(Release No. 35-27701; 70-10100)
Allegheny Energy, Inc., et al.
Supplemental Order Releasing Jurisdiction over Modified Financing Condition
Allegheny Energy, Inc. ("Allegheny"), a registered public-utility holding company under the Public Utility Holding Company Act of 1935, as amended ("Act"), and its subsidiary, Allegheny Energy Supply Company, LLC ("AE Supply"), a registered public-utility holding company and a public-utility company within the meaning of the Act (together, "Applicants"), with headquarters located in Hagerstown, Maryland, have filed an application-declaration, as amended ("Application"), under sections 6(a), 7, 9, 10 and 12 (c) of the Act and rules 46 and 54. Applicants ask the Commission to release jurisdiction reserved in the supplemental order in Holding Co. Act Release No. 27652 (Feb. 21, 2003) (the "Capitalization Order") over a condition to certain authorized financing transactions.
Allegheny has three state-regulated electric utility subsidiaries, West Penn Power Company ("West Penn"), Monongahela Power Company ("Monongahela Power") and The Potomac Edison Company ("Potomac Edison"), and one state-regulated gas utility subsidiary, Mountaineer Gas Company ("Mountaineer Gas"). Mountaineer Gas is a wholly owned subsidiary of Monongahela Power. The three electric utilities and the gas utility are collectively referred to below as the "Operating Companies."
AE Supply is the electric generating company for the Allegheny system. Between 1999 and 2001, in response to deregulation legislation in Maryland, West Virginia, Virginia and Pennsylvania, the electric Operating Companies transferred generating assets totaling approximately 6,900 megawatts ("MW") to AE Supply. AE Supply provides power to West Penn, Potomac Edison and Monongahela Power under contracts that represent a significant portion of the normal capacity of AE Supply's generating assets.
Thus, AE Supply's core business since its formation has been the provision of power to the electric Operating Companies to serve their native load. Although AE Supply is a public-utility company for purposes of the Act, it is not a utility for purposes of state regulation, nor is it subject to regulation as a utility in any of the states in which it operates.
B. Recent Financial Difficulties
Beginning in 2000, the Allegheny system significantly expanded its merchant power business. AE Supply has acquired, constructed or obtained contractual control over a total of 2,250 MW of capacity.
In 2001, AE Supply acquired Global Energy Markets, the energy commodity marketing and trading business of Merrill Lynch Capital Services, Inc. The acquisition included a long-term contractual right to call up to 1,000 MW of generating capacity in southern California. Shortly after the acquisition, AE Supply entered into a power sale agreement with the California Department of Water Resources ("CDWR"). Also in 2001, in response to concern over the cost of natural gas and the prices for electricity in California, AE Supply entered into a series of forward purchases of electricity at prices above the contractual price of the CDWR contract as a hedge. These forward purchases have resulted in significant negative cash flows since the summer of 2001.
Beginning in 2002, the merchant power business suffered a number of setbacks. Some markets, most notably California, experienced interruptions of supply and price volatility. Merchant trading was affected negatively by the bankruptcy of Enron and liquidity problems at several other major market participants. These events caused state deregulation to be delayed, discontinued and/or reversed. As a result, the demand for merchant power did not develop as expected. Additional capacity, coupled with lower than expected loads and a relatively weak economy, have led to an excess of supply over demand and reduced wholesale prices in several regional markets in which AE Supply owns, operates or contractually controls generation assets. In addition, the CDWR contract and related forward purchase hedges have caused cash losses at AE Supply of more than $400 million since 2001.
During the third quarter of 2002, AE Supply announced a restructuring of its energy marketing and trading activities. The company is significantly reducing its reliance on the wholesale energy trading business, primarily by restricting activities to an asset-backed strategy using its generating assets located in the Mid-Atlantic and Midwest regions. In furtherance of this strategy, the number of employees has been reduced and operations relocated from New York City to western Pennsylvania. In addition, AE Supply cancelled a number of generation projects, including a 540 MW combustion turbine generation project for St. Joseph, Indiana that had previously been suspended. Over the next several years, AE Supply will reduce capital expenditures by approximately $900 million. Allegheny also undertook a number of cost-cutting initiatives in 2002, including reducing pre-tax operating expenses by an estimated $45 million and reducing its workforce by approximately 10%. To increase liquidity, Allegheny committed that a reduced dividend would be paid in December 2002 and in 2003, between 0% and 50% of the historical dividend level. At its December 5, 2002 meeting, Allegheny's Board of Directors suspended the fourth quarter 2002 cash dividend on its common stock. Finally, Allegheny has agreed that it will not pay any dividends or other distributions on its common stock under the terms of a credit agreement described below.
