SECURITIES AND EXCHANGE COMMISSION
(Release No. 35-27840; 70-10100)
Allegheny Energy, Inc., et al.
Supplemental Order Extending Authorization to Enter into Financing Transactions and to Pay Dividends out of Capital or Unearned Surplus; Reserving Jurisdiction
April 29, 2004
Allegheny Energy, Inc. ("Allegheny"), a registered holding company, and Allegheny Energy Supply Company, LLC ("AE Supply"),1 a registered holding company and public-utility company subsidiary of Allegheny (together "Applicants"), Hagerstown, Maryland, have filed a post-effective amendment ("Amendment") to a previous application-declaration under sections 6(a), 7 and 12(c) of the Act and rules 46, 52 and 54 under the Act.
Applicants seek a continuation through December 31, 2004 ("Extended Authorization Period"), of the authorizations, financing parameters, and other terms and conditions of previous financing orders as described below, including relief from the Commission's requirement that they maintain a common equity ratio of at least 30%. They also seek a continuation through the Extended Authorization Period of the dividend authority previously granted to AE Supply, authority to issue and sell up to $350 million in common stock, and authority to have outstanding at any time up to $1.950 billion in short- and long-term debt. The Applicants also request that the Commission reserve jurisdiction, pending completion of the record, over certain authorizations granted in previous financing orders as described in more detail below.
Applicants received authority to engage in a broad range of financing transactions through July 31, 2005. See Holding Co. Act Release No. 27486 (Dec. 31, 2001) ("Original Financing Order"), as supplemented by Holding Co. Act Release No. 27521 (April 17, 2002) ("April Order"), Holding Co. Act Release No. 27579 (Oct. 17, 2002) ("Supplemental Order", and together with the Original Financing Order and the April Order, "Financing Order"), Holding Co. Act Release No. 27652 (Feb. 21, 2003) ("Capitalization Order"), and Holding Co. Act Release No. 27780 (Dec. 22, 2003) ("Continuation Order").2
The Financing Order grants, among other things, the following authorizations:
The Financing Order established a number of financing parameters as conditions to the authorized financing transactions. These parameters include requirements that Allegheny maintain, on a consolidated basis, common equity of 30 percent of total capitalization and that AE Supply maintain common equity of 30 percent of total capitalization.
In the Capitalization Order, the Commission modified the financing parameters as follows ("Revised Financing Conditions"):
In addition, the Capitalization Order authorized AE Supply to pay dividends of up to $500 million out of capital and unearned surplus in order to provide Allegheny with necessary liquidity.
Applicants committed in their application seeking the Capitalization Order that at any time Allegheny's ratio of common equity to total capitalization is not at least 30 percent, neither Allegheny nor any of its subsidiaries will invest or commit to invest any funds in any new projects which qualify as EWGs or FUCOs; provided, however, that Allegheny may increase its investment in EWGs as a result of the qualification of existing projects as EWGs; and Allegheny may make additional investments in an existing EWG to the extent necessary to complete any project or to preserve or enhance the value of Allegheny's investment.7 Allegheny requested the Commission to reserve jurisdiction over any additional investment by Allegheny and its subsidiaries in EWGs and FUCOs during the period that Allegheny's common equity ratio is below 30 percent.
Applicants also committed that at any time Allegheny's ratio of common equity to total capitalization is not at least 30 percent, neither Allegheny nor any of its subsidiaries will invest or commit to invest any funds in any new energy-related company within the meaning of rule 58 under the Act ("Rule 58 Company"); provided, however, that Allegheny may increase its investment in an existing Rule 58 Company to the extent necessary to complete any project or to preserve or enhance the value of Allegheny's investment in the company. The commitment also stipulated that Allegheny and/or AE Supply may invest in one or more new Rule 58 Companies which may be created in connection with the restructuring and/or reorganization of the existing energy trading business of AE Supply and its subsidiaries. Allegheny requested that the Commission reserve jurisdiction over any additional investment by Allegheny and its subsidiaries in Rule 58 Companies during the period that Allegheny's common equity ratio is below 30 percent.
