(As filed with the Securities and Exchange Commission on June 30, 2003)
File No. 70-10122
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM U-1/A
AMENDMENT NO. 2
TO
APPLICATION/DECLARATION
UNDER
THE PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
FirstEnergy Corp.
Ohio Edison Company and its Subsidiaries
The Cleveland Electric Illuminating Company and its Subsidiaries
The Toledo Edison Company and its Subsidiaries
Pennsylvania Power Company
American Transmission Systems, Incorporated
Northeast Ohio Natural Gas Corp.
FE Acquisition Corp. and its Subsidiaries
FirstEnergy Properties, Inc. and its Subsidiaries
FirstEnergy Facilities Services Group, LLC and its Subsidiaries
FE Holdings, LLC
FELHC, Inc.
FirstEnergy Securities Transfer Company
FirstEnergy Nuclear Operating Company
FirstEnergy Solutions Corp. and its Subsidiaries
FirstEnergy Generation Corp.
FirstEnergy Ventures Corp. and its Subsidiaries
Marbel Energy Corporation and its Subsidiaries
Centerior Indemnity Trust
Centerior Service Company
FirstEnergy Service Company
Jersey Central Power & Light Company and its Subsidiaries
Pennsylvania Electric Company and its Subsidiaries
Metropolitan Edison Company and its Subsidiaries
York Haven Power Company
Waverly Electric Power & Light Company
GPU Capital, Inc. and its Subsidiaries
GPU Electric, Inc. and its Subsidiaries
GPU Diversified Holdings, LLC and its Subsidiaries
GPU Enertech Holdings, Inc.
GPU Power, Inc. and its Subsidiaries
GPU Telcom Services, Inc. and its Subsidiaries
GPU Nuclear, Inc.
MYR Group, Inc. and its Subsidiaries
76 South Main Street
Akron, Ohio 44308
(Names of companies filing this statement and
address of principal executive offices)
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FIRSTENERGY CORP.
(Name of top registered holding company parent of applicant)
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Leila L. Vespoli Douglas E. Davidson, Esq.
Senior Vice President And Thelen Reid & Priest LLP
General Counsel 875 Third Avenue
FirstEnergy Corp. New York, New York 10022
76 South Main Street
Akron, Ohio 44308
(Names and addresses of agents for service)
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TABLE OF CONTENTS
PAGE
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ITEM 1. DESCRIPTION OF PROPOSED TRANSACTIONS...................................2
1.1 INTRODUCTION...........................................................2
1.2 CURRENT FINANCING AUTHORIZATION........................................3
1.3 FINANCIAL INFORMATION..................................................5
1.4 SUMMARY OF REQUESTED APPROVALS.........................................6
1.5 PARAMETERS APPLICABLE TO EXTERNAL FINANCING TRANSACTIONS...............8
1.6 DESCRIPTION OF SPECIFIC TYPES OF FINANCING............................10
1.7 FINANCING SUBSIDIARIES................................................16
1.8 UTILITY SUBSIDIARY FINANCING..........................................17
1.9 NON-UTILITY SUBSIDIARY FINANCINGS.....................................19
1.10 GUARANTEES............................................................19
1.11 CONTINUATION OF THE MONEY POOLS.......................................20
1.12 TAX ALLOCATION AGREEMENT..............................................23
1.13 CHANGES IN CAPITAL STOCK OF MAJORITY OWNED SUBSIDIARIES...............25
1.14 PAYMENT OF DIVIDENDS AND OTHER PAYMENTS OUT OF CAPITAL AND
UNEARNED SURPLUS......................................................26
1.15 INVESTMENT IN NON-UTILITY SUBSIDIARIES................................26
1.16 SALE OF CERTAIN GOODS AND SERVICES OUTSIDE THE UNITED STATES..........28
1.17 APPROVAL FOR SUBSIDIARY REORGANIZATIONS...............................30
1.18 EXEMPTION FROM SECTION 13(B)..........................................31
1.19 REPORTS PURSUANT TO RULE 24...........................................32
ITEM 2. FEES, COMMISSIONS AND EXPENSES........................................36
ITEM 3. APPLICABLE STATUTORY PROVISIONS.......................................36
3.1 GENERAL...............................................................36
