File No. 70-9627
(Potomac Edison Asset Transfer)
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 4
FORM U-1
APPLICATION/DECLARATION
UNDER
THE PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
_________________________________
Allegheny Energy, Inc. Allegheny Energy Supply Company
10435 Downsville Pike R.R. 12, P.O. Box 1000
Hagerstown, Maryland 21740 Roseytown, Penna. 15601
The Potomac Edison Company Allegheny Energy Service Company
(d/b/a Allegheny Power) 10435 Downsville Pike
10435 Downsville Pike Hagerstown, Maryland 21740
Hagerstown, Maryland 21740
__________________________________
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 Winter, Esq. Patricia J. Clark, Esq. Terence Burke, Esq.
Deputy General Counsel Deputy General Counsel Deputy General Counsel
Allegheny Power Allegheny Energy Supply Allegheny Ventures, Inc
Company
800 Cabin Hill Drive R.R. 12, P.O. Box 1000 10435 Downsville Pike
Greensburg, PA 15601 Roseytown, PA 15601 Hagerstown, MD 21740
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 Proposed Transaction . . . . . . . . . . 3
A. Introduction and Summary of the Proposed Transaction . 3
B. Background . . . . . . . . . . . . . . . . . . . . . 4
C. Regulatory Environment . . . . . . . . . . . . . . . . 6
1. Maryland . . . . . . . . . . . . . . . . . . . . . . 6
2. West Virginia . . . . . . . . . . . . . . . . . . . 6
3. Virginia . . . . . . . . . . . . . . . . . . . . . . 7
4. Federal Energy Regulatory Commission . . . . . . . . 8
D. Overview of Requested Authorizations . . . . . . . . 8
1. The Transaction . . . . . . . . . . . . . . . . . 8
i. Formation of Subsidiaries . . . . . . . . . . . . 8
ii. Capitalization of Subsidiaries . . .. . . . . . . 8
iii. Transfers . . . . . . . . . . . .. . . . . . . . 9
2. Allegheny Energy - AE Units 1 and 2 LLC . . . . . . 11
3. Agreements . . . . . . . . . . . . . . . . . . . .11
4. Capitalization Ratios . . . .. . . . .. . . . . . . 12
5. Reservation of Jurisdiction . . . . . . . . . . . .12
Item 2. Fees, Commissions and Expenses . . . . . . . . . . . . .12
Item 3. Applicable Statutory Provisions . . . . . . . . . . . .13
A. Sections 9 & 10 . . . . . . . . . . . . . . . . . . .13
1. Compliance with State Law . . . . . . . . . . . . . 13
2. Capital Structure Not Unduly Complicated . . . . . .14
3. Consideration is Fair and Reasonable . . . . . . . .14
B. Section 12 & Rule 46 . . . . . . . . . . . . . . . . .14
C. Section 13(b) Compliance . . . . . . . . . . . . . . 15
D. Rule 54 Compliance . . . . . . . . . . . . . . . . . .16
Item 4. Regulatory Approvals . . . . . . . . . . . . . . . . . .16
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 . . . . . . . 18
<PAGE>
Item No. 1. DESCRIPTION OF THE PROPOSED TRANSACTION
A. Introduction and Summary of the Proposed Transaction
Allegheny Energy, Inc. ("Allegheny"), a registered holding
company, Allegheny Energy Service Company ("AESC"), a service
subsidiary of Allegheny, The Potomac Edison Company ("Potomac
Edison"), a wholly owned public utility electric subsidiary of
Allegheny, and Allegheny Energy Supply Company, LLC ("Genco"),<F1> a
wholly owned generating company subsidiary of Allegheny
(collectively, "Applicants"),<F2> hereby file this application-
declaration with the Securities and Exchange Commission
("Commission") under Sections 6(a), 7, 9(a), 10, 12(b) and 13(b)
of the Public Utility Holding Company Act of 1935, as amended
("Act"), and Rules 43(a), 44, 45, 46, 54, 90 and 91 under the Act.
As part of the ongoing restructuring in the electric utility
industry, Potomac Edison has filed restructuring and / or
compliance plans with the utility regulatory commissions of the
states of Maryland, West Virginia, and Virginia which, among other
things, unbundled generation from transmission and distribution.
These restructuring plans have been either negotiated and / or
contested and the subject of hearings. Each of the states has
issued, or is in the final process of issuing, restructuring
orders. In accordance with the orders Potomac Edison now seeks
approval to: (1) form and capitalize two first tier single member
limited liability corporations and a second tier single member
limited liability corporations for the purpose of holding
generating assets, rights, interests and related obligations; (2)
transfer utility generating assets, rights, and obligations to
Genco; (3) issue notes; and (4) enter into operating agreements.
Potomac Edison's request is consistent with an earlier order
issued by the Commission wherein Potomac Edison's sister utility,
West Penn Power Company, received approval to transfer its
generating assets, rights, interest and related obligations.<F3> The
proposed transaction is essentially the same as the West Penn
Power Company transaction except: 1) Potomac Edison generating
assets must be released from the first mortgage; and (2) at the
<F1> See Allegheny Energy, Inc., Holding Co. Act Release No.35-27101,
Order Authorizing Formation of Subsidiary Company; Transfer of
Assets to Generation Company; Issuance and Acquisition of
Securities; Capital Contributions; and Service Agreements
(November 12, 1999). In Application No. 70-9683 (filed May 25,
2000), Genco, among other things, is seeking authorization to,
directly or indirectly through one or more exempt subsidiaries or
intermediate companies, engage in Rule 58 activities; acquire
interests in, finance the acquisition of, and/or hold the
securities of, one or more Exempt Wholesale Generators ("EWGs").
