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U.S. Securities and Exchange Commission


(Release No. 35-27875; 70-10178)

Allegheny Energy Inc.

Order Authorizing the Elimination of a Stockholder Protection Rights Plan

July 13, 2004

Allegheny Energy Inc. ("Allegheny"), a registered holding company under the Public Utility Holding Company Act of 1935, as amended ("Act"), located in Greensburg, Pennsylvania, has filed a declaration ("Declaration") with the Securities and Exchange Commission ("Commission") under sections 6(a)(2) and 7 of the Act and rule 54 under the Act. The Commission issued a notice of the Declaration on May 21, 2004 (Holding Co. Act Release No. 27847).

Allegheny proposes to eliminate a stockholder protection rights plan ("Plan") previously authorized by the Commission by order dated July 23, 1999 (Holding Co. Act Release No. 27052) ("Plan Order"). Under the Plan, the Allegheny Board of Directors ("Board") declared a dividend of one right ("Right") for each outstanding share of Allegheny common stock, par value $1.25 per share ("Common Stock"), payable to all stockholders of record on May 16, 2000. Allegheny now proposes to eliminate these Rights and terminate the Plan.

Allegheny initially adopted the Plan in order to discourage abusive takeover tactics and to ensure that each shareholder is treated fairly in any transaction involving an acquisition of control over Allegheny. The Plan was implemented according to a rights agreement ("Rights Agreement") between Allegheny and ChaseMellon Shareholder Services, Inc. ("Rights Agent"). In particular, the Rights Agreement was designed to create the possibility that Allegheny's stockholders, by exercising their Rights, would be able to increase substantially the cost of acquiring more than 15% of Allegheny's outstanding Common Stock.

Shareholder proposals were submitted at Allegheny's annual meetings in May of 2001 and 2002, seeking to make the adoption or maintenance of a "poison pill" subject to shareholder approval. Each year, the proposal received the affirmative vote of more than 50 percent of the votes cast; therefore, the Nominating and Corporate Governance Committee of the Board reconsidered the appropriateness of the Plan and, in July 2003, recommended to the Board that the Rights and the Plan be terminated. The Board approved that recommendation.

I. Description of Rights Being Eliminated.

A. Exercise Price.

The Rights created under the Rights Agreement entitle the holders to purchase one share of Common Stock at a pre-determined exercise price ("Exercise Price"), subject to adjustment. The Rights, currently held by owners of Allegheny's Common Stock, are not exercisable and cannot be traded without the outstanding shares of Common Stock until the occurrence of a triggering event, which is described below. At that time, the Rights would become exercisable and certificates ("Rights Certificates") representing the Rights would be distributed and would be traded independently of outstanding shares. However, the Rights would not entitle the holder to make a discounted purchase of shares of Allegheny's Common Stock or of the common stock of the person acquiring Allegheny until the occurrence of a Flip-in or Flip-over event, which are described below.

B. Triggering Events.

The Rights Agreement provides that the Rights will not become exercisable (i.e., Common Stock could not be purchased at the Exercise Price) until the earlier of (i) the first date, or a later date as the Board may from time to time fix, of public announcement by Allegheny that any person or group ("Acquiring Person") acquires beneficial ownership of 15% or more of Allegheny's outstanding Common Stock ("Flip-in Date") and (ii) 10 days (unless extended by the Board) after any person or group commences a tender or exchange offer which would, upon its consummation, result in that person or group becoming an Acquiring Person ("Flip-over Trigger").

C. Flip-in.

Upon the occurrence of a Flip-in Date, the holders of the Rights, other than an Acquiring Person and certain transferees, whose Rights will become void, would immediately have the right to receive, for each Right exercised, Common Stock having a market value equal to two times the Exercise Price then in effect. At its option, the Board may, at any time after the Flip-In Date but before the acquirer acquires more than 50% of Common Stock, elect to exchange all Rights which have not become null for Common Stock at a ratio of one share for each Right.

