File No. 70-9627
(Potomac Edison Asset Transfer)
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 1
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 . . . . . . . . . . . . . . . . . . . . . . 3
C. Regulatory Environment . . . . . . . . . . . . . . . . .4
1. Maryland . . . . . . . . . . . . . . . . . . . . . . .4
2. West Virginia . . . . . . . . . . . . . . . . . . . . 4
3. Virginia . . . . . . . . . . . . . . . . . . . . . . .5
D. Overview of Requested Authorizations . . . . . . . . ..5
1. The Transaction . . . . . . . . . . . . . . . . . ..5
i. Formation of Subsidiaries . . . . . . . . . . . . ..5
ii. Capitalization of Subsidiaries . . .. . . . . . . .6
iii. Transfers . . . . . . . . . . . .. . . . . . . . . 6
2. Allegheny Energy - AE Units 1 and 2 LLC . . . . . . ..7
3. Agreements . . . . . . . . . . . . . . . . . . . . .7
4. Reservation of Jurisdiction . . . . . . . . . . . . .8
Item 2. Fees, Commissions and Expenses . . . . . . . . . . . . . .8
Item 3. Applicable Statutory Provisions . . . . . . . . . . . . .9
A. Sections 9 & 10 . . . . . . . . . . . . . . . . . . . .9
1. Compliance with State Law . . . . . . . . . . . . . .10
2. Capital Structure Not Unduly Complicated . . . . . ..10
3. Consideration is Fair and Reasonable . . . . . . . ..10
B. Section 12 & Rule 46 . . . . . . . . . . . . . . . . ..11
C. Section 13(b) Compliance . . . . . . . . . . . . . . 11
D. Rule 54 Compliance . . . . . . . . . . . . . . . . . . 12
Item 4. Regulatory Approvals . . . . . . . . . . . . . . . . . ..12
Item 5. Procedure . . . . . . . . . . . . . . . . . . . . . . .12
Item 6. Exhibits and Financial Statements . . . . . . . . . . .13
A. Exhibits . . . . . . . . . . . . . . . . . . . . . . 13
B. Financial Statements . . . . . . . . . . . . . . . . .13
Item 7. Information as to Environmental Effects . . . . . . . .14
<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"), a
wholly owned generating company subsidiary of Allegheny
(collectively, "Applicants"),<F1> hereby file this application-
declaration with the Securities and Exchange Commission
("Commission") under Sections 6(a), 7, 9(a), 10, 11, 12(b) and
13(b) of the Public Utility Holding Company Act of 1935, as
amended ("Act"), and Rules 45, 46, 54, 90 and 91 under the Act.
As part of the ongoing restructuring in the electric utility
industry, Potomac Edison has been required to file a restructuring
plan 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.<F2> The proposed
transaction is essentially the same as the West Penn Power Company
transaction except: 1) the Potomac Edison generating assets must
be released from the first mortgage; and (2) at the end of the
transaction, the generation will be merged into the existing
affiliate generating company - Genco.
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")
<F1> 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.
<F2> 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>
has jurisdiction over a portion of electricity sold into the
wholesale market. Each of the three states and the FERC regulate
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 (or to
wholesale customers for FERC regulated sales) 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, related assets, related
liabilities, and other rights and interests to Genco
("Transaction").<F3> 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 has attempted to
structure this Transaction in compliance with each states'
timeline. As discussed more fully in this application, the
respective timelines for the transferring the generation function
to an affiliate are as follows: Maryland - July 1, 2000; West
Virginia - January 1, 2001, and, Virginia - still being determined
by state regulatory body. The FERC does not have a timeline,
however, as Potomac Edison is exiting the generation business it
would be inefficient for Potomac Edison to maintain and operate
generation solely to supply the FERC jurisdictional allocation.
Potomac Edison holds undivided ownership interests in:
electric generating stations ("Generating Assets")<F4>; related
assets ("Related Assets"); and certain generation related
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
<F3> 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.
<F4> 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>
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.<F5> 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.<F6>
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, 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 other rights and interests
("Other Right and Interests") as more fully described below.
Potomac Edison's Other Rights and Interests include: contractual
rights and obligations corresponding to four jointly owned
generation facilities ("Joint-Owner Operation Agreements");<F7> and,
an ownership interest in Ohio Valley Electric Corporation
("OVEC"), an investor owned utility.<F8>
Potomac Edison seeks authority to indirectly transfer to
Genco its undivided interests in its Generating Assets, Related
Assets, Related Liabilities, Virginia Hydros, 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.
<F5> 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.
<F6> See Footnote No. 4.
<F7> 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."
<F8> 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%).
<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.<F9> 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 [Generating 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. 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, Allegheny Power 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 to West
Virginia's jurisdictional allocation in Generating Assets, Related
Assets, and Related Liabilities on or about July 1, 2000.
During the 2000 Legislative Session the West Virginia
Legislature approved the WV PSC's electric deregulation plan.