Genco is not an EWG nor are there any plans for Genco to become an
EWG.
<F2> Potomac Edison, along with West Penn Power Company and
Monongahela Power Company collectively d/b/a Allegheny Power
deliver electric and gas energy to about 1.4 million customers in
parts of Maryland, Ohio, Pennsylvania, Virginia, and West
Virginia. Allegheny Power, together with Genco which operates and
markets competitive retail and wholesale electric generation and
operates regulated electric generation for its affiliates, and
Allegheny Ventures which actively invests in and develops energy-
related and telecommunications projects through Allegheny
Communications Connect ("ACC"), an exempt telecommunications
company ("ETC"), make up the Allegheny system.
<F3> See Allegheny Energy, Inc., Holding Co. Act Release No.35-27101,
Order Authorizing Formation of Subsidiary Company; Transfer of
Assets to Generation Company; Issuance and Acquisition of
Securities; Capital Contributions; and Service Agreements
(November 12, 1999).
<PAGE>
end of the transaction, the generation will be merged into the
existing affiliate generating company - Genco.<F4>
B. Background
Potomac Edison is an electric utility that provides service
to customers in parts of the states of Maryland, West Virginia,
and Virginia. As a public utility, Potomac Edison is subject to
regulation in each of the states in which it operates.
Additionally, the Federal Energy Regulatory Commission ("FERC"),
under section 203 of the Federal Power Act,<F5> has jurisdiction over
the sale, lease, or other disposition of Potomac Edison's utility
assets. Additionally, FERC has licensing authority over Potomac
Edison's hydroelectric generating facilities and over wholesale
power transactions. Finally, FERC has jurisdiction over the
transfer of AE Units 1 & 2 (as discussed herein). Each of the
three states regulates a different "slice" of the Potomac Edison
system. The extent of their jurisdiction, or the regulated
"slice," is based on the portion of the output of electricity
delivered to end-users and capacity committed from Potomac Edison.
This concept is commonly referred to as the "jurisdictional
allocation" or "allocation." Potomac Edison's system is allocated
as follows: 56.34% to Maryland; 19.80% to West Virginia; 17.98% to
Virginia; and, 5.88% to FERC. The jurisdictional allocation
relates solely to usage and is unrelated to Potomac Edison's
undivided ownership interests in electric generating assets.
Potomac Edison, subject to obtaining the requisite regulatory
approvals, proposes to leave the generating business in its
entirety. To accomplish this Potomac Edison proposes to transfer
its electric generating assets (other than certain hydroelectric
assets as discussed below), related assets, related liabilities,
and other rights and interests to Genco ("Transaction").<F6>
Transferring less than 100% of the generating function would
result in reduced efficiencies due to the complexities of the
various standards and rules of conduct. Moreover, as the
generation assets are common assets it would be impossible and
highly inefficient to attempt to sub-divide the physical
operations. Potomac Edison has, or is in the process of obtaining
regulatory approval from each of the jurisdictional bodies.
Maryland, West Virginia and Virginia are proceeding separately
with restructuring and each state is on a separate timeline to
grant authorization.
Potomac Edison holds undivided ownership interests in:
electric generating stations ("Generating Assets");<F7> related
assets ("Related Assets"); and certain generation related
<F4> States of incorporation for each is as follows: Allegheny -
Maryland, Potomac Edison - Maryland and Virginia; Genco -
Delaware, and Allegheny Energy Service Company - Maryland. The
subsidiaries which are proposed herein will be incorporated as
follows: PE Transferring Agent, LLC and PE Genco - Maryland; and
PE Virginia Hydros, LLC -Virginia.
<F5> 16 U.S.C. 824b(a) (1994).
<F6> In Holding Company Act Release No. 27101, the Commission, among
other things, authorized the formation of Genco, an LLC formed to
hold all the electric generating assets, rights, interests and
associated liabilities of Allegheny's wholly owned utility
subsidiary West Penn Power Company.
<F7> The term "Generating Assets" does not include Potomac Edison's
100% interest in the Luray, Newport, Shenandoah, and Warren hydro
electric generating stations located in Virginia ("Virginia
Hydros") or the Riverton property which together represent less
than 1% of the total net book value. Due to the structure of
Virginia law if Genco Potomac Edison were itself to directly
acquire the Virginia Hydros, it would be subject to regulation as
an electric utility in Virginia. To avoid such a result Potomac
Edison proposes, subject to Commission authorization, to transfer
the Virginia hydros as follows: (1) form a special purpose entity
("PE VA Hydro, LLC") for the purpose of holding the Virginia
Hydros; (2) transfer the Virginia Hydro to PE VA Hydro, LLC, as a
capital contribution and in exchange for the equity interests in
PE VA Hydro, LLC; (3) dividend the interests in PE VA Hydro, LLC,
to Allegheny; and (4) PE VA Hydro, LLC, will then become a
subsidiary of Genco. AESC will provide services to PE VA Hydros,
LLC, at cost.
