[Federal Register Volume 68, Number 188 (Monday, September 29, 2003)]
[Notices]
[Pages 56020-56024]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-24500]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 35-27723]


Filings Under the Public Utility Holding Company Act of 1935, as 
Amended (``Act'')

September 23, 2003.
    Notice is hereby given that the following filing(s) has/have been 
made with the Commission under provisions of the Act and rules 
promulgated under the Act. All interested persons are referred to the 
application(s) and/or declaration(s) for complete statements of the 
proposed transaction(s) summarized below. The application(s) and/or 
declaration(s) and any amendment(s) is/are available for public 
inspection through the Commission's Branch of Public Reference.
    Interested persons wishing to comment or request a hearing on the 
application(s) and/or declaration(s) should submit their views in 
writing by October 17, 2003, to the Secretary, Securities and Exchange 
Commission, Washington, DC 20549-0609, and serve a copy on the relevant 
applicant(s) and/or declarant(s) at the address(es) specified below. 
Proof of service (by affidavit or, in the case of an attorney at law, 
by certificate) should be filed with the request. Any request for 
hearing should identify specifically the issues of facts or law that 
are disputed. A person who so requests will be notified of any hearing, 
if ordered, and will receive a copy of any notice or order issued in 
the matter. After October 17, 2003 the application(s) and/or 
declaration(s), as filed or as amended, may be granted and/or permitted 
to become effective.

Allegheny Energy Inc., et al. (70-10100)

    Allegheny Energy Inc. (``Allegheny''), a registered holding 
company, and Allegheny Energy Supply Company LLC

[[Page 56021]]

