital surplus will not
jeopardize the financial integrity of AGC, the Operating Subsidiaries or the
APS system.
DISCUSSION
Section 12(c) makes it unlawful for any registered holding company
or subsidiary company thereof to declare or pay a dividend in contravention of
rules or regulations or orders the Commission may prescribe "to protect the
<PAGE>
financial integrity of companies in holding company systems, to safeguard the
working capital of public-utility companies, to prevent the payment of
dividends out of capital or unearned surplus, and to prevent the circumvention
of the provisions of [the Act]." Rule 46(a) prohibits a registered holding
company or subsidiary thereof from paying dividends out of capital or unearned
surplus "except pursuant to a declaration ... and ... order of the
Commission."
In the June 1995 report of the Division of Investment Management
to the entire Commission, the Division of Investment Management recommended
that the SEC study whether payment of dividends out of capital or unearned
surplus should be permitted without an order of the SEC, particularly with
respect to nonutility companies.
In determining whether to permit a registered holding company to
pay dividends out of capital surplus, the Commission is guided by the
standards of Section 12(c). See Eastern Utilities Associates, HCAR 25330
(1991). The Commission considers various factors, including: (i) the asset
value of the company in relation to its capitalization (ii) the company's
prior earnings, (iii) the company's current earnings in relation to the
proposed dividend, and (iv) the company's projected cash position after
payment of a dividend. Furthermore, the payment of the dividend must be
appropriate, in the public interest, and in the best interests of the security
holders.
AGC's payment of dividends out of capital surplus will have no
impact for the APS System on a consolidated basis. AGC is jointly owned by
the operating subsidiaries. The effect on the operating subsidiaries'
investment in AGC is the same whether dividends are paid from retained
earnings or capital surplus. AGC's proposal to pay dividends out of capital
surplus does not contravene the intent of section 12(c) of the Act. AGC is
motivated by the unique circumstance of being a company with only one asset,
which is a depreciating asset, on which the shareholders are entitled to a
return of principal. AGC receives each year an amount of depreciation that
amounts to more than capital expenditures. The excess is credited to capital
surplus. The payment of dividends out of capital surplus will not be
detrimental to the financial integrity or working capital of either AGC or the
Operating Subsidiaries, nor will it adversely affect the position of debt
security holders.
ITEM 2. FEES, COMMISSIONS AND EXPENSES
None, other than (i) ordinary expenses not over $500 in connection
with the preparation of this Application or Declaration, and (ii) the $2,000
filing fee for this Application or Declaration.
None of such fees, commissions or expenses are to be paid to any
associate company or affiliate of the Applicant or any affiliate of any such
associate company except for legal, financial and other services to be
performed at cost by Allegheny Power Service Corporation.
<PAGE>
ITEM 3. APPLICABLE STATUTORY PROVISIONS
The Applicant has been advised that the proposed transactions, in
whole or in part, may be subject to Section 12(c) of the Public Utility
Holding Company Act of 1935 and Rules 46 and 54 thereunder.
ITEM 4. REGULATORY APPROVAL
No commission other than the Securities and Exchange Commission
has jurisdiction over the proposed transactions.
ITEM 5. PROCEDURE
It is requested that the Commission's order granting this
Application or Declaration be issued on or before August 30, 1996. There
should be no recommended decision by a hearing or other responsible officer of
the Commission and no 30-day waiting period between the issuance of the
Commission's order and its effective date. The 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 transactions covered by this Application or Declaration.
ITEM 6. EXHIBITS AND FINANCIAL STATEMENTS
(a) F Opinion of Counsel
G Financial Data Schedule
H Form of Notice
(b) Financial Statements as of June 30, 1996
1-A APS and subsidiaries consolidated balance sheet, per
books.
<PAGE>
1-B APS and subsidiaries consolidated statements of
income, per books, and earned surplus.