<PAGE>
liabilities ("Related Liabilities"). Potomac Edison's undivided
ownership interests in Generating Assets consist of: a 25%
interest in the Fort Martin Power station located in Maidsville,
West Virginia; a 33% interest in the Albright Power Station
located in Albright, West Virginia; a 32.76% interest in the
Harrison Power Station located in Shinnston, West Virginia; a 20%
interest in the Hatfield's Ferry Power Station located in
Masontown, Pennsylvania; a 30% interest in the Pleasants Power
Station, located in Saint Mary's, West Virginia; a 100% interest
in the R. Paul Smith Station and R. Paul Smith Ash Basin both
located in Williamsport, Maryland; and a 100% interest in the
Millville, Dam #4 and Dam #5 hydro stations in located in West
Virginia.<F8> Additionally, as discussed, Potomac Edison has a 100%
interest in the Virginia Hydros. Potomac Edison proposes to
transfer the Virginia Hydros to PE VA Hydro, at net book value, as
of July 1, 2000.<F9>
Potomac Edison's Related Assets consist of current assets,
deferred charges, cash and temporary cash investments, and the
value of the investment in an undivided 28% ownership interest in
the stock of Allegheny Generating Company ("AGC"), a Virginia
corporation which it jointly owns with Genco and Monongahela
Power, which owns a 40% undivided interest in the Bath County,
Virginia, pumped storage hydroelectric generating facility and
related transmission facilities ("Bath County Rights and
Obligations"). Related Liabilities include accounts payables,
accrued taxes, tax deferrals, pollution controls bonds,<F10> and other
deferred credits. Related Liabilities do not include first
mortgage bonds. Potomac Edison is of the view that the transfer of
the Generating Assets but not Related Liabilities would negatively
impact the debt to equity ratios of Potomac Edison. Additionally,
Potomac Edison has an ownership interest in the Ohio Valley
Electric Corporation ("OVEC"),<F11> an investor owned utility ("Other
Rights and Interests").<F12>
Potomac Edison seeks authority to indirectly transfer to
Genco its undivided interests in its Generating Assets, Related
Assets, Related Liabilities, and Other Rights and Interests
corresponding to the jurisdictional allocation for Maryland, West
Virginia, Virginia, and the FERC, - and, as more fully described
in this application, for Genco and the intermediary transferees to
accept and transfer the interests received.
<F8> The jurisdictional allocation is calculated as follows, for
example using Maryland - the value of Potomac Edison's undivided
interest in the Fort Martin Power Station would be calculated by
multiplying the 56.34% Maryland allocation by the dollar value of
Potomac Edison's 25% undivided interest in Fort Martin on June 30,
2000.
<F9> See Footnote No. 8.
<F10> Notwithstanding the transfer of the payment obligation to Genco,
Potomac Edison shall remain liable for the pollution control bonds
by operation of the terms and conditions thereof.
<F11> Allegheny assigned 16% of its 12.5% ownership interest (and
corresponding power purchase interest) to Potomac Edison.
Allegheny's assignment of 16% of its 12.5% ownership interest
translates into a 2% ownership interest in OVEC (out of the
original 12.5%).
<F12> Applicants also intend to transfer contractual rights and
obligations corresponding to four jointly owned generation
facilities ("Joint-Owner Operation Agreements") and OVEC. The
jointly owned facilities are Fort Martin, Harrison, Hatfield Ferry
and Pleasants - each of which is operated pursuant to an operating
agreement ("Joint Operating Agreement"). Each of the Joint-Owner
Operation Agreements has a clause which provides that "[t]his
Agreement shall continue in full force and effect for a period of
45 years from the date hereof and for such longer period as the
Companies shall by mutual agreement continue to operate any of the
units at the Station."
<PAGE>
C. Regulatory Environment
1. Maryland
On December 15, 1999, Potomac Edison filed for review with
the Maryland Public Service Commission ("MD PSC") an application
for the transfer of the Maryland allocated share of its generation
assets as determined in accordance with MD PSC procedures.<F13> In
the 1999 session the Maryland General Assembly passed the
Competition Act which in Section 7-508 provides that: an Electric
Company may transfer its generation assets to an affiliate as part
of the restructuring of the electric generation services market in
Maryland. Section 7-508(C)(2) continues on to provide that:
"[T]he [MD PSC] may review and approve the transfer (of generation
facilities) for the sole purpose of determining: (i) that the
appropriate accounting has been followed; (ii) that the transfer
does not or would not result in an undue adverse effect on the
proper functioning of a competitive electric supply market; and
(iii) the appropriate transfer price and rate making."
In Case No. 8797, the MD PSC approved a Settlement Agreement
filed by the Potomac Edison and other interested parties.<F14> The
Settlement Agreement provided for customer choice of generation
suppliers by all of Potomac Edison's Maryland customers, except
those on certain contracts, beginning July 1, 2000. Section 31 of
the Settlement Agreement provided that "[A]fter full customer
choice is available as of July 1, 2000, [Potomac Edison] shall
either transfer its generation assets to an affiliate at book
value or shall transfer, sell, lease, assign, mortgage or
otherwise dispose of or encumber its generation assets to a third
party consistent with the Restructuring Legislation." The section
goes on to provide that: "[Potomac Edison's] generation shall be
deregulated only after full customer choice is available as of
July 1, 2000, and the generation assets are either transferred to
an affiliate or are transferred, sold, leased, assigned, or
mortgaged or otherwise disposed of or encumbered to a third
party." By this application Potomac Edison is seeking to comply
with the state's regulatory mandate.
2. West Virginia
On January 28, 2000, the West Virginia Public Service
Commission ("WV PSC") issued an order in Case No. 98-0452-E-GI,
adopting a stipulation to open the electric markets in West
Virginia. See Case 98-0452-E-GI, General Investigation to
Determine Whether West Virginia Should Adopt a Plan for Open
Access to the Electric Power Supply Market and for the Development
of a De-regulation Plan. The order, as more fully set forth in
Exhibit D-2A, Order of the WV PSC Adopting A Plan to Restructure
the Electric Generation Supply Market in West Virginia (January
28, 2000), among other things, authorized Potomac Edison to
transfer its undivided ownership interests corresponding its West
Virginia generation assets.
