Holding Company Act Release 27571
SECURITIES AND EXCHANGE COMMISSION
(Release No. 35-27571; 70-8893)
Allegheny Energy, Inc., et al.
Supplemental Order Authorizing Dividends out of Capital Surplus
September 27, 2002
Allegheny Energy, Inc. ("Allegheny"), a registered public utility holding company, Hagerstown, Maryland, its direct wholly owned public utility company subsidiaries Monongahela Power Company ("Monongahela Power"), Fairmont, West Virginia, and Allegheny Energy Supply Company, LLC ("Supply"), Hagerstown, Maryland; and its indirect wholly owned public utility company subsidiary Allegheny Generating Company ("AGC"), Hagerstown, Maryland, have filed with the Securities and Exchange Commission ("Commission") a post-effective amendment to a declaration ("Declaration") under section 12(c) of the Act and rules 46 and 54 under the Act. The Commission issued a notice of the post-effective amendment on July 8, 2002 (HCAR 27549).
By order dated September 19, 1996 (HCAR No. 26579), the Commission authorized AGC to pay dividends from capital surplus through December 31, 2001. In this post-effective amendment, AGC seeks authorization to pay dividends out of capital surplus through December 31, 2005.
AGC is a single asset company owning a 40% undivided interest in a 2100-megawatt hydroelectric station located in Bath County, Virginia.1 AGC has declining capital needs and its current retained earnings are insufficient to pay common stock dividends. As a result, AGC proposes to pay dividends with respect to its common stock out of capital surplus through December 31, 2005. Because AGC has only one asset and the Operating Subsidiaries, which are its only customers, take all of the capacity from that asset, the company, by design, has no growth opportunity. The asset has a net book value, at June 30, 2002, of $584.2 million, and was financed with $134.9 million of equity and $203.5 million of debt, which includes long-term and short-term debt, in combination with deferred taxes and investment tax credits. AGC's total revenues of about $68.2 million for the twelve (12) months ended June 30, 2002 are primarily equal to the owner's return on investment, as determined by a Federal Energy Regulatory Commission ("FERC") tariff, plus operating expenses (about $50.7 million for the twelve (12) months ended June 30, 2002) and depreciation (about $16.8 million for twelve (12) months ended June 30, 2002). Cash received from revenues exceeds the cash requirements for operating expenses and return primarily because of the recovery of depreciation expense.
Since AGC has no growth prospects, its owners expect a return on, as well as a return of, their investment. By design, the annual dividends, currently about $32.0 million based on previous calendar year dividend payments, must exceed the annual earnings, currently about $19.4 million based on twelve (12) months ended June 30, 2002, to avoid a cash buildup approximately equal to the annual depreciation. Dividends paid and to be paid (about $32.0 million estimated annual dividends to be paid, including $7 million paid in the second quarter of 2002), however, are less than the total of earnings and depreciation (about $36.2 million as of June 30, 2002, comprised of $16.8 million of depreciation and $19.4 million of net income). Actual capitalization at June 30, 2002 is $203.5 million debt and $134.9 million equity declining to about $153.5 million debt and $86.2 million equity at June 30, 2005. No dividends will be paid which will cause cash to be less than the amount required to meet operating expense and debt service. By this design, the capitalization is systematically reduced each year as the asset depreciates. Debt is retired and dividends are paid in amounts necessary to maintain a 45% equity position.
Allegheny states that AGC's payment of dividends out of capital surplus will have no impact upon the Allegheny system on a consolidated basis. Allegheny further states that the effect of the Operating Subsidiaries' investment in AGC is the same whether dividends are paid from retained earnings or capital surplus.
AGC's current earnings are determined in accordance with a FERC-approved cost of service formula. Under that formula, available cash flow from operations is applied first to the minimal capital expenditure requirements for AGC's existing single asset, and next to the pay down of debt and to the payment of dividends in a proportion that maintains debt at about 60% and equity at about 40% of total capitalization.
AGC's current and proposed dividend payment policy remains unchanged since AGC's operations commenced in 1985. Prior to 1985, AGC paid no dividends but accrued retained earnings as a result of recording allowance for funds used during construction in accordance with the FERC uniform system of accounts. From 1985 to 1996, AGC paid dividends from current earnings and accrued retained earnings.
Allegheny states, for purposes of rule 54, that the conditions specified in rule 53(a) are satisfied and that none of the adverse conditions specified in rule 53(b) exist. As a result, the Commission will not consider the effect on the Allegheny system of the capitalization or earnings of any Allegheny subsidiary that is an exempt wholesale generator or foreign utility company, as each is defined in sections 32 and 33 of the Act, respectively, in determining whether to approve the proposed transaction.
Applicants state that no fees, commissions and expenses are anticipated in connection with the proposed transactions. Applicants state that no state or federal commission, other than this Commission, has jurisdiction over the extension of time request.
Due notice of the filing of the post-effective amendment to the Declaration has been given in the manner prescribed by rule 23 under the Act, and no hearing has been requested of or ordered by the Commission. Based on the facts in the record, the Commission finds that the applicable standards of the Act are satisfied and that no adverse findings are necessary.
IT IS ORDERED that the post-effective amendment to the Declaration be permitted to become effective immediately, subject to the terms and conditions prescribed in rule 24 under the Act.
For the Commission, by the Division of Investment Management, pursuant to delegated authority.
Margaret H. McFarland
1 AGC is jointly owned by Monongahela Power (27%) and Supply (73%) (collectively, "Operating Subsidiaries").