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 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 GENERATING COMPANY
By:
CAROL G. RUSS
Carol G. Russ
Counsel
Dated: July 29, 1996
<PAGE>
EXHIBIT H
SECURITIES AND EXCHANGE COMMISSION
(Release No. 35- : )
Allegheny Generating Company
Notice Requesting Approval for Payment of
Dividends Out of Capital or Unearned Surplus
Allegheny Generating Company ("AGC") is a wholly owned subsidiary
of Monongahela Power Company ("Monongahela"), The Potomac Edison Company
("Potomac Edison") and West Penn Power Company ("West Penn", together with
Monongahela and Potomac Edison, the "Operating Subsidiaries"). The Operating
Subsidiaries, in turn, are wholly-owned subsidiaries of Allegheny Power
System, Inc. (APS), a registered public utility holding company. AGC requests
authority to pay dividends with respect to its common stock, from time to time
through December 31, 2001, out of capital or unearned surplus, to the extent
permitted under applicable corporate law and any applicable financing
agreements to which AGC is a party which restrict distributions to
shareholders. Due to the nature of being a single asset company with
declining capital needs, AGC's retained earnings are currently insufficient to
pay common stock dividends. AGC seeks authority to pay such dividends out of
capital or unearned surplus.
BACKGROUND
AGC was incorporated in 1981 under the laws of Virginia. It is
jointly owned by the Operating Subsidiaries as follows: Monongahela, 27%;
Potomac Edison, 28%; and West Penn, 45%. AGC has no employees, and its only
assets are a 40% undivided interest in a 2100-megawatt ("MW") pumped-storage
hydroelectric station located in Bath County, Virginia, which was placed in
commercial operation in December 1985, and its connecting transmission
facilities. The remaining 60% undivided interest in the Bath County Station
is owned by Virginia Electric and Power Company, the nonaffiliated operator of
the station.
AGC's 840 MW share of capacity of that station is sold exclusively
to the three Operating Subsidiaries pursuant to a power agreement. AGC's
rates are set by a formula filed with and previously accepted by the Federal
Energy Regulatory Commission (the "FERC"). AGC's revenues are determined
under a "cost of service formula" wholesale rate schedule approved by the
FERC. Under this arrangement, AGC recovers in revenues all of its operation
and maintenance expenses, depreciation, taxes, and a return on its investment.
Therefore, if all other factors remain equal, revenues are expected to
continue to decrease each year due to a normal continuing reduction in AGC's
net investment in the Bath County Station and its connecting transmission
facilities upon which the return on investment is determined. The net
investment (primarily net plant less deferred income taxes) decreases each
year by the amount that provisions for depreciation and deferred income taxes
exceed net plant additions. Although AGC has made certain capital
expenditures on the Station, AGC has no plans for construction of any other
major facilities.
<PAGE>
Current earnings by AGC continue to be determined as they have
since the Bath County Project commenced operation in 1985, in accordance with
a FERC approved cost of service formula. Available cash flow from operations
is applied first to the minimal capital expenditure requirements for its
existing single asset, and next to the pay down of debt and to the payment of
dividends in a proportion that maintains debt at about 55% and equity at about
45% of capital.
The current and proposed dividend payment policy is unchanged from that
which has been followed since operations commenced in 1985. Prior to 1985, no
dividends were paid but retained earnings accrued as a result of recording
allowance for funds used during construction (AFUDC) in accordance with the
FERC uniform system of accounts.
AGC's circumstances are unique in that it is a company with only one
asset, a depreciating asset on which shareholders are entitled to a return of
principal. Prior to 1996, the payment of dividends in excess of current
earnings was made possible out of retained earnings from AFUDC accumulated
during construction, 1982 - 1985.
As of June 30, 1996, AGC reported total assets of $700,681,000,
$27,060,000 net income, $210,016,000 capital investment by the three Operating
Subsidiaries and $242,934,000 million in long-term debt which includes
debentures, medium-term notes, commercial paper, and notes payable to
affiliates. Its capitalization ratios are 54% debt and 46% equity. The
following chart shows the amount of earnings and depreciation received and the
amount of dividends paid out by AGC in the past five years.