In February 2003, Allegheny and AE Supply entered into agreements with lenders for new and restructured debt totaling $2.4 billion (the "Credit Facilities"), representing loan commitments of $2.2 billion for AE Supply and $0.2 billion for Allegheny. The new debt at AE Supply consists of secured debt totaling $1.977 billion, of which $1.927 billion is outstanding, and unsecured debt totaling $131 million (assuming all letters of credit were converted into debt). The new debt at Allegheny totals $330 million of unsecured debt, of which $314 million remains outstanding. AE Supply's new debt requires repayments of $250 million in the fourth quarter of 2003 and $200 and $150 million, respectively, in the third and fourth quarters of 2004. Allegheny's new debt requires repayment of approximately $8 million each quarter.
C. Current Financial Situation
Applicants state that, in the third quarter of 2002, after identifying miscalculations in business segment information included in its second quarter Form 10-Q, Allegheny initiated a comprehensive review of its financial processes, records and internal controls of its current and prior financial statements. Allegheny identified numerous accounting errors and internal control deficiencies, including inadequate reconciliation of accounts; lack of, or failure to adhere to, accounting policies; improper classification of transactions; and improper cut-off of transactions. These deficiencies were aggravated by difficulties in integrating the energy trading business acquired in March 2001.
Allegheny states that it has acted to mitigate the risk of material misstatements in its financial statements. Allegheny has developed a plan and engaged an outside professional services firm to help implement significant additional procedures to remedy internal control deficiencies. The procedures are meant to facilitate the completion of the audit of Allegheny's financial statements for 2002 by PricewaterhouseCoopers ("PWC").
Allegheny states that it recently determined, based upon currently available unaudited financial information for the year ended December 31, 2002, that its common stock equity on a consolidated basis as of December 31, 2002 was below the 28% common equity ratio required by the Capitalization Order. 1 Allegheny states that the decline in its common equity ratio resulted from the following events.
First was the cancellation of the St. Joseph, Indiana project which led Allegheny to write down the value of its investment in the project. Second, in connection with the review of its financial statements, Allegheny and its outside auditor determined that reduced liquidity in the energy markets made it appropriate to revise the volatility assumptions used in valuing Allegheny's trading book. These actions, together with other unusual items, such as write-downs for impairment charges, net losses recorded with respect to asset sales and charges relating to the workforce reduction and relocation of the energy trading function, decreased Allegheny's stockholders' equity by approximately $740 million in 2002.
In addition, AE Supply's 2003 financial performance and cash flows have been substantially weaker than projected. Applicants state that most of the unexpected cash requirements are associated with the residual trading and marketing activities. Applicants explain that most agreements with AE Supply's trading counterparties require posting of collateral, depending upon the mark-to-market value of the contracts. Forward price volatility over time can significantly affect AE Supply's cash requirements, as additional collateral may be required. Beginning in the third quarter of 2002 through the second quarter of 2003, forward power and gas prices increased significantly, resulting in collateral requirements that have exceeded projections by more than $100 million. In addition, these rising prices caused AE Supply to decide to prepay for natural gas and power supplies needed for power deliveries during the summer months of 2003 (approximately $45 million) as a hedge. Finally, the effects of terminations of trading agreements by counterparties left AE Supply short of power during the first two quarters of 2003. Covering these short positions with spot purchases has been costly, due to price increases. Although these events were offset to some extent by AE Supply's receipt of an income tax refund, the net effect of all changes has left AE Supply with insufficient liquidity to conduct its business in the future without further financing or asset sales.
Applicants note that price volatility will be a continuing risk to AE Supply so long as it has significant trading positions in the market. AE Supply's goal is to eliminate trading risk and volatility exposure. It intends to cover its short positions during the summer through spot market purchases, sell its trading positions in the western United States (known as the "West Book"), and systematically neutralize or eliminate other trading positions.
Specifically, AE Supply is currently engaged in selling its West Book and expects to close the sale in September or October 2003. The sale will greatly reduce trading risk in the West after the closing date. In the eastern United States, AE Supply has a large short position, caused primarily by contract terminations due to Applicants' credit ratings. This position will be substantially eliminated by the scheduled maturities of the sales contracts by the end of 2003. Therefore, absent nonperformance by power suppliers, it will be unnecessary for AE Supply to purchase electricity in the spot market in 2004.