(``AE Supply''), a registered holding company and public utility 
subsidiary of Allegheny, 10435 Downsville Pike, Hagerstown, Maryland 
21740, have filed a post effective amendment (``Application'') to a 
previous application-declaration under sections 6(a), 7 and 12(c) of 
the Act and rules 45, 46, and 54 under the Act.
    Allegheny and AE Supply (collectively, ``Applicants'') request that 
the Commission release jurisdiction it reserved in a previous order 
dated February 21, 2003 (Holding Co. Act Release No. 27652) 
(``Capitalization Order'') over the authority of AE Supply to issue 
guarantees. In addition, Applicants request authority for AE Supply's 
subsidiaries, Allegheny Trading Finance Company (``ATF'') and Allegheny 
Energy Supply Development Services LLC (``AESDS''), to dividend to AE 
Supply out of capital up to the full amount of the proceeds of certain 
asset sales. Applicants state that all of the authority requested in 
this Application is necessary to implement elements of Applicants' plan 
for returning to financial health and compliance with Commission 
standards for registered holding company capital structures.
    The Capitalization Order granted for a period through December 31, 
2003 (``Modified Authorization Period'') modifications to certain 
authorizations the Commission granted to the Applicants by order dated 
December 31, 2001 (Holding Co. Act Release No. 27486 (``Original 
Financing Order''), as supplemented by orders dated April 17, 2002 
(Holding Co. Act Release No. 27521) (``April Order'') and October 17, 
2002 (Holding Co. Act Release No. 27579) (``Supplemental Order'' and 
together with the Original Financing Order and the April Order, 
``Financing Order'').
    In the Original Financing Order, the Commission authorized, among 
other things:
    (i) Allegheny and/or its subsidiaries, including AE Supply, to 
enter into guarantees (``Allegheny Guarantees'') with respect to the 
obligations of its subsidiaries in an aggregate principal amount not to 
exceed $3 billion (``Aggregate Guarantee Limitation''), based on the 
amount at risk outstanding at any one time, exclusive of (a) any 
guarantees or credit support arrangements authorized by the Commission 
in separate proceedings and (b) any guarantees exempt under rule 45(b); 
and
    (ii) Applicants' subsidiaries, other than their operating 
companies,\1\ (``Other Subsidiaries'') to enter into guarantees from 
time to time, with respect to the obligations of any of the Other 
Subsidiaries, as may be appropriate, to enable AE Supply and/or the 
Other Subsidiaries to carry on their respective businesses in an 
aggregate principal amount, together with the Allegheny Guarantees, not 
to exceed the Aggregate Guarantee Limitation, based on the amount at 
risk outstanding at any one time.
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    \1\ West Penn Power Company (``West Penn''), Monongahela Power 
Company (``Monongahela''), Potomac Edison Company (``Potomac 
Edison'') and Mountaineer Gas Company, a subsidiary of Monongahela, 
are referred to in this Application as the ``Operating Companies'').
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    In the Capitalization Order, the Commission modified the financing 
parameters that are conditions to the financing transactions authorized 
in the Financing Order, as follows (``Revised Financing Conditions''):
    (i) The common equity of Allegheny, on a consolidated basis, will 
not fall below 28 percent of its total capitalization; and the common 
equity of AE Supply, on a consolidated basis, will not fall below 20 
percent of its total capitalization (``Common Equity Conditions'');
    (ii) The effective cost of capital on any security issued by 
Allegheny or AE Supply will not exceed competitive market rates 
available at the time of issuance for securities having the same or 
reasonably similar terms and conditions issued by similar companies of 
reasonably comparable credit quality; provided that in no event will 
(a) the interest rate on any debt securities issued under a bank credit 
facility exceed the greater of (i) 900 basis points over the comparable 
term London Interbank Offered Rate \2\ or (ii) the sum of 9 percent 
plus the prime rate as announced by a nationally recognized money 
center bank, and (b) the interest rate on any debt securities issued to 
any other financial investor exceed the sum of 12 percent plus the 
prime rate as announced by a nationally recognized money center bank; 
and
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    \2\ It should be noted, however, that the interest rate 
applicable after the occurrence of a default may be increased by an 
additional increment, typically 200 basis points.
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    (iii) The underwriting fees, commissions and other similar 
remuneration paid in connection with the non-competitive issuance of 
any security issued by Allegheny or AE Supply will not exceed the 
greater of (a) 5 percent of the principal or total amount of the 
securities being issued or (b) issuances expenses that are paid at the 
time in respect of the issuance of securities having the same or 
reasonably similar terms and conditions issued by similar companies of 
reasonably comparable credit quality;
    (iv) The respective financing transactions will not be subject to 
the requirement to maintain either unsecured long-term debt or any 
commercial paper that may be issued at investment grade level; and
    (v) The Applicants may issue short-term and/or long-term debt under 
circumstances when the debt, upon issuance, is either unrated or is 
rated below investment grade.
    In addition, the Capitalization Order reserved jurisdiction over 
(a) the financing authorizations at a time that the common equity ratio 
levels of Allegheny and AE Supply were below 28 percent and 20 percent, 
respectively, and (b) the issuance of debt securities at an interest 
rate in excess of the modified interest rates. By order dated July 23, 
2003 (Holding Co. Act Release No. 27701) (``July 23 Order''), the 
Commission released jurisdiction over the issuance by Allegheny of up 
to $325 million of convertible trust preferred securities through a 
newly organized Capital Corp (as defined in the Original Financing 
Order), with the proceeds to be provided to Allegheny in exchange for 
its subordinated debentures, with warrants.
    As of December 31, 2002, Allegheny's common equity on a 
consolidated basis was below the 28 percent common equity ratio 
required by the Capitalization Order. In addition, AE Supply's common 
equity ratio may be below 20 percent. Applicants, therefore, seek in 
this Application a release of jurisdiction over guarantee authority 
that AE Supply requires in order to complete specific transactions 
described below. Completion of these transactions constitutes a part of 
the plan developed by the Applicants for resolution of their current 
financial difficulties, as described in their application submitted to 
the Commission on July 17, 2003, as amended on July 23, 2003, seeking 
authorization to issue the securities in the July 23 Order (``Trust 
Preferred Securities Application''). The dividend authority for ATF and 
AESDS requested in this Application also is necessary to implement this 
plan fully.