1995 1994 1993 1992 1991
Earnings 27,224 29,717 27,182 30,724 32,929
Depreciation 17,018 16,852 16,899 16,827 16,778
Earnings Plus
Depreciation 44,242 46,569 44,081 47,551 49,707
Dividend Payment 35,800 35,500 34,200 39,787 43,000
As illustrated by the above chart, AGC's earnings and depreciation exceed what
it pays out in dividends. Paying dividends out of capital surplus will not
jeopardize the financial integrity of AGC, the Operating Subsidiaries or the
APS system.
DISCUSSION
Section 12(c) makes it unlawful for any registered holding company
or subsidiary company thereof to declare or pay a dividend in contravention of
rules or regulations or orders the Commission may prescribe "to protect the
financial integrity of companies in holding company systems, to safeguard the
working capital of public-utility companies, to prevent the payment of
dividends out of capital or unearned surplus, and to prevent the circumvention
<PAGE>
of the provisions of [the Act]." Rule 46(a) prohibits a registered holding
company or subsidiary thereof from paying dividends out of capital or unearned
surplus "except pursuant to a declaration ... and ... order of the
Commission."
In the June 1995 report of the Division of Investment Management
to the entire Commission, the Division of Investment Management recommended
that the SEC study whether payment of dividends out of capital or unearned
surplus should be permitted without an order of the SEC, particularly with
respect to nonutility companies.
In determining whether to permit a registered holding company to
pay dividends out of capital surplus, the Commission is guided by the
standards of Section 12(c). See Eastern Utilities Associates, HCAR 25330
(1991). The Commission considers various factors, including: (i) the asset
value of the company in relation to its capitalization (ii) the company's
prior earnings, (iii) the company's current earnings in relation to the
proposed dividend, and (iv) the company's projected cash position after
payment of a dividend. Furthermore, the payment of the dividend must be
appropriate, in the public interest, and in the best interests of the security
holders.
AGC's payment of dividends out of capital surplus will have no
impact for the APS System on a consolidated basis. AGC is jointly owned by
the operating subsidiaries. The effect on the operating subsidiaries'
investment in AGC is the same whether dividends are paid from retained
earnings or capital surplus. AGC's proposal to pay dividends out of capital
surplus does not contravene the intent of section 12(c) of the Act. AGC is
motivated by the unique circumstance of being a company with only one asset,
which is a depreciating asset, on which the shareholders are entitled to a
return of principal. AGC receives each year an amount of depreciation that
amounts to more than capital expenditures. The excess is credited to capital
surplus. The payment of dividends out of capital surplus will not be
detrimental to the financial integrity or working capital of either AGC or the
Operating Subsidiaries, nor will it adversely affect the position of debt
security holders.
Except as described herein, no associate company or affiliate of
the Applicants or any affiliate of any such associate company has any material
interest, directly or indirectly, in the proposed transactions.
The application and any amendments thereto are available for
public inspection through the Commission's Office of Public Reference.
Interested persons wishing to comment or request a hearing should submit their
views in writing by , 1996, to the Secretary, Securities and
Exchange Commission, Washington, DC 20549, and serve a copy on the Applicant
at the address specified above. Proof of service (by affidavit or, in case of
an attorney at law, by certificate) should be filed with the request. Any
request for a hearing shall identify specifically the issues of fact or law
that are disputed. A person who so requests will be notified of any hearing,
if ordered, and will receive a copy of any notice or order issued in this
matter. After said date, the application, as filed or as it may be amended,
may be granted.
For the Commission, by the Division of Investment Management,
pursuant to delegated authority.