3. Virginia
<F13> In the Matter of the Application of The Potomac Edison Company
d/b/a Allegheny Power regarding the Transfer of its Maryland
Generation Assets to an Affiliate Under Section 7-508 of the
Electric Customer Choice and Competition Act of 1999 ("Competition
Act") (Dec. 15, 1999).
<F14> See MD PSC Order No. 75851 (March 15, 2000).
<PAGE>
Pursuant to the Virginia Code, on May 25, 2000, Potomac
Edison filed an application with the Virginia State Corporation
Commission ("VA SCC") for approval to of a plan for the functional
separation of its generating assets from its transmission and
distribution assets, as required by the Virginia Electric Utility
Restructuring Act.<F15> Potomac Edison provides electric service to
approximately 84,000 customers located in 14 northwestern Virginia
counties. In that application, Potomac Edison proposed to transfer
certain utility securities (i.e., AGC stock), certain contractual
entitlements (i.e., OVEC contractual rights and obligations), and
generating assets - excluding certain hydro facilities in
Virginia, to Genco (collectively referred to as "Phase I" by the
VA SCC).
4. Federal Energy Regulatory Commission
Pursuant to Section 203 of the Federal Power Act, <F16> U.S.C.
824b (1994), and Part 33 of the FERC's regulations thereunder, 18
C.F.R. Part 33 (1999), Potomac Edison and Genco filed an
application with the FERC. The application requested FERC's
approval to transfer: (1) jurisdictional allocation of step-up
transformers allocable to Potomac Edison's Maryland, West Virginia
and Virginia service areas; (2) securities evidencing Potomac
Edison's ownership interest in AGC; (3) certain wholesale power
purchase and supply agreements, including those jurisdictional
agreements Potomac Edison may enter into between the date of this
Application and the date of the proposed asset transfer; (4)
Potomac Edison's pollution control and solid waste bonds
associated with the transferred generating assets; and, (5)
licenses for the hydro electric generating facilities.
D. Overview of Requested Authorizations
1. The Transaction
i. Formation of Subsidiaries
Potomac Edison seeks authorization to form two first tier and
one second tier wholly owned limited liability companies. One of
the first tier limited liability companies, PE Transferring Agent,
LLC, will be formed for the purpose of acquiring the Generating
Assets, Related Assets, Related Liabilities, and Other Rights and
Interests from Potomac Edison. PE Genco, LLC, will be formed as
a second tier subsidiary of PE Transferring Agent, LLC, for the
purpose of acquiring the aforementioned Generating Assets, Related
Assets, Related Liabilities, and Other Rights and Interests from
PE Transferring Agent, LLC.16 Next Potomac Edison seeks
authority to form a first tier limited liability company - PE VA
Hydro, LLC. PE VA Hydro, LLC, would be formed for the purpose
of holding the Virginia Hydros.
Legitimate business reasons exist for the formation,
capitalization and temporary existence of PE Transferring Agent,
LLC and PE Genco, because they are essential to minimize the tax
and transactional costs of reorganization and transition to
competition. Potomac Edison and Allegheny believe that these
advantages offset the need to create a temporary entity and are
consistent with prior orders. PE Transferring Agent, LLC, will be
<F15> See Exhibit D-3, Application of The Potomac Edison Company . to
Acquire Utility Assets and Enter into a Contract with an
affiliated Interest (Filed February 7, 2000).
<F16> PE Transferring Agent LLC is an intermediate entity for tax and
other lawful business purposes.
<PAGE>
liquidated as soon as the transfers contemplated herein are
completed. Similarly, legitimate business reasons exists for the
formation of PE VA Hydro, LLC. Due to the structure of Virginia
law if Potomac Edison were to transfer the hydros to Genco, Genco
would be subject to regulation as an electric utility in Virginia.
To avoid such a result Potomac Edison proposes, subject to
Commission authorization, to transfer the Virginia Hydros to PE VA
Hydro, LLC.
ii. Capitalization of Subsidiaries
As of July 1, 2000, Potomac Edison proposes to make an
initial capital contribution to PE Transferring Agent, LLC in the
amount of $200,000 in government collateralized repurchase
agreements. PE Transferring Agent, LLC, proposes to acquire the
limited liability interests in PE Genco, LLC, in exchange for an
initial capital contribution in the amount of $100,000 in
government collateralized repurchase agreements. Potomac Edison
seeks authorization for PE Transferring Agent, LLC, to issue and
Potomac Edison to acquire all of the limited liability interests
in PE Transferring Agent, LLC. Potomac Edison additionally
proposes to transfer its interests in the Virginia Hydros to PE VA
Hydro, LLC, as a capital contribution. In exchange for the
Virginia Hydros, PE VA Hydro, LLC, proposes to issue, and Potomac
Edison proposes to accept, the limited liability interests in PE
VA Hydro, LLC.
Potomac Edison proposes to issue two non-interest bearing
promissory notes as additional capital contributions to PE
Transferring Agent, LLC. Potomac Edison proposes to contribute a
non interest bearing note payable to PE Transferring Agent, LLC,
for approximately $157.4 million, which is the difference between
Related Assets ($57.9 million) and Related Liabilities ($215.3
million) ("Balancing Note").<F17> Potomac Edison proposes to issue
another non-interest bearing note to PE Transferring Agent, LLC
("Liquidation Note"). The Liquidation Note will be in an amount
that is $20 million greater than the Purchase Note. The
Liquidation Note will be in the amount of $501 million. The
additional $20 million principal amount is necessary in order to
assure that the principal amount of the Liquidation Note is
sufficient to offset the principal amount of the Promissory Note
and expected accrued interest.
iii. Transfers
As of July 1, 2000,<F18> Potomac Edison proposes to transfer or
contribute<F19> a total of 100% of its ownership interests in
Generating Assets, Related Assets, Related Liabilities, Virginia
Hydros, and Other Rights and Interests. Specifically, Potomac
Edison proposes to transfer its ownership interests in the
Generating Assets, Related Assets, Related Liabilities, and Other
Rights and Interests to PE Transferring Agent, LLC. For the
reasons set forth in footnote no. 8, Potomac Edison does not
propose to transfer ownership interests in the Virginia Hydros to
PE Transferring Agent, LLC. Instead, Potomac Edison's ownership
interests in the Virginia Hydro, as set forth in the preceding
section, are to be contributed to PE VA Hydro, LLC, in exchange
for the limited liability interests in PE VA Hydro, LLC. As of
<F17> Other Rights and Interests have, and are carried at, a zero book
value.
