SECURITIES AND EXCHANGE COMMISSION
(Release No. 35-27796; 70-10100)
Allegheny Energy, Inc., et al.
Supplemental Order Releasing Jurisdiction Over Authorization to Issue Securities
February 3, 2004
Allegheny Energy, Inc. ("Allegheny"), a registered holding company under the Public Utility Holding Company Act of 1935, as amended ("Act"), and Allegheny Energy Supply Company LLC ("AE Supply"), a registered holding company and a public-utility company subsidiary of Allegheny (collectively, "Applicants"), both at Hagerstown, Maryland, have filed with the Securities and Exchange Commission ("Commission") a post-effective amendment ("Post-Effective Amendment") to a previous application-declaration under sections 6(a), 7, 9, 10 and 12(c) of the Act and rules 45, 46, 52 and 54 under the Act. A notice of the original application was issued November 5, 2002 (Holding Co. Act Release No. 27596).
A. Current Financing Authority
Previous orders have authorized Applicants to engage in a broad range of financing transactions through December 31, 2005 (See Holding Co. Act Release No. 27486 (December 31, 2001) ("Original Financing Order"), supplemented by Holding Co. Act Release No. 27521 (April 17, 2002)("April Order"), Holding Co. Act Release No. 27579 (October 17, 2002)("Supplemental Order")(together with the Original Financing Order and the April Order, "Financing Order"), Holding Co. Act Release No. 27652 (February 21, 2003)("Capitalization Order"), Holding Co. Act Release No. 27701 (July 23, 2003) ("Trust Preferred Securities Order"), and Holding Co. Act Release No. 27780 (December 22, 2003)("December Order") (all collectively, the "Prior Orders").
The Financing Order, among other things, authorized:
The Supplemental and Capitalization Orders modified certain of the financing parameters through the period ending December 31, 2003.5 Those orders modified the financing parameters as follows ("Revised Financing Conditions"):
In addition, the Capitalization Order authorized AE Supply to pay dividends out of capital and unearned surplus up to $500 million through December 31, 2003, in order to provide Allegheny with necessary liquidity.
The Capitalization Order reserved jurisdiction over (i) 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 (ii) the issuance of debt securities at an interest rate in excess of the modified interest rates. In July 2003, Applicants were granted a release of jurisdiction over the issuance by Allegheny of up to $325 million of convertible trust preferred securities in the Trust Preferred Securities Order.7 The Capitalization Order required the Applicants to file an application with the Commission if they wished to seek relief from the 30 percent common equity requirement and to extend the Revised Financing Conditions after December 31, 2003. On October 30, 2003, Applicants filed a request for relief from the common equity requirement and an extension of the Revised Financing Conditions. The December Order granted those requests through April 30, 2004.8 Because the common equity ratios of Allegheny and AE Supply currently remain below 28 and 20 percent, respectively, the companies need a release of jurisdiction over certain of the Revised Financing Conditions before they can issue securities.
B. Current Financing Request
By this Post-Effective Amendment, Applicants request that the Commission release jurisdiction reserved in the Capitalization Order over the Applicants proposal to issue securities when their capitalization ratios are below 28 and 20 percent. Specifically, Applicants seek to issue a total of $1.6 billion in short- and long-term debt securities and $350 million in common stock previously approved by the Commission. Applicants will use the proposed new debt securities to repay current credit facilities and engage in transactions related to that end. The new common stock would be used to pay down debt at Allegheny and/or AE Supply.
Applicants state that they continue to make progress in implementing their plans for a return to financial health and compliance with the Commission's capitalization requirements for registered holding companies. In February 2003, Allegheny had $330 million in debt and a letter of credit outstanding under two separate credit facilities. It has reduced this amount to approximately $262 million as of December 31, 2003. In addition, AE Supply has at this time $76 million in either escrow or pledged accounts that will be used to repay credit facilities when available. AE Supply also has recently repaid $64.4 million in pollution control notes and $250 million of credit facility debt. During 2003, Monongahela Power repaid $19.1 million in pollution control notes, and West Penn repaid $76 million of its stranded cost securitization debt. Mountaineer Gas recently repaid $3.3 million of its notes, and Allegheny Generating Company, a subsidiary company of AE Supply and Monongahela Power, repaid $50 million in debentures. In addition, as noted above, Allegheny issued $300 million in convertible trust preferred securities in July 2003.
In February 2003, Allegheny and AE Supply restructured approximately $2.4 billion of debt, including about $2.0 billion of bank debt. As conditions to that restructuring, Applicants agreed to accept many restrictions and to take certain actions, including discontinuing construction projects, redirecting the energy trading business, paying amounts owed to trading counterparties, and repaying the restructured bank debt according to a two-year schedule. Applicants have fulfilled all of these obligations according to schedule, including a $250 million bank debt repayment in December 2003, which was paid two weeks before the due date. The proposed refinancing will complete the repayment more than a year ahead of schedule of all of the bank debt restructured in February 2003.