I. Background Information

    The Applicants state that they continue to make significant 
progress toward the resolution of their financial difficulties. On July 
25, 2003, Allegheny completed its private placement of $300 million of 
convertible trust preferred securities, as authorized by the July 23 
Order. On July 28, 2003, AE Supply announced that its subsidiary ATF 
had entered into an agreement to sell its

[[Page 56022]]

energy supply contract with the California Department of Water 
Resources (``CDWR Contract'') and associated hedge transactions 
(collectively, ``West Book'') to J. Aron & Company (``Aron''), a 
division of The Goldman Sachs Group, for $405 million, subject to 
adjustments for market price changes and hedge transactions not 
transferred. On September 15, 2003, AE Supply and ATF announced that 
they completed the sale of the West Book to Aron for $354 million. Much 
of the adjustment from the estimated sale price, previously announced 
on July 28, 2003, is attributable to contracts with one counterparty, 
valued at $38.6 million, which were removed from the sale by mutual 
agreement of the parties. Changes in the mark-to-market value of the 
remaining contracts at closing and reduction in the number of remaining 
trades assumed by Aron, account for the rest of the adjustment. The 
proceeds from the sale will be applied, in large part, to finance the 
termination of tolling agreements with Williams Companies, Inc. and Las 
Vegas Cogeneration II and certain related hedging arrangements. In 
addition, Allegheny will have deposited, after certain escrow funds are 
released and under authorization by certain of its creditors, the 
remainder of the proceeds (estimated to be approximately $75 million) 
in a cash collateral account for the benefit of certain of its 
lenders.\3\ These funds will be available to reduce the amount of AE 
Supply's debt that must be refinanced should Allegheny receive 
Commission authorization and then decide to refinance its bank 
borrowings.
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    \3\ As a condition to closing, Aron escrowed $71 million of the 
proceeds pending an order from the Commission authorizing AE Supply 
to undertake the guarantees connected with the sale of the West 
Book.
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    Sale of the West Book and the sale of the securities authorized by 
the July 23 Order are the major components of Allegheny's plan to 
return to financial health. In addition, AE Supply and its 
subsidiaries--Allegheny Energy Supply Conemaugh LLC, Allegheny Energy 
Supply Hunlock Creek LLC, Allegheny Trading Finance Company, and 
Allegheny Energy Supply Development Services LLC--have entered into 
asset sales agreements described below, which also are an important 
part of this plan. Applicants state that the authority they seek in 
this Application is important to obtaining full value from these 
transactions. The resulting proceeds will make available significant 
additional cash, which can be used to reduce debt and improve the 
common equity of the Applicants. In short, authority sought in this 
Amendment will assist directly in permitting the Applicants to achieve 
the capitalization standards required by the Commission.

II. Summary of Financing Request

    Applicants are seeking a release of jurisdiction by the Commission 
over authority of AE Supply to engage in certain guarantee and other 
transactions. In the Capitalization Order, the Commission reserved 
jurisdiction over the financing authorizations granted in the Financing 
Order if the Applicants' capitalization did not meet the Common Equity 
Conditions. Applicants request that the Commission release jurisdiction 
over $600 million of the Aggregate Guarantee Limitation, which AE 
Supply will utilize to undertake the guarantee obligations summarized 
below. To date, Allegheny and its subsidiaries have used $42.6 million 
of $3 billion Aggregate Guarantee Limitation.