<F18> As July 1, 2000 falls on a Saturday it will be necessary, with
Commission authorization, for Potomac Edison to form the
subsidiaries prior to that date. July 1, 2000 will be the
effective date of the Transaction.
<F19> The contributions are set forth in the preceding section.
<PAGE>
June 30, 2000, the projected net book values are projected to be
as follows: Generating Assets - $448.4 million; Related Assets -
$57.9 million; Related Liabilities - ($215.3) million), and
Virginia Hydros ($3.6) million.
In exchange for the Generating Assets PE Transferring Agent,
LLC, proposes to issue to Potomac Edison an interest bearing
unsecured promissory note ("Purchase Note") for approximately
$481.2 million. The Purchase Note equals the sum of the net book
value of the Generating Assets ($448.4 million) plus the
estimated net book value of fuel, supplies, and inventory ($32.8
million) (collectively "Inventory"). Inventory will also be
transferred using the Transaction structure described to move the
Generating Assets. Potomac Edison proposes to make a post
transfer true-up to adjust the transaction to reflect actual net
book values as of June 30, 2000.
As of June 30, 2000, Potomac Edison projects it will
have approximately $370 million of outstanding first mortgage
bonds. Potomac Edison expects to obtain a release of the
Generating Assets from the lien of the first mortgage by
certifying or pledging additional bondable property to the trustee
in an amount not less than the net book value of the Generating
Assets. Potomac Edison's first mortgage bond indenture permits
Potomac Edison to transfer any of its property and the Trustee
under the bond indenture must release that property from the lien
of the indenture so long as Potomac Edison replaces that property
with other property that is not currently pledged or certified to
support another first mortgage bond issue. The additional
bondable property pledged is not specifically identified in the
pledge. Rather, a general pledge, by property classification,
covering gross property additions purchased, constructed or
otherwise acquired during a defined period of time is given.
Specifically, two certificates will be given to the Trustee. The
first, certificate, titled the Engineer's Second Certificate
pledges property purchased, constructed or otherwise acquired by
the Company During the period May 15, 1994 to December 19, 1997
inclusive valued at approximately $242 million. The property is
more specifically set forth in Table A below.
Table A
Gross Property Additions purchased, constructed or otherwise
acquired by the Company
During the period May 15, 1994 to December 19, 1997 inclusive
Description
Electric Plant in Service:
Transmission Plant $ 26,851,283.99
Distribution Plant 133,298,819.78
General Plant 10,351,979.49
Construction Work in Progress 70,767,382.45
Electric Plant Held for Future Use 1,079,039.31
Total Electric Plant $242,348,505.02
Additionally, Potomac Edison, proposes to pledge additional
bondable property of the same type as described in Table A,<F20> by
giving the Trustee a certificate evidencing the commitment of
certain property associated with two redeemed bonds. The second
certificate, titled the Officer's Third Certificate covers
property formerly pledged to cover a $75 million bond paid at
maturity on March 1, 2000 and a $50 million bond due 2021 which
was redeemed October 8, 1998. Potomac Edison is required to put
<F20> In addition the Table A categories an additional "non utility
property" category identifying property valued at less than $4,000
is included in this pledge.
<PAGE>
up 10/6 of property to cover every $1 of bonds issued. The $75
million bond was secured by property valued at approximately $125
million and the $50 million bond was secured by $83 million in
real property. The total property pledged equals approximately
$450 million and exceeds the value of the Generating Assets
released ($448.4 million).
The release of Potomac Edison's Generating Assets (although
greater in amount) is no different than the transfer and release
of a single piece of Potomac Edison's property from the indenture.
Since Potomac Edison owns sufficient property to replace or
substitute for the Generating Assets property being released,
Potomac's outstanding first mortgage bonds are not impaired in any
way. After the release of the Generating Assets, these bonds are
supported by the same dollar value of property as before the
release of the Generating Assets. The Trustee under Potomac
Edison's indenture and the Trustee's counsel have both agreed with
that such a transfer and release of Potomac Edison's Generating
Assets is in accordance with the terms of the indenture and that
the security for the remaining outstanding bonds will not be
impaired. Potomac Edison requests authority to pledge those assets
described above in order to obtain the release from the Trustee.
Finally, PE Transferring Agent, LLC, will contribute the
Generating Assets, Related Assets, Related Liabilities, and Other
Rights and Interests to PE Genco, LLC. The Liquidation Note and
Balancing Note remain at PE Transferring Agent, LLC, as does the
Purchase Note obligation. After the transfers are executed, PE
Transferring Agent, LLC, proposes to dividend PE Genco LLC's
limited liability interests, the Balancing Note, and the
Liquidation Note - net of the Purchase Note - to Potomac Edison.
Potomac Edison proposes to then dividend the PE Genco, LLC,
limited liability interests to Allegheny Energy, Inc. Thereafter,
Allegheny proposes to merge PE Genco, LLC, into Genco.