As a result of their progress, the Applicants maintain that their existing debt instruments are trading much closer to par, and in some cases well above par, in the bank and capital markets. That, together with generally lower interest rates, Applicants state, enables them and their financial advisers to pursue the proposed refinancing transactions with confidence that they may obtain significantly lower overall interest costs and, therefore, improve their creditworthiness. In addition, the Applicants believe that Allegheny's improved liquidity and progress toward financial health during the last year will allow them to obtain generally less restrictive covenants (in particular, more lenient amortization terms).
To accomplish these goals, Applicants seek a release of jurisdiction over a total of $1.6 billion in short- and long-term debt securities and debt securities convertible to equity and up to $350 million of Allegheny common equity securities approved in the Original Financing Order but currently subject to the reservation of jurisdiction under the Capitalization Order.9 Applicants commit that the debt (including any convertible securities) issued as a result of the requested authority will not exceed $1.6 billion nor increase the amount of consolidated debt that currently is outstanding for Allegheny and AE Supply.
Specifically, Allegheny seeks authority to issue up to $450 million in short- and long-term unsecured debt, including up to $200 million of letter of credit authority and authority to issue securities convertible into Allegheny common stock. At no time will the combination of debt, letters of credit and convertible securities issued by Allegheny under this authority exceed $450 million. The credit facilities established under the requested authority could include a revolving bank facility, which would allow Allegheny to reduce its debt while still preserving liquidity capacity. Allegheny will use funds raised through these issuances to repay the remaining $262 million outstanding as of December 31, 2003, under an existing credit facility and for other corporate purposes, which would include the repayment of AE Supply debt or the issuance of letters of credit for Allegheny or its subsidiaries as described below.
AE Supply seeks authority to issue up to $1.3 billion of long- or short-term debt, secured or unsecured, or a combination of short- and long-term debt, including authority to obtain up to $300 million of letter of credit capacity. At no time will the combination of debt and letters of credit issued by AE Supply under this authority exceed $1.3 billion. The credit facilities established under the requested authority could include a revolving bank facility that would allow AE Supply to reduce its debt while still preserving liquidity capacity. AE Supply will use the funds raised, together with cash from other Allegheny sources, to repay what remains of three existing credit facilities that had a combined capacity totaling $1.428 billion at the end of 2003.
Although their individual requests in combination are greater than $1.6 billion, in no event will Applicants issue debt securities under the release of jurisdiction sought in this Post-Effective Amendment in an aggregate amount outstanding at any one time that is greater than $1.6 billion. The apparent discrepancy is accounted for by the fact that Applicants seek the flexibility to issue $150 million of the total $1.6 billion at either Allegheny or AE Supply depending on which course proves to be most favorable at the time. If Allegheny issues this amount, AE Supply will issue no more than $1.15 billion in debt securities; and if AE Supply issues it, Allegheny will issue no more than $300 million, ensuring that the total will not exceed $1.6 billion.
Finally, Allegheny seeks authority to issue up to $350 million in common stock to the public through underwriters, who will acquire that stock for their own account and may resell the shares from time to time in one or more transactions, including negotiated transactions, at a fixed public offering price or at varying prices determined at the time of sale. The common stock may be offered to the public either through an underwriting syndicate (which may be represented by a managing underwriter or underwriters designated by Allegheny) or directly by one or more underwriters acting alone. The offering would be effected according to an underwriting agreement of a type generally standard in the industry, and Allegheny may grant the underwriters a "green shoe" option to purchase additional shares at the same price then offered solely for the purpose of covering over-allotments (provided that the total number of shares offered initially, together with the number of shares issued with any option shall not exceed the number of shares authorized for issuance.)10 It is also possible that Allegheny will sell the common stock through dealers, agents or directly to a limited number of purchasers or a single purchaser. If dealers are utilized in the sale of any of the common stock, Allegheny will sell the common stock to the dealers as principals. Any dealer may then resell the securities to the public at varying prices to be determined by the dealer at the time of resale.
The aggregate price of the common stock being sold through any underwriter or dealer shall be calculated based on either the specified selling price to the public or the closing price of the common stock on the day the offering is announced. Public distributions may be according to private negotiation with underwriters, dealers or agents as discussed above or effected through competitive bidding among underwriters. In addition, sales may be made through private placements or other non-public offerings to one or more persons. The sale of the shares of common stock will be at prices and under conditions negotiated or based upon, or otherwise determined by, competitive capital markets. The underwriting fees, commissions or other similar remuneration paid in connection with the issue, sale or distribution of the common stock (not including any original issue discount) will not exceed five percent of the aggregate principal or total amount of the common stock being issued.