A. Hunlock Guarantees

    By agreement, AE Supply agreed to seek authority from the 
Commission to guarantee certain obligations of Allegheny Energy Supply 
Hunlock Creek, LLC (``Hunlock''), an exempt wholesale generator (`` 
EWG'') and wholly-owned subsidiary of Allegheny. Hunlock owns a 50 
percent general partner interest in Hunlock Creek Energy Ventures (the 
``Hunlock Partnership''), which also is an EWG. UGI Hunlock Development 
Company (``UGI Hunlock'') owns the remaining partnership interests in 
the Hunlock Partnership. The Hunlock Partnership owns a 44 MW 
combustion turbine generator and a 48 MW coal-fired generation facility 
known as the Hunlock Creek Electric Generating Station located in 
Hunlock Creek, Pennsylvania (``Hunlock Power Station'').
    In entering into the Hunlock partnership agreement (``Hunlock 
Partnership Agreement''), Hunlock and UGI Hunlock granted to each other 
certain put and call options, which, among other things, gave UGI 
Hunlock the right, for five years from the date of the agreement 
(December 8, 2000) to cause AE Supply to purchase the combustion 
turbine and/or the Hunlock Power Station from the Hunlock Partnership 
for a purchase price of $15 million plus the value of all the Hunlock 
Power Station's inventory, and a price for the combustion turbine equal 
to its then current book value. The current combined price for the 
combustion turbine and the Hunlock Power Station is estimated at 
approximately $42 million, which exceeds the current estimate of the 
fair market value of this property. The Hunlock Partnership Agreement 
also gave Hunlock the right to require the Hunlock Partnership to sell 
the Hunlock Power Station (but not the combustion turbine) to AE Supply 
at any time following the failure of UGI Hunlock to participate in 
certain expansion projects. Because Hunlock, not AE Supply, was the 
signatory to the Hunlock Partnership Agreement, a bona fide dispute 
arose concerning which company--Hunlock or AE Supply--had the rights 
and obligations under the Hunlock Partnership Agreement.
    AE Supply and Hunlock sought to extend the terms of the put and 
call options under the Hunlock Partnership Agreement, which currently 
are exercisable, and to clarify that Hunlock, not AE Supply, would be 
the obligor on the put option (``Hunlock Obligation''). They also 
agreed that AE Supply would guarantee the Hunlock Obligation upon 
receipt from the Commission of authority under the Act to do so. The 
put and call options were, therefore, amended to provide that they 
could be exercised only for ninety days following January 1, 2006, with 
Hunlock confirmed to be the obligor under the put option. AE Supply 
paid $3 million to UGI Development (UGI Hunlock's parent) in exchange 
for UGI Development and UGI Hunlock releasing AE Supply from any 
current obligation it had under the put option of the Hunlock 
Partnership Agreement. In addition, UGI Hunlock and Hunlock agreed to 
extend the terms of the put and call options under the Hunlock 
Partnership Agreement and clarify that Hunlock would be the obligor 
under the Hunlock Partnership Agreement.
    Applicants therefore request authority for AE Supply to guarantee 
Hunlock's obligations under the Hunlock Obligation. Entering into this 
guarantee will allow AE Supply to maximize the proceeds from the sale, 
which is described below, of interests in the Conemaugh Generating 
Station near Johnstown, Pennsylvania (``Conemaugh Interest'').\4\ 
Depending upon market prices for generating plants in 2006, AE Supply 
could be called upon to perform Hunlock's obligations to purchase the

[[Page 56023]]

combustion turbine and the Hunlock Power Station at a price that would 
be greater than their then current market value.
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    \4\ The $5 million of the sale price for the Conemaugh Interest 
placed into escrow will be released at the earlier of (a) the time 
that AE Supply enters into an agreement to guarantee Allegheny 
Energy Supply Conemaugh LLC's indemnification obligations and an 
agreement to guarantee the Hunlock Obligation, or (b) April 15, 
2006. Therefore, the guarantee of Hunlock's obligations under the 
Hunlock Obligation is a precondition to an expeditious release from 
escrow of the $5 million of the proceeds of the sale of the 
Conemaugh Interest.
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B. Conemaugh Guarantees