Applicants state that AE Supply's ability to carry out this plan depends upon its having sufficient cash to manage its positions going forward.2 Allegheny's ability to engage in financing transactions has been impaired by the continuing and unexpectedly long delay in the filing of periodic reports, including financial statements, as required by federal securities laws, and by the absence of audited 2002 financial statements. At present, because the common equity ratio of Allegheny has fallen below 28%, neither Allegheny nor AE Supply can engage in financing transactions and AE Supply requires external funds to meet its immediate liquidity needs. 3
Allegheny is now under new management.4 Applicants state that management and consultants are working to improve the ability to forecast cash requirements and believe that significant improvements have been made since early 2003.
In summary, Applicants are taking actions to improve their long-term financial problems, but state that their need for short-term liquidity is acute. Although AE Supply is in the process of selling various assets, the timing of such sales will not provide sufficient amounts soon enough to meet its immediate needs.5
D. Current Financing Authorizations
The Capitalization Order modified through December 31, 2003 (the "Modified Authorization Period") certain conditions to authorizations granted in Holding Co. Act Release No. 27486 (Dec. 31, 2001) (the "Original Financing Order"), as supplemented by Holding Co. Act Release Nos. 27521 (Apr. 17, 2002) (the "April Order") and 27579 (Oct. 17, 2002) (the "Supplemental Order", and together with the Original Financing Order and the April Order, the "Financing Order").
In the Original Financing Order, the Commission, among other things, authorized:
The Capitalization Order modified financing conditions to the transactions authorized in the Financing Order, as follows (the "Revised Financing Conditions"):
The Capitalization Order reserved jurisdiction, among other things, over common stock equity ratio levels of Allegheny and AE Supply below 28% and 20%, respectively.
E. Requested Release of Jurisdiction
Applicants request the Commission to release jurisdiction reserved in the Capitalization Order over a common equity ratio of Allegheny and AE Supply below 28% and 20%, respectively, to enable (1) Allegheny to issue and sell up to $325 million of convertible trust preferred securities through a newly organized Capital Corporation (as defined in the Original Financing Order), with the proceeds provided to Allegheny in exchange for its subordinated debentures, with warrants; and (2) AE Supply to borrow under its Credit Facilities, through the expiration date thereof of April 30, 2005, up to the maximum loan commitment thereunder of $2.2 billion at any time, as discussed further below. Effectively, Allegheny and AE Supply request the Commission to disregard, for purposes of these transactions, their current common equity ratios, which are below 28% and 20%, respectively.
Allegheny asserts that this authority is necessary for it to implement its plans to improve its financial condition. Allegheny states that it is committed to returning its common equity ratio to 30% or more, and believes that it can reasonably do so by the end of 2005. Applicants state that they cannot at this time provide assurance that they will be in compliance with each of the Revised Financing Conditions on or before December 31, 2003. However, to the extent necessary to achieve a 30% common equity level, Allegheny intends to issue an aggregate of approximately $300 million of common equity during the period 2004 through 2005. Lazard Frères & Co. has proferred a letter to Allegheny expressing the view that there is investor interest in acquiring equity securities of Allegheny in the amounts proposed. 8
Allegheny intends to maintain a consistent level of dividends from the Operating Companies through 2007 in amounts that will not compromise the ability of those companies to meet their capital and operating needs, and thus ensure reliable service. Applicants will advise the Commission of all developments as they implement their strategic and financial plan and will make formal application to the Commission in a timely manner if, and to the extent that, they require further authorizations.
F. Transactions That Will Be Undertaken Pursuant to the Requested Order
1. Issuance by Capital Corporations of Convertible Trust Preferred Securities
Allegheny intends to form one or more Capital Corporations to issue up to $325 million of convertible trust preferred securities, including up to $12 million in such convertible trust securities that may be paid in lieu of cash interest ("pay-in-kind" interest). A limited pay-in-kind feature will enable Allegheny to conserve cash.9 Allegheny will transfer all or a portion of the proceeds of the issuance to AE Supply as a contribution of capital pursuant to rule 45(b)(4) under the Act.