<TABLE> <S> <C>
<ARTICLE> OPUR1
<MULTIPLIER> 1,000
<CURRENCY> U.S.DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JUL-01-1995
<PERIOD-END> JUN-30-1996
<EXCHANGE-RATE> 1
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 5,069,276
<OTHER-PROPERTY-AND-INVEST> 64,526
<TOTAL-CURRENT-ASSETS> 533,150
<TOTAL-DEFERRED-CHARGES> 692,208
<OTHER-ASSETS> 3,818
<TOTAL-ASSETS> 6,362,978
<COMMON> 151,600
<CAPITAL-SURPLUS-PAID-IN> 1,012,145
<RETAINED-EARNINGS> 987,034
<TOTAL-COMMON-STOCKHOLDERS-EQ> 2,150,779
0
170,086
<LONG-TERM-DEBT-NET> 2,263,449
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 107,513
<LONG-TERM-DEBT-CURRENT-PORT> 5,900
0
<CAPITAL-LEASE-OBLIGATIONS> 2,397
<LEASES-CURRENT> 887
<OTHER-ITEMS-CAPITAL-AND-LIAB> 1,661,967
<TOT-CAPITALIZATION-AND-LIAB> 6,362,978
<GROSS-OPERATING-REVENUE> 2,369,335
<INCOME-TAX-EXPENSE> 145,435
<OTHER-OPERATING-EXPENSES> 1,815,156
<TOTAL-OPERATING-EXPENSES> 1,960,591
<OPERATING-INCOME-LOSS> 408,744
<OTHER-INCOME-NET> 6,581
<INCOME-BEFORE-INTEREST-EXPEN> 415,325
<TOTAL-INTEREST-EXPENSE> 179,995
<NET-INCOME> 235,330
9,256
<EARNINGS-AVAILABLE-FOR-COMM> 226,074
<COMMON-STOCK-DIVIDENDS> 201,297
<TOTAL-INTEREST-ON-BONDS> 113,425
<CASH-FLOW-OPERATIONS> 0<F1>
<EPS-PRIMARY> 1.88
<EPS-DILUTED> 1.88
<FN>
<F1>Not calculated for Form U-1 purposes.
</FN>
</TABLE>
<PAGE>
CONTENTS
Statement
No.
Balance sheets at June 30, 1996
Allegheny Power System, Inc. and Subsidiaries 1-A
Statements of income and retained earnings for twelve months
ended June 30, 1996
Allegheny Power System, Inc. and Subsidiaries 1-B
These financial statements have been prepared for Form U-1
purposes and are unaudited.
Reference is made to the Notes to Financial Statements in the
Allegheny Power System companies combined Annual Report on
Form 10-K for the year ended December 31, 1995, and to the Form 10-Q's
for the quarter ended March 31, 1996.
<PAGE>
ALLEGHENY POWER SYSTEM, INC. AND SUBSIDIARIES Statement 1-A
CONSOLIDATED BALANCE SHEET - JUNE 30, 1996
Assets (Thousands)
Property, plant, and equipment:
At original cost 7,880,554
Accumulated depreciation (2,811,278)
5,069,276
Investments and other assets:
Subsidiaries consolidated--excess of cost
over book equity at acquisition 15,077
Securities of associated company--at cost,
which approximates equity 1,250
Benefit plans' investments 48,199
Other 3,818
68,344
Current assets:
Cash and temporary cash investments 6,699
Accounts receivable:
Electric service, net of $13,310,000 uncollectible allowance 268,815
Other 14,147
Materials and supplies--at average cost:
Operating and construction 84,914
Fuel 54,595
Deferred income taxes 41,727
Prepaid taxes 47,116
Other 15,137
533,150
Deferred charges:
Regulatory assets 599,155
Unamortized loss on reacquired debt 55,329
Other 37,724
692,208
Total Assets 6,362,978
Capitalization and Liabilities
Capitalization:
Common stock 151,600
Other paid-in capital 1,012,145
Retained earnings 987,034
2,150,779
Preferred stock 170,086
Long-term debt and QUIDS of subsidiaries 2,263,449
4,584,314
Current liabilities:
Short-term debt 107,513
Long-term debt due within one year 5,900
Accounts payable 103,672
Taxes accrued:
Federal and state income 27,200
Other 31,521
Deferred power costs 44,648
Interest accrued 41,828
Restructuring liabilities 33,365
Other 66,560
462,207
Deferred credits and other liabilities:
Unamortized investment credit 145,639
Deferred income taxes 987,003
Regulatory liabilities 95,604