    On February 25, 2003, AE Supply and its wholly-owned subsidiary, 
Allegheny Energy Supply Conemaugh, LLC (``Conemaugh''), an EWG under 
the Act, entered into an agreement (``Conemaugh Agreement'') to sell 
the Conemaugh Interest, which is an 83-megawatt (``MW'') share of the 
1,711-MW coal-fired Conemaugh Generating Station, to UGI Development 
Company (``UGI Development''), an indirect, wholly owned subsidiary of 
UGI Corp. (``UGI''). The agreed upon sale price was approximately 
$51.25 million, subject to a $3 million credit in favor of UGI 
Development. That sale supplied (and the return on the aggregate $6 
million placed into two escrows will supply) cash needed to reduce debt 
and is part of Allegheny's overall plan to return to financial health.
    Under the Conemaugh Agreement, AE Supply and Conemaugh agreed, 
jointly and severally, to indemnify UGI Development, its affiliates, 
and their respective directors, officers, employees, agents and 
representatives (collectively, ``UGI Parties'') against certain losses 
arising in the event of a breach of the Conemaugh Agreement. Any 
requirement that AE Supply in fact indemnify a UGI Party under its 
joint and several obligations for a breach by Conemaugh would represent 
a guarantee of the obligations of its subsidiary, which would be 
contrary to the Capitalization Order as long as the capitalization 
standards set forth in that order are not met. In addition, although 
the sale of the Conemaugh Interest resulted in Conemaugh exiting the 
generation business, to the extent it retains EWG status, 
indemnification of its obligations by AE Supply also could have been 
viewed as an additional investment in an EWG. The additional 
investments would be contrary to the Capitalization Order as long as 
the Common Equity Conditions are not met.
    For these reasons, the parties amended the Conemaugh Agreement to 
delete all obligations of AE Supply to indemnify the UGI Parties for 
losses arising out of breaches of the Conemaugh Agreement by Conemaugh. 
The sale price for the amended transaction was $51.25 million, without 
a $3-million credit for UGI Development. The parties agreed that $5 
million of the sale price for the Conemaugh Interest would be placed 
into escrow until the earlier of (i) the time when AE Supply entered 
into an agreement to guarantee Conemaugh's indemnification obligations 
(``Conemaugh Obligations'') and an agreement to guarantee the Hunlock 
Obligation or (ii) April 15, 2006 (``Escrow Termination Date''). Prior 
to the Escrow Termination Date, UGI will be entitled to distributions 
in accordance with the Conemaugh Obligations or the Hunlock Obligation. 
Furthermore, the parties entered into an agreement (``Filing 
Agreement'') to require AE Supply to file with the Commission for 
authority to guarantee the Conemaugh Obligations and the Hunlock 
Obligation within 60 days of the closing (June 26, 2003) of the sale of 
the Conemaugh Interest. AE Supply deposited $1 million into escrow to 
guarantee its obligation to file with the Commission as set forth in 
the Filing Agreement. The parties also agreed that AE Supply would 
enter into an agreement to guarantee the Conemaugh Obligations and the 
Hunlock Obligation upon receipt from the Commission of authority under 
the Act to do so.
    Applicants, therefore, are requesting that the Commission authorize 
AE Supply to guarantee those obligations. Applicants state that this 
authority is appropriate because the burden of undertaking this 
guarantee obligation easily is offset by the benefits the Allegheny 
system currently derives through the sale of the Conemaugh Interest and 
will derive from the receipt of the portion of the sale price currently 
held in escrow.
    Applicants state that the indemnification obligations that AE 
Supply would guarantee are customary obligations of sellers of assets 
of this type. They fall into four broad classes, viz., obligations to 
indemnify for losses arising out of: (i) Breaches by Conemaugh of its 
obligations under any of its covenants or agreements contained in the 
Conemaugh Agreement or the agreement relating to the Hunlock facility; 
(ii) breaches by Conemaugh of its representations and warranties made 
in the Conemaugh Agreement, (iii) certain liabilities or obligations of 
Conemaugh or associated with its ownership of the Conemaugh Interest, 
and (iv) the failure of Conemaugh to comply with the provisions of any 
applicable bulk sales or transfer laws. This list of obligations and 
liabilities that AE Supply would guarantee is typical of the guarantee 
or indemnification obligations that parent companies normally provide 
in a commercial context, according to the Applicants.
    In addition, Conemaugh only has an obligation to indemnify UGI 
Parties to the extent the UGI Parties' losses subject to 
indemnification exceed $500,000; however, this limitation on 
indemnification does not apply to losses related to breaches of 
Conemaugh's representations and warranties regarding title to the 
Conemaugh Interest or to breaches of its covenants or agreements. 
Applicants, therefore, submit that the undertaking by AE Supply of the 
proposed guarantee obligations is partially mitigated and that the 
remaining risk is outweighed by the benefits that will accrue to the 
Allegheny system through the return of the escrowed funds and the use 
of the escrowed funds to reduce debt.