Applicants cite four reasons why it is necessary for the holding company rather than AE Supply to issue these securities to attract sufficient investor interest. First, the amount of debt outstanding at AE Supply, secured debt in particular, is such that prospective investors would be unwilling to be ranked subordinate to the secured creditors and pari passu with the unsecured creditors. Second, investors perceive that they would have a greater risk in the event of a bankruptcy by AE Supply rather than Allegheny. Third, the holding company's revenue stream comes from both its regulated and unregulated businesses, the regulated portion being the larger, and investors would rely on the combined revenues to repay the proposed new debt. Finally, in the Applicants' judgment, the lender approvals necessary to issue unsecured debt at the AE Supply level would be more extensive and difficult to obtain than the necessary approvals for an issuance by Allegheny.
Allegheny also intends to (1) issue debentures, with warrants, to each Capital Corporation in exchange for the proceeds of the financing; (2) acquire voting interests or equity securities of each Capital Corporation and (3) guarantee the obligations of each Capital Corporation. Allegheny will also enter into an expense agreement with each Capital Corporation providing that Allegheny will reimburse the Capital Corporation for any expenses at cost. The aggregate amount of convertible trust preferred securities issued by the Capital Corporation will count against the $4 billion Financing Limit of the Original Order for issuance of securities by Allegheny.
2. Borrowings under Credit Facilities by AE Supply
As noted previously, Applicants entered into agreements with lenders in February 2003 concerning new and restructured debt totaling $2.4 billion. AE Supply intends to borrow under its Credit Facilities up to the maximum loan commitment thereunder of $2.2 billion, provided that the aggregate principal amount of AE Supply's secured debt outstanding will not at any time exceed $2 billion. This measure will allow AE Supply to obtain funds to the extent that incremental loan capacity is available from the banks pursuant to the Credit Facilities.
The proceeds from the sale of the convertible trust preferred securities, together with the borrowings under AE Supply's Credit Facilities, will provide liquidity to permit AE Supply to meet its cash needs for collateral requirements and to cover positions. Approximately $27 million and $23 million of the proceeds will be applied to retire debt at Allegheny and AE Supply, respectively. Approximately $70 million of the proceeds will be used to reduce the open positions and some of the risk in AE Supply's trading book during the summer months of 2003. The balance, together with proceeds from the expected sale of AE Supply's West Book, will pay AE Supply's $250 million amortization of bank debt due in the fourth quarter of 2003, referenced above, and provide a significant cash reserve to meet any requirements associated with the book if prices move adversely to AE Supply.
After giving effect to the issuance of the convertible trust preferred securities and assuming that the Credit Facilities are fully drawn, the aggregate debt outstanding of Allegheny and AE Supply and equity issued by Allegheny pursuant to the Financing Order will be $2.78 billion, within the Financing Limit of $4 billion.10
As discussed above, Applicants request the Commission to release jurisdiction reserved in the Capitalization Order over the condition to maintain a common equity ratio below 28% for Allegheny and 20% for AE Supply, respectively. Section 20(a) of the Act in pertinent part authorizes the Commission to amend orders "from time to time" "as it may deem necessary or appropriate to carry out the provisions of this title." The requested release of jurisdiction would revise a condition to financing transactions authorized under section 7 of the Act.11
As a matter of regulatory policy, the Commission has generally favored a minimum consolidated common equity component of 30% for registered holding companies. The Commission has recognized, however, that special circumstances may warrant a lower equity component.12 The Commission has stated that it "under appropriate circumstances has applied the capitalization ratio standard flexibly where, for example, there was assurance that capitalization ratios would improve over the foreseeable future, and where it was in the public interest and the interest of investors and consumers that a proposed financing should be permitted to go forward."13
It is appropriate to grant the requested relief in this matter. Applicants' inability to engage in the financing transactions could lead to the bankruptcy of either company or both. Yet Applicants represent that the value of AE Supply's assets exceeds its liabilities and the Operating Companies have a healthy business and cash flow. In these circumstances, it seems appropriate to permit Applicants to attempt to solve their short-term liquidity crisis rather than relegate them to liquidating or reorganizing their business in bankruptcy.
Applicants state that they have carefully analyzed their current situation and made significant efforts to develop a systematic plan to return to a healthy financial condition. They believe that, if given the requested order, they will be able to continue a course toward recovery. Applicants have provided projections that show the holding company's consolidated common equity ratio returning to 30% by the end of 2005. Allegheny's new management believes that these projections are reasonably achievable through the execution of their strategic and financial plan.
Although there can be no assurance that Applicants will avoid insolvency, the Commission believes that they are pursuing a reasonable plan.14 The plan includes debt reduction, Operating Company dividend payouts, and the issuance by Allegheny of at least $300 million of common equity in the period 2003 through 2005. Lazard Frères & Co. has advised Allegheny that there is investor interest in acquiring equity securities in this amount.