Finally, 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.
On July 17, 2003, Applicants filed a post-effective amendment in this file seeking a release of jurisdiction over the issuance by Allegheny of up to $325 million of convertible trust preferred securities. The Commission granted that request in the Trust Preferred Securities Order.8
Allegheny filed, on September 23, 2003, another post-effective amendment seeking a release of jurisdiction over the issuance of $328 million in guarantees by AE Supply and the payment of certain dividends to AE Supply. The Commission granted that request in the Guarantees Release Order.9
Finally, Allegheny filed, on January 2, 2004, another post-effective amendment seeking a release of jurisdiction over the issuance of $1.6 billion in short-term and long-term debt securities and $350 million in common stock. The Commission granted that request in the Securities Release Order.10
The Capitalization Order required the Applicants to file an application with the Commission if they wished to seek relief from the 30% common equity requirement after December 31, 2003, and to extend the Revised Financing Conditions. The Commission granted this relief through April 30, 2004, in the Continuation Order and reserved jurisdiction over the Revised Financing Conditions and relief from the 30% common equity requirement through December 31, 2004. The Continuation Order also extended a portion of the dividend authority granted in the Capitalization Order and authorized AE Supply to pay dividends of up to $275 million out of capital and unearned surplus through April 30, 2004.
Although AE Supply has experienced tightened liquidity and weak financial performance, the Applicants maintain that they have taken a number of steps to reduce expenses, raise cash and refocus the business of AE Supply and 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 Trust Preferred Securities Order. On September 15, 2003, AE Supply announced that its subsidiary ATF had completed the sale of its energy supply contract with CDWR ("CDWR Contract") and associated hedge transactions (collectively, "West Book") to J. Aron & Company ("Aron"), a division of The Goldman Sachs Group, for $354 million. ATF applied the proceeds from the sale, in large part, to finance the termination of tolling agreements with Williams Companies Inc., Las Vegas Cogeneration II, and certain related hedging arrangements. The remainder of the proceeds were used to reduce the amount of AE Supply's debt that needed to be refinanced and to provide liquidity for AE Supply.
The sale of the West Book was described in the Trust Preferred Securities Application, along with the sale of the securities authorized by the Trust Preferred Securities Order, as major components of Allegheny's plan to return to financial health. In addition, AE Supply and Conemaugh have completed the sale of an 83 megawatt interest in coal-fired Conemaugh Generating Station near Johnstown, Pennsylvania.
In February 2004, AE Supply issued the sale-related guarantees contemplated in the Guarantees Release Order and obtained the release of $5 million held in escrow pending issuance of the guarantees. AE Supply also issued a guarantee to Aron guaranteeing ATF's obligations under the CDWR Contract sale agreement and obtained the release of approximately $71 million, plus interest, that had been held in escrow pending issuance of the guarantees. After termination payments were made to end certain tolling agreements, ATF distributed to AE Supply $49 million remaining from the proceeds of the CDWR Contract sale.
AE Supply's subsidiary, Allegheny Energy Supply Development Services, LLC, sold excess inventory for $8 million which, with interest, amounted to $8.3 million at the time the funds were distributed to AE Supply under the Guarantees Release Order.
In March 2004, under authority granted in the Securities Release Order, Allegheny and AE Supply refinanced their outstanding bank debt, reducing their annual interest costs by more than $60 million, extending their maturities and improving their financial flexibility. At the time of this refinancing, Applicants were able to pay down approximately $32 million of debt at Allegheny and $132 million of debt at AE Supply. The refinancing transactions and other transactions described above are all part of Allegheny's plan to return to financial health, and implementation of this plan has resulted in each of Moody's Investor's Service ("Moody's"), Standard and Poor's Ratings Service ("S&P") and Fitch IBCA Ratings Services ("Fitch") moving the Applicants from a negative to a stable outlook.