Additionally, Potomac Edison proposes to dividend the interests in
PE VA Hydro, LLC, to Allegheny; and, Allegheny will contribute the
interests to Genco - both in a manner consistent with the
dividending of interests as approved by this Commission in the
West Penn asset transfer.<F21> PE VA Hydro, LLC, will then become a
wholly owned subsidiary of Genco.
Upon completion of the Transaction, Potomac Edison's
Generating Assets, Related Assets, Related Liabilities, and Other
Rights and Interests will have been successfully transferred to
Genco. Thereafter, Applicants propose to liquidate Transferring
Agent, LLC.
2. Allegheny Energy, Inc. - AE Units and Interest
Allegheny requests authority to merge AE Units 1 and 2, LLC
into Genco in exchange for Genco assuming the outstanding debt
related to those interests. AE Units 1 and 2, LLC is a non-EWG
indirect subsidiary of Allegheny. AE Units 1 and 2, LLC is not
the subsidiary of a utility. Allegheny Units 1 & 2, LLC holds
interests in two 44 MW generating units. AE Units 1 & 2, LLC's
principle asset is a 100% ownership interest in two 44 MW units
located in Springdale, Pennsylvania. The net book value of AE
Units 1 & 2 is approximately $47,727,139 of total assets of
$50,090,928. Equity and liabilities total $50,090,928.
<F21> In Holding Company Act Release No. 27101, the Commission, among
other things, authorized the dividending of interests to Genco.
<PAGE>
3. Agreements
Under the terms of the Maryland Settlement Agreement, Potomac
Edison must provide standard offer service to customers through
2008. Subject to the WV PSC and Virginia Corporation Commission
issuing final orders, Potomac Edison may be required enter into
similar standard offer service as provider of last resort.
Potomac Edison has discretion concerning how it arranges for its
standard offer service load. Potomac Edison and Genco propose to
enter into an energy supply agreement or series of agreements with
each one pertinent to an individual jurisdictional supply
obligation ("Agreements") sufficient to allow Potomac Edison to
meet its standard offer service obligations under the Settlement
Agreement or under similar requirements and conditions as imposed
in West Virginia or Virginia. Genco would be free to satisfy the
standard offer service load requirements either by dispatch of the
transferred generation facilities or by purchases in the market.
The Agreements would allow Potomac Edison to fulfill its
regulatory obligations in Maryland, West Virginia or Virginia as
required.
Authorization is requested for Potomac Edison to render
services to PE VA Hydro, LLC, with respect to the Virginia Hydros
and to Genco with respect to the Generating Assets for the
operation of the Generating Assets and the Virginia Hydros until
all necessary permits and licenses have been obtained by or
transferred to Genco and PE VA Hydro, LLC, respectively.<F22> All
agreements will be performed in adherence with the "at cost"
provisions of Rules 90 and 91 under the Act. Potomac Edison will
continue to operate the Generating Assets and Virginia Hydros
until all necessary permits and licenses have been obtained by or
transferred to Genco.
4. Capitalization Ratios
The Transaction, when completed, will not impact the debt
/ equity ratios of Allegheny. Moreover, Potomac Edison,
Allegheny, and all the subsidiaries thereof, will not undertake to
issue any debt or engage in any transaction if such action would
result in either Potomac Edison's or the Allegheny consolidated
system's debt / equity ratios falling below the Commission's
debt / equity requirement of 30% common stock equity.
Additionally, within sixty (60) days after the end of each
financial quarter, Potomac Edison and Allegheny will provide the
Commission with reports containing actual and pro forma
capitalization ratio calculations in the same format that was
provided in the confidential exhibit to this application for
Allegheny on a consolidated basis and for Potomac Edison.
5. Reservation of Jurisdiction
Allegheny and Potomac Edison request that this Commission
reserve jurisdiction over the authorization requests related to
the Virginia Hydros - including services from Potomac Edison.
Potomac Edison has not received authority from the VA SCC to
transfer the Virginia Hydros. Accordingly, Applicants request
that the Commission reserve jurisdiction over the proposed
transactions by Potomac Edison: (1) to form PE VA Hydro, LLC (to
which Potomac Edison will transfer the Virginia Hydros as a
capital contribution; and (2) for Potomac Edison to dividend the
interests in PE VA Hydro, LLC, to Allegheny.
Additionally, Allegheny requests that at this time the
Commission reserve jurisdiction over the authority to merge AE
Units 1 and 2, LLC into Genco in exchange for Genco assuming the
<F22> No authorization is requested for Potomac Edison's rendering of
services to PE Transferring Agent, LLC, and PE Genco, LLC, as the
period of ownership is sufficiently incidental so as to fall
within the exclusion of Rule 87(a).
<PAGE>
outstanding debt related to those interests until Allegheny and
Potomac Edison obtain the necessary FERC approval.
Item 2. FEES, COMMISSIONS AND EXPENSES
Fees and expenses in the estimated amount of $100,000 plus
ordinary expenses of approximately $500 are expected to be
incurred in connection with the preparation of this application.
None of the fees, commissions, or expenses is to be paid to any
associate or affiliate company of Allegheny or any affiliate of
any such associate company except for legal, financial, and other
services to be performed at cost.
Item 3. APPLICABLE STATUTORY PROVISIONS
The relevant standards for Commission review of this
application under Sections 6(a), 7, 9(a), 10, 12(b) and 13(b) of
the Public Utility Holding Company Act of 1935, as amended
("Act"), and Rules 43(a), 44, 45, 46, 54, 90 and 91 under the Act.
A. Sections 9 & 10
Section 9(a)(1) provides that unless the Commission under
Section 10 has approved the acquisition, it shall be unlawful for
any registered holding company or any subsidiary company thereof
"to acquire, directly or indirectly, any securities or utility
assets or any other interest in any business." Section 10(f)
provides that:
The Commission shall not approve any acquisition
as to which an application is made under this
section 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.
