SECURITIES AND EXCHANGE COMMISSION
(Release No. 35-27664; 70-10102)
FirstEnergy Corporation, et al.
Order Authorizing Acquisition of Securities of Nonutility Company
April 4, 2003
FirstEnergy Corp. ("FirstEnergy"), a registered holding company, Akron, Ohio, and GPU Diversified Holdings LLC ("GPUDH"), its wholly owned direct nonutility subsidiary, Morristown, New Jersey, have filed an application ("Application") with the Securities and Exchange Commission ("Commission") under sections 9(a) and 10 of the Public Utility Holding Company Act of 1935, as amended ("Act") and rule 54 under the Act. The Commission issued a notice of the Application on November 1, 2002.1
By orders dated December 17 and December 26, 1996,2 the Commission authorized GPU International, Inc. ("GPUI"), which at the time was a wholly owned nonutility subsidiary of GPU, Inc. ("GPU"), a registered holding company, to invest up to $30 million to acquire: (1) voting and preferred shares of Ballard Generation Systems Inc. ("BGS"),3 a joint venture with Ballard Power Systems Inc. ("BPS"), a nonassociate Canadian company; (2) options to acquire specified additional amounts of voting and preferred stock of BGS; and (3) warrants to purchase BPS stock ("BPS Warrants"). 4 The Prior Orders authorized GPUI to acquire 9.9% of the voting shares and twenty percent of the total equity of BGS, including shares obtained through the exercise of the purchased options. Subsequently, GPUI made a number of acquisitions of BGS stock.5 On December 24, 1996, GPUI purchased 300,001 voting and 290,300 preferred shares for $5,903,000. Over the course of the next two years, GPUI bought an additional 1.3 million BGS shares for $13 million.6 In December of 2000, GPUDH acquired from GPUI all of its voting and preferred BGS stock, and GPU acquired the BPS Warrants from GPUI.7 In June of 2001, GPUDH acquired an additional 425,000 voting shares of BGS stock. Currently, GPUDH owns 1,425,001 voting and 890,300 preferred shares of BGS stock (collectively, "BGS Shares"), representing approximately 8.6% and 13.2% of BGS' outstanding voting and equity (including voting and non-voting preferred stock) securities, respectively.
By order dated October 29, 2001,8 the Commission authorized GPU to merge with and into FirstEnergy. GPU did not survive the merger, and FirstEnergy is its successor in interest.
Applicants now propose to restructure their investment. Specifically, they request authority for GPUDH to exchange the BGS Shares for a number of restricted shares9 of BPS common stock that has a value equal to the value of the BGS Shares. For the purpose of this exchange, each BGS Share would be valued at $19.50, and exchanged for a number of BPS shares equal in value as determined by the current market value of BPS' common shares. As a result of the proposed investment, GPUDH will not own, directly or indirectly, ten percent or more of the outstanding BPS voting common shares; the company estimates that GPUDH's ownership will represent less than two percent of BPS' outstanding shares.
The principal business of BPS and its associated companies is the development, manufacture and commercialization of proton exchange membranes ("PEM") fuel cells and PEM fuel cell systems for use in transportation, stationary, portable and other power operations. All of BPS' sales revenue is derived from PEM fuel cell products.
Applicants state that FirstEnergy cannot comply with all of the requirements of rule 53(a), but that none of the adverse conditions described in rule 53(b) exist. During the twelve month period that ended September 30, 2002, FirstEnergy's "aggregate investment," as that term is defined in rule 53(a)(1)(i), in exempt wholesale generators ("EWGs") and foreign utility companies ("FUCOs"), as those terms are respectively defined in sections 32 and 33 of the Act, was approximately $1.27 billion, which was approximately 69% percent of FirstEnergy's consolidated retained earnings ($1.85 billion) during that period. Although FirstEnergy's current aggregate investment in EWGs and FUCOs exceeds the limit described in rule 53(a), the company is still below the previously established aggregate investment limit.10 Applicants state that, since the Commission issued the Merger Order, these types of investments have not had a material adverse impact on FirstEnergy's consolidated capitalization. Additionally, FirstEnergy's common stock equity ratio has improved.11 Applicants state that writedowns by FirstEnergy on its investments in Avon Energy Partners Holdings ("Avon") and GPU Empresa Distribuidora Electrica Regional S.A. and affiliates ("Emdersa") have had a negative impact on its earnings,12 but that FirstEnergy's other investments in EWGs and FUCOs have contributed positively to its earnings. They also point out that the proposed transactions will not have any material impact on FirstEnergy's capitalization.