Applicants have to date utilized none of their $1 billion in equity securities financing authority, $1.950 billion of their $4 billion in debt financing authority, $339 million of their $3 billion guarantee authority, and $18.7 million of the $500 million dividend authority.
II. Current Request
Applicants now seek an extension through December 31, 2004, of (i) the Revised Financing Conditions, (ii) relief from the requirement that Allegheny maintain common equity of 28% and that AE Supply maintain common equity of 20%, (iii) the authority for AE Supply to pay dividends out of capital and unearned surplus through December 31, 2004, in an amount up to $481.3 million, (iv) the authority for Allegheny to issue and sell up to $350 million in common stock as granted in the Securities Release Order, and (v) the authority for the Applicants to have outstanding at any one time up to $1.950 billion in short- and long-term debt as previously authorized in certain of the orders discussed above.11 In addition, Applicants request that the Commission reserve jurisdiction, pending completion of the record, over transactions authorized in the Financing Order, but not authorized in this order, when the common stock equity ratio levels of Allegheny and AE Supply are below 28% and 20%, respectively.
Subject to the Revised Financing Conditions and the commitments set forth above, Applicants will use the requested authorization to engage only in those classes of transactions originally contemplated in the Financing Order: (1) payments, redemptions, acquisitions and refinancing of their outstanding securities; (2) investments in EWGs and FUCOs;12 (3) loans to, and investments in, other system companies; and (4) other lawful corporate purposes permitted under the Act.
Specifically, during the Extended Authorization Period, the Applicants will use the proceeds of up to $1.950 billion of debt financing to replace outstanding notes and bonds with debt containing more favorable interest costs, maturities and covenants. Proceeds from equity issuances will be used to pay down debt as well. The Applicants maintain that the requested authority will give them flexibility to take advantage of refinancing opportunities as they occur.
As noted previously, the Capitalization Order authorized AE Supply to pay dividends of up to $500 million out of capital and unearned surplus.13 The Continuation Order authorized AE Supply to pay a portion of these dividends (up to $275 million) out of capital and unearned surplus through the period ending April 30, 2004. Applicants seek further continuation of this authority through the Extended Authorization Period in the amount of up to $481.3 million under the conditions and limitations set forth in the Continuation Order. The Applicants commit that these dividends will be used solely to pay the debt of Allegheny. Allegheny commits that none of these dividends will be used to pay dividends to stockholders.
When Allegheny and AE Supply restructured their debt in February 2003, the lending group determined it was important that each lender be indifferent as to whether its exposure was to Allegheny or AE Supply. Accordingly, the lenders required that the Applicants enter into an intercreditor agreement under which, if either company or any of its subsidiaries were to issue debt or equity, an amount equal to a percentage of the proceeds would be paid as a dividend to Allegheny if AE Supply (or one of its subsidiaries) was the issuer or as a capital contribution to AE Supply if Allegheny (or one of its subsidiaries, other than AE Supply or its subsidiaries) was the issuer. Applicants state that the intercreditor agreement was intended to help ensure that all lenders were paid, regardless of which debtor had better access to the capital markets, and to mitigate differences that might arise among the lenders because of exposure. The percentage to be contributed or distributed is determined by a formula. Because of the Applicants' recent refinancing, the formula now requires that 100 percent of the proceeds of any debt or equity issuance made by Allegheny or its subsidiaries (other than AE Supply or AE Supply's subsidiaries) must be contributed to AE Supply.
In March 2004, Allegheny entered into a revolving credit facility that permits it to pay down debt during periods when funds are not required and to borrow funds only when and in such amounts as are needed. Each time Allegheny draws on the revolving credit facility, an amount equal to the proceeds of the borrowing must be contributed to AE Supply, according to the intercreditor agreement. Without the ability to dividend up the contributed funds, AE Supply would receive money it does not need, and Allegheny would fail to obtain the liquidity it sought. Similarly, when Allegheny issues equity, it has to contribute the proceeds to AE Supply. If AE Supply has no dividend authority, Allegheny will be unable to apply the proceeds to pay down its debt.
