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U.S. Securities and Exchange Commission


(Release No. 35-27920; 70-10100)

Allegheny Energy, Inc., et al.

Supplemental Order Extending Authority to Enter into Financing Transactions and to Pay Dividends out of Capital or Unearned Surplus; Reservation of Jurisdiction

December 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"),1 a registered holding company and public utility company subsidiary of Allegheny (collectively "Applicants"), Greensburg, Pennsylvania, have filed a post-effective amendment ("Amendment") to a previous application-declaration with the Securities and Exchange Commission ("Commission") under sections 6(a), 7, and 12 of the Act and rules 46, 52 and 54 under the Act. The Commission issued a notice of the proposed transactions on November 30, 2001 (Holding Co. Act Release No. 27471).

Applicants seek a continuation through April 30, 2005, of certain previously authorized financing transactions and financing parameters as described below. By order dated April 29, 2004 (Holding Co. Act Release No. 27840)("April 29 Order"), the Commission extended through December 31, 2004, revised financing conditions for the Applicants, relief from the requirement that Allegheny maintain common equity of 28% and that AE Supply maintain common equity of 20%, authority for AE Supply to pay dividends out of capital and unearned surplus in an amount up to $481.3 million,2 authority for Allegheny to issue and sell up to $350 million in common stock,3 and authority for the Applicants to have outstanding at any one time up to $1.950 billion in short- and long-term debt.4 In addition, the Commission reserved jurisdiction, pending completion of the record, over transactions authorized by previous financing orders, but not covered by the April 29 Order, when the common stock equity ratio levels of Allegheny and AE Supply are below 28 and 20 percent, respectively.5

In this Amendment, Applicants seek only an extension of their current financing authority and the currently applicable financing conditions established by the Commission. Applicants do not seek any changes in or additions to their current authority. Applicants also seek a continuation of the reservation of jurisdiction, pending completion of the record, over all transactions authorized in the Financing Order, but not released in the order issued under this Amendment, when the common stock equity ratio level of Allegheny and AE Supply is below 28 and 20 percent, respectively.

As required by the April 29 Order and prior Commission orders currently applicable to them, Applicants would use the authority for which they seek an extension for general corporate purposes, including: (1) payments, redemptions, acquisitions, and refinancing of outstanding securities issued by Applicants; (2) investments in exempt wholesale generators ("EWGs") and foreign utility companies ("FUCOs");6 (3) loans to, and investments in, other system companies;7 and (4) other lawful corporate purposes permitted under the Act. In addition, Allegheny commits that any dividends paid to it by AE Supply under the requested authority will be used solely to pay the debt of Allegheny or to meet the requirements of the Applicants' intercreditor agreement.8 Allegheny commits that no dividends issued under this authority will be used by it to pay dividends to its stockholders.

Applicants will continue to use the proceeds of their up to $1.950 billion in debt financing authority to replace outstanding notes and bonds with debt containing more favorable interest costs, maturities and covenants in order to maximize Applicants' financial flexibility. With continued improvement in Applicants' financial health, Applicants will have opportunities to access the equity markets on reasonable terms. Proceeds from equity issuances will be used to pay down debt. Applicants are unable to predict what and when refinancing opportunities will arise. Accordingly, the requested authority is necessary to grant Applicants the flexibility necessary to take fullest advantage of these opportunities as they occur.

Applicants will continue to be subject to the reporting requirements established in the April 29 Order.

Applicants state that fees, commissions and expenses incurred or to be incurred in connection with this Amendment will not exceed $5,000. No state or federal commission, other than this Commission, has jurisdiction with respect to the proposed transactions described in this Amendment.

The requested authority is subject to rule 54 under the Act.9 Allegheny does not satisfy the requirements of rule 53(a)(1). In the 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, 2004, Allegheny's "aggregate investment," as defined in rule 53(a)(l), was approximately $129 million. These investments by Allegheny were made in compliance with the Financing Order.

Allegheny is no longer in compliance with the financing conditions set forth in the 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 investment in them or in connection with the qualification of an existing project as an EWG, as long as the revised financing conditions, as defined in the Capitalization Order, were met. However, as reflected in Allegheny's unaudited financial statements, as of September 30, 2004, Allegheny's common equity ratio was 17.4 percent.10 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 requirements of rule 53(a)(2), rule 53(a)(3) and rule 53(a)(4). None of the circumstances described in 53(b)(1) have occurred. The circumstances described in rule 53(b)(2) and 53(b)(3) have occurred. The requirements of rule 53(c) are met.

Allegheny submits that the requested authorization will not have a substantial adverse impact upon the financial integrity of Allegheny, the Operating Companies, or Mountaineer Gas Company ("Mountaineer").11 Moreover, the Operating Companies, Mountaineer, 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 and Mountaineer will continue to be maintained at not less than 30 percent.12 In addition, each of the Operating Companies and Mountaineer is subject to regulation by state commissions that are able to protect utility customers within their respective states.

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 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
Deputy Secretary



Modified: 12/08/2004