However, the adopting legislation provided that the implementation
of the WV PSC's plan would be delayed until the passage of a bill
and a resolution preserving tax revenues for state and local
<F9> 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).
<PAGE>
government. The change effectively delays the "start date" for
customer choice from January 1, 2001 to an unknown date. Potomac
Edison is currently engaged in discussions with the WV PSC.
Potomac Edison is seeking, and expects to receive prior to the
issuance of an order by this Commission, an order from the WV PSC
clarifying the authorized date of transfer
3. Virginia
Pursuant to Sec. 56-90 of the Virginia Code, Potomac Edison
filed an application with the Virginia Corporation Commission for
authority to enter into a contract with its affiliate to transfer
ownership interests in certain utility assets.<F10> Potomac Edison
provides electric service to approximately 84,000 customers
located in 14 northwestern Virginia counties.<F11>. On April 14,
2000, as part of ongoing settlement discussions in Virginia,
Potomac Edison withdrew the previously filed Application of The
Potomac Edison Company . to Acquire Utility Assets and Enter into
a Contract with an affiliated Interest. Potomac Edison expects to
file an application for restructuring not later than May 22, 2000.
Thereafter, Potomac Edison anticipates an order approving the
asset transfer.
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.<F12> 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
onsistent with prior orders. PE Transferring Agent, LLC, will be
<F10> 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).
<F11> Potomac Edison will file by amendment, post effective amendment
or pursuant to Rule 24 a full discussion of the electric
deregulation settlements and statutes, when adopted or enacted, in
Virginia.
<F12> 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").<F13> 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.
The specific steps of the Transaction is set forth in the
Potomac Edison's confidential exhibit titled "Accounting Framework
for Maryland, FERC, West Virginia, and Virginia Asset Transfer"
which has, or will be, filed as a confidential exhibit to this
application. The exhibit serves as a blueprint for how the
Transaction will be executed.
iii. Transfers
As of July 1, 2000,<F14> Potomac Edison proposes to transfer or
contribute <F15> 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. 4, Potomac Edison does not
<F13> Other Rights and Interests have, and are carried at, a zero book
value.
<F14> 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.
<F15> The contributions are set forth in the preceding section.
<PAGE>
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
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 from the lien of the
first mortgage by certifying ("pledging") additional bondable
property to the trustee in an amount not to exceed the net book
value of the Generating Assets. The release provisions of the
first mortgage do not require PE Transferring Agent, LLC to become
an obligor under Potomac Edison's outstanding first mortgage
bonds. This property would include, among other things, remaining
utility assets of Potomac Edison. Potomac Edison requests
authority to pledge those assets in order to obtain the described
release.
Finally, PE Transferring Agent, LLC, proposes to contribute
the Generating Assets, Related Assets, Related Liabilities
(excluding the first mortgage bonds), 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 contribute the interests
in PE VA Hydro, LLC, to Allegheny; and, Allegheny proposes to
contribute the interests to Genco. 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, Virginia
Hydros, 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. Allegheny Units 1 & 2, LLC holds
interests in two 44 MW generating units. As of March 31, 2000, 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
<PAGE>
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.
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.<F16> 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..
Upon completion of the Transaction, Potomac Edison's
debt/equity ratio, as set forth in Exhibit B (FS-2), will meet or
exceed the Commission's debt/equity requirements in a manner
consistent with recent Commission orders.
4. Reservation of Jurisdiction
In the event Potomac Edison has not received final state
authorization to transfer its West Virginia or Virginia
jurisdictional allocations in Generating Assets, Related Assets,
and Other Rights and Interests by July 1, 2000, Potomac Edison
proposes that this Commission reserve jurisdiction subject to: 1)
West Virginia and / or Virginia granting approval of the
restructuring; and 2) Potomac Edison completing the record in this
matter by amendment, post effective amendment or pursuant to Rule
24. Thereafter, when authorized by this Commission, Applicants
propose to utilize the same Transaction structure as set forth
herein, to the extent legally necessary, to transfer the
Generating Assets, Related Assets, and Other Rights and Interests
corresponding to the jurisdictional allocations for those states.
The reservation of jurisdiction request for Related Liabilities
and the Virginia Hydros is set forth below.
Additionally, Allegheny and Potomac Edison request that in the
event the aforementioned state authorizations are received that
this Commission reserve jurisdiction over the requests related to
<F16> 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>
the Virginia Hydros. Specifically, applicants request that the
Commission reserve jurisdiction over the following proposed
transactions: (1) to form PE VA Hydro, LLC; (2) to transfer the
Virginia Hydro to PE VA Hydro, LLC, as a capital contribution in
exchange for the equity interests in PE VA Hydro, LLC; (3) for
Potomac Edison to contribute the interests in PE VA Hydro, LLC, to
Allegheny and for Allegheny to contribute the interests to Genco;
and (4) PE VA Hydro, LLC, will then become a subsidiary of Genco.