D. Flip-over.

On or after the Flip-in Date, and prior to (i) Allegheny being acquired by another person or entity not controlled by Allegheny ("Acquirer") in a merger or other business combination transaction in which the Common Stock is exchanged for securities or other property and the Acquirer receives different treatment than all other holders of Common Stock, or (ii) 50% or more of Allegheny's consolidated assets or earnings power being sold or transferred to an Acquirer, Allegheny is obligated under the Plan to enter into a supplemental agreement with the Acquirer for the benefit of the holders of the Rights providing that each holder of a Right (except Rights which previously were to be voided as set forth above) would be entitled to receive, for each Right exercised, common stock of the Acquirer having a market value equal to two times the Exercise Price then in effect.

E. Redemption of Rights.

The Rights could be redeemed, as a whole, at the discretion of the Board, at a Redemption Price of $.01 per Right, subject to adjustment. The Redemption Price shall be paid, at Allegheny's option, in cash, shares of Common Stock or other equivalent Allegheny securities, at any time prior to the close of business on the date that any person became an Acquiring Person. The Rights expire at the close of business 10 years from the date of the Rights Agreement, unless earlier redeemed or exchanged by Allegheny as described below.

F. Exchange of Shares for Rights.

At any time after a Flip-in Date and prior to the time that any person (other than Allegheny and certain related entities), together with its affiliates and associates, become the beneficial owner of 50% or more of the outstanding shares of Common Stock, the Board could direct the exchange of shares of Common Stock for all of the Rights (other than Rights which have become void) at the exchange ratio of one share of Common Stock per Right, subject to adjustment.

G. Adjustment to Exercise Price.

The Exercise Price payable and the number of shares of Common Stock (or other securities, as the case may be) issuable upon exercise of the Rights were subject to adjustment from time to time to prevent dilution (i) in the event of a stock dividend on, or a subdivision or combination of, the Common Stock, or (ii) upon the distribution to holders of the Common Stock of securities or assets (excluding regular periodic cash dividends) whether by dividend, reclassification, recapitalization or otherwise.

H. Termination of the Plan and the Rights Agreement.

The Plan provides that Allegheny may amend the Plan without the approval of any holders of Rights prior to the Flip-In Date. Since Allegheny no longer intends that the Rights be exercisable under the Plan or the Rights Agreement, Allegheny proposes to terminate the Rights by notice to the Rights Agent as provided in Amendment 1 to the Plan. Upon the termination of the Rights, the Plan and the Rights Agreement will be terminated. To the extent required under the Act, Allegheny requests authorization to terminate the Rights, the Plan, and the Rights Agreement.

II. Rule 54 Analysis

Rule 54 of the Act is applicable to the proposed transactions. Allegheny does not satisfy the requirements of rule 53(a)(1). However, the Commission has authorized Allegheny to invest up to $2 billion in exempt wholesale generators ("EWGs") and foreign utility companies ("FUCOs") and found that this investment would not have either of the adverse effects set forth in rule 53(c).1 As of March 31, 2004, Allegheny's "aggregate investment," as defined in rule 53(a)(l), was approximately $235 million. Allegheny is, however, no longer in compliance with the revised financing conditions of its Financing Order and subsequent orders. As of March 31, 2004, 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, rules 53(a)(2), 53(a)(3), and 53(a)(4). None of the circumstances described in 53(b)(1) have occurred. The circumstances described in rule 53(b)(2) and (b)(3) have occurred. The Applicant states that the requirements of rule 53(c) are met.

Allegheny believes that the requested authorization will not have a substantial adverse impact upon the financial integrity of Allegheny nor its public-utility company subsidiaries ("Operating Companies"). Allegheny maintains that the requested relief will not adversely affect the Operating Companies or their customers. The ratio of common equity to total capitalization of each of the Operating Companies will continue to be maintained at not less than 30 percent2 and the ratios will not be affected by the proposed transactions.

The estimated fees, commissions and expenses to be incurred in connection with the proposed termination of the Plan will not exceed $10,000. No state or federal commission, other than this Commission, has jurisdiction with respect to the proposed transactions.

Due notice of the filing of this Declaration 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 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 the Declaration, as amended, 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.

Jill M. Peterson
Assistant Secretary



Modified: 07/19/2004