Restructuring liabilities 15,600
Other 72,611
1,316,457
Total Capitalization and Liabilities 6,362,978
<PAGE>
Statement 1-B
ALLEGHENY POWER SYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME FOR TWELVE MONTHS ENDED JUNE 30, 1996
(Thousands)
ELECTRIC OPERATING REVENUES 2,369,335
OPERATING EXPENSES:
Operation:
Fuel 523,000
Purchased power and exchanges 176,823
Deferred power costs, net 42,167
Other 369,638
Maintenance 256,731
Depreciation 258,763
Taxes other than income taxes 188,034
Federal and state income taxes 145,435
Total Operating Expenses 1,960,591
Operating Income 408,744
OTHER INCOME AND DEDUCTIONS:
Allowance for other than borrowed funds
used during construction 2,719
Other income, net 3,862
Total Other Income and Deductions 6,581
Income Before Interest Charges and
Preferred Dividends 415,325
INTEREST CHARGES AND PREFERRED DIVIDENDS:
Interest on first mortgage bonds 113,425
Interest on other long-term obligations 53,809
Other interest 15,353
Allowance for borrowed funds used during
construction (2,592)
Dividends on preferred stock of subsidiaries 9,256
Total Interest Charges and
Preferred Dividends 189,251
Consolidated Net Income 226,074
<PAGE>
Statement 1-B
(continued)
ALLEGHENY POWER SYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF RETAINED EARNINGS
FOR TWELVE MONTHS ENDED JUNE 30, 1996
(Thousands)
Balance at July 1, 1995 967,764
Add:
Consolidated net income 226,074
1,193,838
Deduct:
Dividends on common stock of Allegheny
Power System, Inc. (cash) 201,297
Expenses related to subsidiary companies'
preferred stock transactions 5,507
Total Deductions 206,804
Balance at June 30, 1996 987,034
EXHIBIT F
412-838-6770
July 29, 1996
Securities and Exchange Commission
450 5th Street, N.W.
Washington, DC 20549
Gentlemen:
Referring to the Application or Declaration on Form U-1
contemporaneously filed by Allegheny Generating Company ("AGC") under the
Public Utility Holding Company Act of 1935 with respect to the proposed
payment of dividends out of capital or unearned surplus, all as described in
the Application or Declaration of which this Opinion is a part, I have
examined or caused to be examined such documents and questions of law as I
deemed necessary to enable me to render this opinion.
I understand that the actions taken in connection with the
proposed transactions will be in accordance with the Application or
Declaration; that all amendments necessary to complete the above-mentioned
Application or Declaration will be filed with the Commission; and that all
other necessary corporate action by the Board of Directors and officers of AGC
in connection with the described transactions has been or will be taken prior
thereto.
Based upon the foregoing, I am of the opinion that if the said
Application or Declaration is permitted to become effective and the proposed
transactions are consummated in accordance therewith: (i) all state laws
applicable to the proposed transaction will have been complied with; (ii) the
consummation of the proposed transactions will not violate the legal rights of
the holders of any of the securities issued by AGC or by any associate or
affiliate company or any of them.
This opinion does not relate to State Blue Sky or securities laws.
I consent to the use of this Opinion as part of the Application or
Declaration to which it is appended, which is to be filed by AGC.
Very truly yours,
CAROL G. RUSS
Carol G. Russ
Counsel for
ALLEGHENY GENERATING COMPANY