If the requirements of subsection (f) of this section are
satisfied, the Commission shall approve the acquisition 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
<PAGE>
(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.
The Transaction, for the reasons set forth below, satisfy the
standards of Section 10 of the Act.
1. The Transaction Complies With State Law
The Transaction complies with, or upon completion of the
record shall comply with, applicable state laws on the matter of
restructuring and the transfer of utility assets. Specifically,
Potomac Edison and Allegheny have structured the Transaction in
response to state laws and legislative mandates. The Transaction
puts into effect the state regulatory and legislative
determination that restructuring is in the public interest.
The Transaction is reasonably incidental, economically
necessary and appropriate to the operations of Potomac Edison,
Allegheny Power and the Allegheny system. Specifically, the
Transaction will: (a) allow Potomac Edison to continue to serve
the needs of its regulated customers while positioning the
Allegheny system for competition in the deregulated retail
generation market; (b) remove the Generating Assets from rate-
regulated Potomac Edison; (c) allow Genco to manage and operate
the Generating Assets with due regard to market considerations;
and, (d) increase the flexibility for financing activities on cost-
effective terms that reflect the costs of capital for each area of
business activity.
2. The Capital Structure Is Not Unduly Complicated
The Transaction does not unduly complicate the capital
structure of the Allegheny system. The capital structure of the
Allegheny system on a consolidated basis will be essentially
unchanged. The Transaction will tend toward the proper
functioning of the Allegheny system in a partly deregulated,
partly regulated operating environment. The Transaction simplifies
the Allegheny structure and results in a more economical and
efficient system. The resulting increased efficiency of
operations significantly offsets any perceived added complexity
caused by the Transaction.<F23> For all of the foregoing reasons, the
Transaction satisfies the requirements of, and is entirely
consistent with the Act.
3. The Consideration is Fair and Reasonable
The consideration to be paid in connection with the
Transaction is fair and reasonable. Indeed, the MD PSC has
determined that the price (i.e., net book value) to be paid to
Potomac Edison by PE Genco, LLC for the Generating Assets as fair
and reasonable. Moreover, in File No. 70-9483, the Commission
reached a similar conclusion on the fair and reasonableness of the
consideration received in approving West Penn Power Company's
application to transfer its Pennsylvania utility assets into Genco
<F23> See Wisconsin's Environmental Decade, Inc. v SEC, 882 F.2d 523,
527 (D.C. Cir. 1989); Northeast Utilities, Holding Co. Act Release
No. 25221 (Dec. 21, 1990); Entergy Corp., Holding Co. Act Release
No. 25 136 (Aug. 27, 1990).
<PAGE>
at net book value.<F24> The Commission's reasoning in that case is
equally applicable to this Transaction.
B. Section 12 & Rule 46
Section 12(c) governs the proposed dividends for which
authorization has been sought. Section 12(c) provides that:
It shall be unlawful for any registered holding
company or any subsidiary company thereof, by use
of the mails or any means or instrumentality of
interstate commerce, or otherwise, to declare or
pay any dividend on any security of such company
or to acquire, retire, or redeem any security of
such company, in contravention of such rules and
regulations or orders as the Commission deems
necessary or appropriate 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, or to prevent the
circumvention of the provisions of this chapter or
the rules, regulations, or orders thereunder.
Allegheny expects that the distribution of the Ownership Interests
of PE Genco, LLC to Potomac Edison and, then, by Potomac Edison to
Allegheny, in each instance will be a dividend out of "capital or
unearned surplus" within the meaning of Rule 46 under the Act.
Applicants believe that, in the overall context of the
Transaction, neither shareholders, ratepayers nor the public will
be adversely affected. The distributions have been structured as
such in order to minimize the tax burden on the Applicants. The
distributions are fundamentally necessary to effect the transfer
by Potomac Edison of the Generating Assets to an affiliate in the
Allegheny system in accordance with the Settlement Agreement.
The distributions will be the final step in the reduction of
the capitalization of Potomac Edison and the reorganization of the
Allegheny system, in accordance with, and fulfillment of, the
regulations and legislative policies and objectives that
culminated in deregulation of and competition in electrical
generation in Maryland, as described herein. The distributions
are not intended to harm the interests of Potomac Edison or,
ultimately, Allegheny. The Allegheny system will continue to own
the assets transferred by such distributions. The regulated parts
of Potomac Edison's business (transmission and distribution) are
not subject to deregulation and competition will continue to be
owned directly by Potomac Edison. Potomac Edison and the public
which it serves will not be subject to the impact of deregulation
and competition on Potomac Edison's former generation business and
will, to a large degree, be protected from the uncertainties and
possible losses affecting generation in a competitive and
deregulated retail environment. For these reasons, the proposed
distributions are entirely consistent with the policies and
principles behind Section 12 of the Act.
<F24> See Allegheny Energy, Inc., Holding Co. Act Release No.35-
27101, Order Authorizing Formation of Subsidiary Company; Transfer
of Assets to Generation Company; Issuance and Acquisition of
Securities; Capital Contributions; and Service Agreements
(November 12, 1999).
<PAGE>
C. 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
between such companies.
Any transaction between Genco and Potomac Edison, including the
Joint Owner Operating Agreements, and any other service agreements
related to the Generating Assets or for the operation of all other
Generating Assets, 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.
D. Rule 54 Compliance
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's average consolidated retained earnings were
approximately $865.0 million, and Allegheny's aggregate investment
in EWGs and FUCOs was approximately $4.2 million. Accordingly,
Allegheny 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'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 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 Allegheny 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
Transaction.