C. West Book Guarantees and Dividend Authority

    As noted above, AE Supply and its subsidiary ATF completed the sale 
of the West Book to Aron.
i. Guarantee Authority
    AE Supply has agreed as part of the West Book sale to seek 
authority from the Commission to guarantee ATF's payment obligations 
under the sales agreement. ATF was established for the sole purpose of 
owning the CDWR Contract and performing obligations under that 
contract. Accordingly, upon the distribution of the proceeds of the 
sale of the contract from ATF to AE Supply, ATF would be left without 
resources to meet indemnification obligations, if any arise. ATF's 
potential payment obligations under the sales agreement consist of 
indemnification paid to Aron and its affiliates for losses they incur 
arising out of breaches of representations, warranties, covenants, 
agreements and other obligations contained in or connected with the 
sales agreement.
    Other obligations of ATF that AE Supply would guarantee include a 
duty to operate its business prior to closing in accordance with past 
practice; to provide Aron with access to books and records relating to 
the contracts and to cooperate in the exchange of information, to use 
its best efforts to obtain necessary regulatory approvals, to notify 
Aron of significant changes in facts and circumstances, to pay all 
taxes attributable to the transfer of the contracts, and to file tax 
returns relating to the contracts for all periods prior to the closing 
date. ATF also has agreed to indemnify Aron against losses incurred as 
a result of certain specified pending class-action litigations relating 
to wholesale sales of electricity in California, which would be 
guaranteed by AE Supply under the authority sought. ATF's 
indemnification obligations are subject to a $2 million deductible. 
Applicants do not believe

[[Page 56024]]

any indemnification obligation is likely to arise. Under the sales 
agreement, until AE Supply receives authority to guarantee ATF's 
obligations, 20 percent of the proceeds of the West Book sale will be 
held in escrow to support ATF's indemnity obligation and will be 
unavailable to reduce debt at AE Supply.
ii. Dividend Authority
    Finally, Applicants seek authority for ATF to dividend out of 
capital to AE Supply up to the full amount of the cash proceeds of the 
sale of the CDWR Contract. The CDWR Contract is ATF's only significant 
asset; and following completion of its sale, ATF will not engage in 
other business activities. The dividends themselves are necessary to 
allow AE Supply to reduce debt and fully implement its plans for 
returning to financial health and compliance with the Commission's 
capitalization requirements.
    Finally, AESDS, which engages in generation facility development, 
has entered into an agreement to sell a combustion turbine currently 
held in inventory for a purchase price of $8 million, subject to 
certain adjustments. This turbine does not constitute ``utility 
assets,'' as defined in Section 2(a)(18) of the Act. Applicants request 
authority for AESDS to dividend up to the full amount of the proceeds 
of this sale to AE Supply, which will use these proceeds for general 
corporate purposes and to enhance its liquidity. Applicants expect that 
AESDS will conduct no further business following completion of the sale 
and the dividending of the proceeds of the asset sale to AE Supply.

    For the Commission, by the Division of Investment Management, 
under delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-24500 Filed 9-26-03; 8:45 am]
BILLING CODE 8010-01-P