Allegheny will use the net proceeds (after deduction of fees, commissions and expenses) of the common stock offering to pay down debt at Allegheny and/or its subsidiaries. The requested authority is part of Allegheny management's overall plan for returning to financial health and common equity ratios for the Applicants of at least 30 percent. According to Applicants, the transactions that are the subject of this Post-Effective Amendment are essential for continuing that progress and moving from liquidity sources dominated by a banking group to a more typical mix of institutional investors and banks and extending maturities and reducing refinancing risk. The Applicants maintain that this step represents a normal evolution of financing as a company moves away from liquidity problems toward establishing better access to the capital markets, including the equity market.
Although Applicants have experienced tightened liquidity and weak financial performance, they believe that the strength of the underlying assets of AE Supply will provide improved financial performance in the future. The record states that the Operating Companies have not been forced to curtail or diminish their services because of the financial difficulties at AE Supply. From January 2000 through the third quarter of 2003, Monongahela Power, Potomac Edison and West Penn have in aggregate paid approximately 79% of their income before extraordinary charges and the cumulative effect of accounting changes to Allegheny in dividends. In the first three quarters of 2003 (fourth quarter income figures are not yet available), that value was approximately 45%. During 2003, in addition to funding their capital expenditures and operating expenses, the utilities repaid over $95 million of debt with cash.
C. Rule 54 Analysis
Rule 54 under the Act states that in determining whether to approve the issue or sale of a security by a registered holding company for purposes other than the acquisition of an EWG or a FUCO or other transactions by a registered holding company or its subsidiaries other than with respect to EWGs or FUCOs, the Commission shall not consider the effect of the capitalization or earnings of any subsidiary which is an EWG or a FUCO upon the registered holding company system if rule 53(a), (b) and (c) are satisfied.
Allegheny does not satisfy the requirements of rule 53(a)(1). In the Original Financing Order, the Commission authorized Allegheny to invest up to $2 billion in EWGs and FUCOs and found that this investment would not have either of the adverse effects set forth in rule 53(c). As of September 30, 2003, Allegheny's "aggregate investment," as defined in rule 53(a)(l), was approximately $185 million. These investments by Allegheny were made in compliance with the Original Financing Order.
As discussed above, Allegheny is no longer in compliance with the Financing Conditions set forth in the Original Financing Order. In the Capitalization Order, Allegheny was authorized to make additional investments in EWGs to the extent necessary to complete any project or to preserve or enhance the value of Allegheny's investment in them or in connection with the qualification of an existing project as an EWG, as long as the Revised Financing Conditions were met. However, as reflected in Allegheny's financial statements, as of September 30, 2003, Allegheny's common equity ratio was below 28 percent.11 As a result, Allegheny is no longer able to make any investments in EWGs and FUCOs without further authorization from the Commission.
Allegheny currently complies with, and will comply with, the record keeping requirements of rule 53(a)(2), the limitation under rule 53(a)(3) on the use of the Allegheny system's domestic public utility company personnel to render services to EWGs and FUCOs, and the requirements of rule 53(a)(4) concerning the submission of copies of certain filings under the Act to retail regulatory commissions. None of the circumstances described in 53(b)(1) has occurred. The circumstances described in rule 53(b)(2) and rule 53(b)(3) have occurred.
Allegheny submits that the requirements of rule 53(c) are met. Through this Post-Effective Amendment, Allegheny requests Commission approval of certain financing transactions. Allegheny believes that the requested authorization will not have a substantial adverse impact upon the financial integrity of Allegheny and the Operating Companies. Applicants state that the proposed transactions will provide the Allegheny system, including AE Supply, with sufficient liquidity to meet immediate financial needs, including required debt amortization. Applicants believe the Operating Companies and their customers will not be adversely impacted by the requested relief. The Applicants further represent that the ratio of common equity to total capitalization of each of the Operating Companies will continue to be maintained at not less than 30 percent12 and that these ratios will not be affected by the proposed transactions.
Fees, commissions and expenses incurred in connection with this Post-Effective Amendment are expected to be approximately $25,000.
No state or federal agency, other than the Commission, has jurisdiction over any of the proposed transactions.
The requirements to file notifications under rule 24 and otherwise as set forth in Prior Orders remain in effect.
Based on the facts in the record, the Commission finds that as to the matters over which jurisdiction is released, the applicable standards of the Act and rules under the Act are satisfied and that no adverse findings are necessary.
IT IS ORDERED, under the applicable provisions of the Act and the rules under the Act, that the Post-Effective Amendment, as amended, be granted and permitted to become effective immediately, subject to the terms and conditions prescribed in rule 24 under the Act.
IT IS FURTHER ORDERED that jurisdiction previously reserved over the issuance of up to an aggregate of $1.6 billion in short- and long-term debt securities by Allegheny and AE Supply and $350 million in common equity by Allegheny is released.
IT IS FURTHER ORDERED that all other jurisdiction previously reserved in the Prior Orders continues to be reserved.
By the Commission.
Margaret H. McFarland
|Home | Previous Page||