<PAGE>
Item 4. REGULATORY APPROVAL
By order dated June 30, 2000, the FERC authorized the
transfer of the: (1) jurisdictional allocation of step-up
transformers allocable to Potomac Edison's Maryland, West Virginia
and Virginia service areas; (2) AGC stock; (3) pollution control
bonds and solid waste bonds associated with the transferred
generating assets; and (4) hydro electric generating facilities.<F25>
The FERC retains jurisdiction over the transfer of AE Units 1 & 2,
LLC.
With respect to State approvals, on June 22, 2000, the MD PSC
issued an order on Potomac Edison's request to transfer its
generation assets. In that order the MD PSC approved the
Settlement Agreement requiring the transfer of Maryland's share of
Potomac Edison's generation assets as determined in accordance
with accepted MD PSC procedures. With respect to West Virginia,
on March 11, 2000, the West Virginia legislature adopted a plan
under which Potomac Edison was granted the right to transfer its
"West Virginia generation assets." Finally, on July 11, 2000, the
VA SCC authorized the transfer of Potomac Edison's AGC stock
generating assets (excluding the Virginia Hydros), and approved
Phase I of the plan for the functional separation of Potomac
Edison's generating assets from its transmission and distribution
assets as required by the Virginia Electric Utility Restructuring
Act. Virginia retains jurisdiction over the transfer of the
Virginia Hydros. Except as noted above, no state commission or
federal commission, other than this Commission, has jurisdiction
over any part of the proposed transactions.
Item 5. PROCEDURE
It is requested that the Commission's order granting this
Application or Declaration be issued on or before July 1, 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 effective
date. Applicants consent to the Division of Corporate Regulation
assisting in the preparation of the Commission's decision and
order in this matter, unless the Division opposes the Transaction
covered by this Application or Declaration.
Item 6. EXHIBITS AND FINANCIAL STATEMENTS
A. Exhibits
A-1 Certificate of Organization of Subsidiaries
(filed July 27, 2000).
B-1 Fort Martin Unit No. 2 Construction and
Operating Agreement, dated December 30, 1965,
between Monongahela, Potomac Edison, and Potomac Edison
(incorporated by reference to File No. 70-9483).
B-2 Pleasants Power Station Construction and
Operating Agreement, dated as of September 15, 1977,
between Monongahela, Potomac Edison and West Penn
(incorporated by reference to File No. 70-9483 )
B-3 Hatfield's Ferry Power Station Construction
<F25> Dam #4, Dam #5, Luray, Millville, Newport, Shenandoah and
Warren.
<PAGE>
and Operating Agreement, dated April 20, 1968, between
Monongahela, Potomac Edison and West Penn
(incorporated by reference to File No. 70-9483).
B-4 Harrison Power Station Construction and
Operating Agreement, Dated as of March 31, 1971, between
Monongahela, Potomac Edison and West Penn (incorporated
by reference File No. 70-9483)
B-5 Form of Assignment of each Joint-Owner Operating
Agreement (filed July 27, 2000).
B-6 Form of Proposed Operating Agreement between
Potomac Edison and GENCO (filed July 27, 2000).
B-8 Inter-Company Power Agreement between Ohio
Valley Electric Corporation, Potomac Edison and the
other parties thereto, dated July 10, 1953, as modified
(incorporated by reference File No. 70-9483)
B-9 Equity Agreement between Monongahela, Potomac Edison and
West Penn, dated June 17, 1981, as amended
(incorporated by reference File No. 70-9483)
B-10 APS Power Agreement between, Monongahela, Potomac
Edison, West Penn, And, AGC, dated August 24, 1981
(incorporated by reference File No. 70-9483)
B-11 Form of Service Agreement to be entered into
between AESC and PE Transferring Agent LLC.
(filed July 27, 2000).
D-1 Application of Potomac Edison to Maryland PSC
D-2 Order of Maryland PSC Approving Plan
(filed July 27, 2000).
D-3 Application of Potomac Edison to Virginia
Corp. Commission
D-4 Order of Virginia Corporation Commission
Approving Plan
(filed July 27, 2000).
D-5 Approval of FERC regarding Transfer of Hydro
Generating Facilities
(filed July 27, 2000).
D-6 Approval by FERC regarding Transfer of Shares of
AGC from Potomac Edison to PE Transferring Agent LLC
D-7 Approval by FERC of transfer of Potomac Edison's
rights under the OVEC Agreement to PE GENCO.
<PAGE>
F Opinion of Counsel
(filed July 27, 2000).
FS-1 Allegheny Energy, Inc. and subsidiaries
consolidated balance sheet, statement of income, and
capital ratios per books and pro forma (filed
confidentially via Form SE)
FS-2 Allegheny Energy Supply Company consolidated
balance sheet, statement of income, and capital ratios
per books and pro forma (filed confidentially via Form
SE)
Item 7. INFORMATION AS TO ENVIRONMENTAL EFFECTS
A. The authorizations applied for herein do 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 companies have duly
caused this statement to be signed on their behalf by the
undersigned thereunto duly authorized.
ALLEGHENY ENERGY, INC.
/s/ THOMAS K. HENDERSON
Thomas K. Henderson
POTOMAC EDISON POWER COMPANY
/s/ THOMAS K. HENDERSON
Thomas K. Henderson
ALLEGHENY ENERGY SUPPLY COMPANY
/s/ THOMAS K. HENDERSON
Thomas K. Henderson
<PAGE>
ALLEGHENY ENERGY SERVICE COMPANY
/s/ THOMAS K. HENDERSON
Thomas K. Henderson
Dated: July 27, 2000