This intercreditor agreement continues in place until November 2007, when debt held by certain non-bank parties to the agreement matures. Until then, should Allegheny or any of its subsidiaries issue debt or equity, an amount equal to the proceeds must be contributed to AE Supply. AE Supply has refinanced all the debt that was intended to be paid down with the proceeds of any capital contributions and is, therefore, free to return the funds to Allegheny. Absent the ability to distribute contributed funds back to Allegheny, the agreement promotes the inefficient aggregation of capital in AE Supply and denies Allegheny the benefit of issuing debt or equity, according to the Applicants.
The Applicants request the dividend authority solely to comply with this agreement. Applicants expect that refinancings of debt at Allegheny will continue through the Extended Authorization Period. Due to its obligations under the intercreditor agreement, Allegheny will be required to contribute additional funds to AE Supply in order to accomplish the refinancings. These funds, however, will be immediately returned to Allegheny in the form of dividends. Because only contributed funds will be distributed back to Allegheny, these dividends will have no effect on AE Supply's paid-in capital account. Although the payments returned to Allegheny technically constitute dividends, they do not have the effect on capitalization that dividends are normally understood to have, in that they do not result in any permanent shifts of capital from subsidiary to parent.
As of December 31, 2003, AE Supply had retained earnings of approximately negative $1.2 billion.14 To the extent that AE Supply is required under generally accepted accounting principles to record any writedowns, impairment charges or other adjustments, AE Supply's retained earnings would be further reduced. Therefore, the declaration and payment of the proposed dividends would be charged in whole or in part to capital and/or unearned surplus. Allegheny and AE Supply represent that AE Supply will not declare or pay any dividend out of capital or unearned surplus in contravention of any law restricting the payment of dividends. In addition, AE Supply will comply with the terms of any credit agreements and indentures that severely restrict the amount and timing of distributions by AE Supply to its members.
III. Reporting Requirements
Applicants shall 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 will file a rule 24 certificate of notification within 15 days after June 30, September 30, and December 31, 2004, which will contain the following information:
Allegheny will file rule 24 certificates of notification within 5 days of the event, which will contain the following information:
IV. Rule 54 Analysis
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 December 31, 2003, Allegheny's "aggregate investment," as defined in rule 53(a)(l), was approximately $234 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 desirable to preserve or enhance the value of Allegheny's investments 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 audited financial statements, as of December 31, 2003, Allegheny's common equity ratio was below 28 percent. 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, rule 53(a)(2), rule 53(a)(3) and rule 53(a)(4). None of the circumstances described in rule 53(b)(1) have 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. Allegheny requests relief from the 28% and 20% equity requirements for Allegheny and AE Supply, respectively, and an extension of the Revised Financing Conditions, as well as an extension of the previously granted dividend authority. Allegheny believes that the requested authorization will not have a substantial adverse impact upon the financial integrity of Allegheny nor the Operating Companies. Applicants maintain that the proposed transactions will provide the Allegheny system, including AE Supply, with sufficient liquidity to meet its immediate financial needs, including required debt amortization. The Operating Companies and their customers will not be adversely impacted by the requested relief. The ratio of common equity to total capitalization of each of the Operating Companies will continue to be maintained at not less than 30%.15 Furthermore, the common equity ratios of the Operating Companies will not be affected by the proposed transactions.
Fees, commissions and expenses incurred or to be incurred in connection with this Amendment will be approximately $10,000. No state or federal commission other than this Commission, has jurisdiction over the proposed transactions.
Due notice of the filing of this Amendment has been given in the manner prescribed in 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, except as to those matters over which jurisdiction has been reserved, the applicable standards of the Act and rules 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, except as to those matters over which jurisdiction has been reserved, the 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 is reserved, pending completion of the record, over transactions authorized in the Financing Order, but not authorized in this order, when the common stock equity ratio levels of Allegheny and AE Supply are below 28% and 20%, respectively.
For the Commission, by the Division of Investment Management, pursuant to delegated authority.
Margaret H. McFarland
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