AESC will provide services to PE VA Hydros, LLC, at cost.
Finally, Allegheny and Potomac Edison request that in the
event the aforementioned state authorizations are not received
that this Commission reserve jurisdiction over the request to
transfer the jurisdictional allocation of the aforementioned
states' Related Liabilities except for pollution control bonds
which cannot be subdivided and must transfer with any transfer of
Generating Assets.
Item 2. FEES, COMMISSIONS AND EXPENSES
Estimated fees and expenses expected to be incurred by
Applicants in connection with the Transaction are
___________________ (to be filed by amendment).
Item 3. APPLICABLE STATUTORY PROVISIONS
The relevant standards for Commission review of this
application under Sections 6(a), 7, 9(a), 10, 11, 12(b) and 13(b)
of the Public Utility Holding Company Act of 1935, as amended
("Act"), and Rules 45, 46, 54, 90 and 91 under the Act. To the
extent that other sections of the Act or the Commission's rules
thereunder are deemed applicable to the Transaction, such sections
and rules should be considered to be set forth herein.
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;
<PAGE>
(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
(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.<F17> 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
<F17> 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>
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
at net book value under.<F18> The Commission's reasoning in that case
is equally applicable to this Transaction.
B. Section 12 & Rule 46
Section 12(c) governs the proposed dividend 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
<F18> 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>
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.
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, Supply Agreement, Bath Project
Rights and Obligations, APC Power Agreement 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 exempt wholesale
generators ("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 December 31, 1999, Allegheny's average consolidated
retained earnings were approximately $897million, and Allegheny's
aggregate investment in EWGs and FUCOs was approximately $4.2
million. Accordingly, Allegheny may invest up to approximately
$448.5 million or an additional $444.3 million (50% of Retained
Earnings less existing investment) in EWGs and FUCOs as of
December 31, 1999. 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. 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
transactions.
<PAGE>
Item 4. REGULATORY APPROVAL
The proposed Transaction has been authorized and pre-approved
to the extent required by the MD PSC. An application has been, or
will be, filed to obtain the necessary approvals of West Virginia
and Virginia. Additionally, an application has been, or will be,
filed with the Federal Energy Regulatory Commission for approval
of the transfer of jurisdictional assets of the generation
facilities as well as licenses for hydro facilities;<F19> the transfer
of the stock of AGC; and the assignment and delegation of rights
and obligations under the APS Power Agreement. Other than the
aforementioned regulatory bodies, no other state or federal
commission , other than this Commission, has jurisdiction over the
proposed Transaction.
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
(to be filed by amendment).
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
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
(to be filed by amendment).
<F19> Dam #4, Dam #5, Luray, Millville, Newport, Shenandoah and
Warren.
<PAGE>
B-6 Form of Proposed Operating Agreement between
Potomac Edison and Genco (to be filed by amendment).
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.
(to be filed by amendment).
D-1 Application of Potomac Edison to Maryland PSC
(to be filed by amendment)
D-2 Order of Maryland PSC Approving Plan
(to be filed by amendment)
D-3 Application of Potomac Edison to Virginia
Corp. Commission
(to be filed by amendment)
D-4 Order of Virginia Corporation Commission
Approving Plan
(to be filed by amendment)
D-5 Approval of FERC regarding Transfer of Hydro
Generating Facilities
(to be filed by amendment)
D-6 Approval by FERC regarding Transfer of Shares of
AGC from Potomac Edison to PE Transferring Agent LLC
(to be filed by amendment).
D-7 Approval by FERC of transfer of Potomac Edison's
rights under the OVEC Agreement to PE Genco, LLC.
(to be filed by amendment)
F Opinion of Counsel
(to be filed by amendment).
G-1 Potomac Edison Financial Data Schedule (pro forma)
(filed May *, 2000).
<PAGE>
G-2 Potomac Edison 's Financial Data Schedule (actual).
(filed May *, 2000 )
H Form of Notice
(Filed February 11, 2000)
B. Financial Statements as of December 31, 1999
FS-1 Allegheny Energy, Inc. and subsidiaries consolidated
balance sheet, per books and pro forma
(filed May *, 2000 )
FS-2 Allegheny Energy, Inc. and subsidiaries consolidated
statement of income and retained earnings, per books and
pro forma
(filed May *, 2000 )
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, Esq.
Vice President
POTOMAC EDISON POWER COMPANY
/s/ THOMAS K. HENDERSON
Thomas K. Henderson, Esq.
Vice President
<PAGE>
ALLEGHENY ENERGY SUPPLY COMPANY
/s/ THOMAS K. HENDERSON
Thomas K. Henderson, Esq.
Vice President
ALLEGHENY ENERGY SERVICE COMPANY
/s/ THOMAS K. HENDERSON
Thomas K. Henderson, Esq.
Vice President
Dated: June 7, 2000