Applicants state that the requested relief will not adversely affect the Operating Companies and their customers. The ratio of common equity to total capitalization of each Operating Company will continue to be maintained at no less than 30%.15 The Maryland Public Service Commission and the Pennsylvania Public Utility Commission have issued letters expressing support for a prompt and flexible approach by this Commission to the resolution of Allegheny's current financial situation.
Bankruptcy, as the alternative, would cause serious disruptions, in view of the relationships between Applicants and the Operating Companies. Among other things, bankruptcy would create uncertainty about the status of AE Supply's agreements to sell power to the Operating Companies. Applicants state that two of the Operating Companies, West Penn and Potomac Edison, buy substantially all of their electricity requirements from AE Supply at prices substantially below current prices in the Pennsylvania-New Jersey-Maryland (PJM) market.16 If AE Supply were to reject the Operating Companies' contract in bankruptcy, the two utilities would be required to buy electricity in the open market, likely at higher prices. In addition, AE Supply jointly purchases with Monongahela Power coal and other supplies for jointly owned power stations. AE Supply reimburses Monongahela Power for its share in the power stations. Bankruptcy of AE Supply could oblige Monongahela Power to purchase the coal and other supplies, with, at best, a delay in reimbursement and, at worst, no reimbursement.
Bankruptcy of AE Supply could also require the Operating Companies to meet any debt services obligations on pollution control bonds of AE Supply. Another difficulty would be the claims that the insurer of the pollution control bonds could make against the Operating Companies under guarantees that they entered into in connection with the transfers of the assets to AE Supply. On July 1, 2003, Moody's Investors Service reduced the ratings of the Operating Companies to below investment grade in recognition of the impact on the utilities of an Allegheny bankruptcy. Finally, a bankruptcy could also affect the provision of services rendered to the Operating Companies by Allegheny Energy Service Corporation, the Allegheny system service company, and thus raise Operating Company costs.
As Applicants note, bankruptcy creates both known and unknown risks of increased costs, business disruptions, departure of valuable employees and lost customers and business opportunities. Bankrupt companies must pay significant expenses for counsel and advisors. Other costs are not readily identifiable or quantifiable, but counterparties may be expected to terminate contracts early and currently unrealized losses would then become realized losses and fixed claims. A bankruptcy would result in a substantial loss of economic value for shareholders. The Commission thinks that the requested order offers Applicants a reasonable means by which they can seek to avoid a bankruptcy.
The Commission has carefully examined the Application under the applicable standards of the Act and has concluded that the proposed transactions are consistent with those standards.
Applicants state that the fees, commissions and expenses to be incurred in connection with the Application are estimated to be $35,000. These estimates do not include the underwriting fees, commissions or other similar remuneration to be paid in consummating the authorized transactions. Applicants state that no state or federal commission, other than this Commission, has jurisdiction over the proposed transactions.
Due notice of the filing of the Application has been given in the manner prescribed by rule 23 under the Act, and no hearing has been ordered by the Commission. Based on the facts in the record, the Commission finds that the applicable standards of the Act and rules are satisfied and that no adverse findings are necessary.
IT IS ORDERED, that the Application, as amended, be, and it hereby is, granted and permitted to become effective immediately, subject to the terms and conditions prescribed in rule 24 under the Act and the following conditions:
Applicants will file a report with the Commission within two business days after the occurrence of any of the following:
The report shall describe all material circumstances giving rise to the event.
Allegheny commits to file Rule 24 certificates of notification quarterly, within 60 days after the end of each of the first three calendar quarters and 90 days after the end of the last calendar quarter until December 31, 2005, which will include the following information:
By the Commission.
1 The Capitalization Order is discussed in section D., infra.
2 Approximately $70 million of the proceeds from Applicants' proposed issuance of convertible trust preferred securities will be used to eliminate open positions and reduce AE Supply's trading risk volatility for the remaining months of 2003.
3 Applicants state also that current information indicates that AE Supply's common equity ratio is near 20%. Projections suggest that the ratio could be below 20% at the time that the proposed securities issuances take place.
4 On June 16, 2003, Allegheny's new Chairman, President and Chief Executive Officer, Paul J. Evanson, joined Allegheny from FPL Group, Inc., the parent of Florida Power & Light Company. On July 7, 2003, Allegheny named Jeffrey D. Serkes as Senior Vice President and Chief Financial Officer. Mr. Serkes was previously Vice President and Treasurer of International Business Machines Corp.