Applicants estimate that the fees, commissions and expenses to be incurred in making the proposed investments are not expected to exceed $35,000. Applicants state that no state or federal commission, other than this Commission, has jurisdiction over any of the proposed transactions.
Due notice of the Application has been given in the manner prescribed by rule 23, and no hearing has been requested of or ordered by the Commission. Based on the facts in the record, it is found that the applicable standards of the Act are satisfied and that no adverse findings are necessary.
IT IS ORDERED, under the applicable provisions of the Act and rules under the Act, that the Application, as amended, is granted, 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.
1 Holding Co. Act Release No. 27591.
2 Holding Co. Act Release No. 26631 and Holding Co. Act Release No. 26635, respectively (collectively, "Prior Orders").
3 BGS is a Canadian company that develops, manufactures and markets stationary electric power systems employing fuel cell technology.
4 The Commission reserved jurisdiction over GPUI's exercise of the warrants, pending completion of the record. See Prior Orders.
5 GPUI paid $10 per share for all voting and preferred BGS stock described below.
6 Specifically, GPUI purchased 250,000 voting shares on October 24, 1997, 150,000 voting and 100,000 preferred shares on November 24, 1997, 300,000 voting and 100,000 preferred shares on June 12, 1998, and 400,000 preferred shares on March 29, 2000.
7 Subsequently, GPUI was acquired by a nonassociate company.
8 See FirstEnergy Corp., Holding Co. Act Release No. 27459.
9 All BPS shares issued to GPUDH would have a holding period of up to twelve months. Sales in the United States after one year would be limited by the constraints of rule 144 under the Securities Act of 1933, as amended. Sales in Canada would be restricted for four months, in accordance with Canadian provincial securities laws.
10 By the Merger Order, the Commission authorized FirstEnergy to invest up to $5 billion amount may include amounts invested in EWGs and FUCOs by FirstEnergy and GPU at the time of the Merger Order ("Current Investments") and amounts relating to possible transfers to EWGs of certain generating facilities owned by certain of FirstEnergy's operating utilities ("GenCo Investments"). FirstEnergy has committed that, through June 30, 2003, its aggregate investment in EWGs and FUCOs other than the Current Investments and GenCo Investments ("Other Investments") will not exceed $1.5 billion. The Commission has reserved jurisdiction over Other Investments in excess of $1.5 billion.
11 Applicants state that, as of December 31, 2002, FirstEnergy's consolidated capitalization consisted of 33% common equity, 1.7% cumulative preferred stock, 1.9% subsidiary-obligated mandatorily redeemable preferred securities, 58.3% long-term debt and 5.1% notes payable. As of December 31, 2001, those ratios were as follows: 30.3% common equity, 3.1% cumulative preferred stock, 2.2% subsidiary-obligated mandatorily redeemable preferred securities, 60.9% long term debt and 3.5% notes payable.
12 At the time of the Merger Order, FirstEnergy identified certain former GPU EWG and FUCO investments for divestiture within one year. Among those identified were Avon, a holding company for Midlands Electricity plc, an electric distribution business in the United Kingdom and Empresa, an electric distribution business in Argentina. In May 2002, FirstEnergy sold 79.9% of its interest in Avon, and in the fourth quarter of 2002, recorded a $50 million charge ($32.5 million net of tax) to reduce the carrying value of its remaining 20.1% interest. As of December 31, 2002, FirstEnergy did not reach a definitive agreement to sell Emdersa and, as a result, the Emdersa assets could no longer be treated as assets pending sale on FirstEnergy's consolidated balance sheet. On November 1, 2002, FirstEnergy began consolidating the results Emdersa's operations in its financial statements. In the fourth quarter of 2002, FirstEnergy recorded a one-time, after-tax charge of $88.8 million (comprised of $104.1 million in currency transaction losses arising principally from U.S. dollar denominated debt, offset by $15.3 million of operating income). In addition to the currency transaction losses, FirstEnergy recognized a currency translation adjustment in other comprehensive income of $91.5 million as of December 31, 2002. These accounting charges, in the aggregate, resulted in a $212.8 million decrease in FirstEnergy's consolidated capitalization of $21.55 billion as of December 31, 2002, which amount includes short-term borrowings.