5 On June 27, 2003, an exempt wholesale generator subsidiary of AE Supply closed on the sale of its interest in a generating facility for approximately $51 million. In addition, AE Supply announced on June 10, 2003 that it had renegotiated the CDWR contract to settle litigation pending before the FERC. The new agreement removes the related uncertainty and enables AE Supply to sell the contract as part of its refocused business strategy. AE Supply and its subsidiary, Allegheny Trading Finance Company, have received bids for the CDWR contract, related hedges and other West Book agreements and are in negotiations for definitive disposition of the CDWR contract and related hedges.
6 Under the Financing Order and the Capitalization Order, Allegheny currently has $314 million of unsecured debt outstanding and AE Supply $1.927 billion of secured debt and $131 million of unsecured debt outstanding, as noted above. Allegheny has not issued any equity securities to date under the Financing Order.
7 However, the interest rate applicable after the occurrence of a default may be increased by an additional increment, typically 200 basis points.
8 See Exhibit N to the Application.
9 At Allegheny's option, and for only one quarterly interest payment, the pay-in-kind provision permits the issuance, in lieu of cash interest, of additional convertible trust preferred securities having the same terms as those initially issued, with a face value equal to the required interest payment. Assuming a $300 million issuance and a 11.5% rate, this would give Allegheny the option to issue approximately $8.6 million of new convertible trust preferred securities in lieu of one cash interest payment.
10 The Original Financing Order authorized Allegheny, subject to the Financing Conditions, to issue and sell short-term and long-term unsecured debt of up to $4 billion and to issue up to $1 billion of equity securities, provided that the aggregate debt outstanding and equity issued would not exceed the Financing Limit. Allegheny's authorization to issue equity securities includes warrants or other stock purchase rights, as well as preferred securities (including trust preferred securities), which may be convertible into shares of Allegheny common stock. Allegheny is also authorized to form a Capital Corp(s) to issue trust preferred securities. The amount of such securities would count against the Financing Limit.
11 Section 7(d) requires the Commission to allow a declaration concerning a proposed issue or sale of a security to become effective unless the Commission makes certain adverse findings. In particular, the declaration may not become effective if the Commission finds, among other things, that:
If the Commission makes no adverse finding, the requested authorization is granted. Section 7(f) then permits the order "to contain such terms and conditions as the Commission finds necessary to assure compliance with the conditions specified in this section."
12 See, e.g. Xcel Energy Inc., Holding Co. Act Release No. 27597 (Nov. 7, 2002) (authorizing holding company to engage in certain otherwise permissible financings subject to maintaining a common equity ratio of at least 24%; noting that the Commission's goals in administering section 7(d) included ensuring that holding company systems have "a balanced capital structure [that] provides a considerable measure of insurance against bankruptcy . . . and avoids the possibility of deterioration in service to consumers if there is a decline in earnings" (citation omitted)); Conectiv, Holding Co. Act Release No. 27111 (Dec. 14, 1999) (authorizing modification of financing order to change condition that holding company maintain a minimum common equity ratio of 30% to 20%); Eastern Utilities Associates, Holding Co. Act Release No. 24879 (May 5, 1989) (releasing jurisdiction over various financings in connection with investment in nuclear-fueled generating plant); Alabama Power Co., Holding Co. Act Release No. 21711 (Sept. 10, 1980) (authorizing extension of short-term borrowing directed to curing critical financial problems of utility).
13 See Eastern Utilities Associates, Holding Co. Act Release No. 24879, supra note 12.
14 Applicants note that, although the requested order will greatly improve the liquidity of the Allegheny system and thereby significantly reduce the risk of insolvency, future events could nonetheless lead to bankruptcy. Such events would include a dramatic increase in the prices of electricity or natural gas, particularly before the sale of the West Book. Other risks would be a failure by a significant number of suppliers to perform on their commitments and unanticipated major plant outages. Applicants state that their largest exposure to a potential termination for the rest of 2003 is approximately $27 million, based on current forward prices.
15 As of December 31, 2002, the common equity ratios of the Operating Companies were 45% for West Penn, 48% for Potomac Edison and 35.6% for Monongahela Power.
16 Applicants state that the pricing under the contract was the result of negotiations with state regulators that resulted in the creation of certain rate caps.
17 The financial projections referred to in Item 4 will be filed on a confidential basis.