3.2 RULES 53 AND 54.......................................................36
ITEM 4. REGULATORY APPROVALS..................................................38
4.1 EXTERNAL FINANCING....................................................38
4.2 UTILITY MONEY POOL....................................................38
4.3 TAX ALLOCATION AGREEMENT..............................................39
ITEM 5. PROCEDURE.............................................................39
ITEM 6. EXHIBITS AND FINANCIAL STATEMENTS.....................................39
ITEM 7. INFORMATION AS TO ENVIRONMENTAL EFFECTS...............................43
The Application-Declaration filed in this proceeding on April 11, 2003, as
amended and restated in its entirety by Amendment No. 1, filed on June 2, 2003,
is hereby further amended and restated in its entirety to read as follows:
ITEM 1. DESCRIPTION OF PROPOSED TRANSACTIONS
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1.1 Introduction. By Order dated October 29, 2001 in File No. 70-9793
(Holding Co. Act Release No. 27459) as supplemented by supplemental orders dated
November 8, 2001 (Holding Co. Act Release No. 27463) and December 23, 2002
(Holding Co. Act Release No. 27628) (as so supplemented, the "Merger Order"),
the Commission authorized the merger between FirstEnergy Corp., an Ohio
corporation ("FirstEnergy"), and GPU, Inc., a Pennsylvania corporation ("GPU").
The merger became effective on November 7, 2001, with FirstEnergy as the
surviving entity, and FirstEnergy registered under the Act as a holding company
on the same day. The Merger Order also authorized FirstEnergy and its
subsidiaries to engage in a program of external financing, intrasystem
financing, and other related transactions for the period through and including
June 30, 2003.
As a result of the merger, FirstEnergy directly or indirectly owns all of
the outstanding common stock of ten electric utility subsidiaries, Ohio Edison
Company ("Ohio Edison"), The Cleveland Electric Illuminating Company ("Cleveland
Electric"), The Toledo Edison Company ("Toledo Edison"), American Transmission
Systems, Incorporated ("ATSI"), Jersey Central Power & Light Company ("JCP&L"),
Pennsylvania Electric Company ("Penelec"), Metropolitan Edison Company
("Met-Ed"), Pennsylvania Power Company ("Penn Power"), York Haven Power Company
("York Haven"), and The Waverly Electric Power & Light Company ("Waverly
Electric"), which together provide service to approximately 4.3 million retail
and wholesale electric customers in a 37,200 square-mile area in Ohio, New
Jersey, New York and Pennsylvania; and one gas utility subsidiary, Northeast
Ohio Natural Gas Corp. ("NONGC"), which provides gas distribution and
transportation service to approximately 5,000 customers in central and northeast
Ohio. FirstEnergy's electric and gas utility subsidiaries are referred to herein
collectively as the "Utility Subsidiaries." Ohio Edison, Cleveland Electric,
Toledo Edison, JCP&L, Penelec, Penn Power and Met-Ed are sometimes referred to
herein as the "Primary Utility Subsidiaries."
FirstEnergy's principal non-utility subsidiaries are FirstEnergy Solutions
Corp. ("FES"), FirstEnergy Facilities Services Group, LLC ("FEFSG"), MYR Group,
Inc. ("MYR"), FirstEnergy Ventures Corp. ("FE Ventures"), MARBEL Energy
Corporation ("MARBEL"), FirstEnergy Nuclear Operating Company ("FENOC"), GPU
Capital, Inc. ("GPU Capital"), GPU Power, Inc. ("GPU Power"), and FirstEnergy
Service Company ("FE ServCo"). FES provides energy-related products and services
and, through FirstEnergy Generation Corp. ("FE GenCo"), an "exempt wholesale
generator" ("EWG") under Section 32 of the Act, operates FirstEnergy's
non-nuclear generation business. FENOC operates the Utility Subsidiaries'
nuclear generating facilities. FEFSG is the parent company of several heating,
ventilating, air conditioning and energy management companies, and MYR is a
utility infrastructure construction service company. FE Ventures owns direct and
indirect interests in a number of telecommunications-related subsidiaries.
MARBEL, an exempt holding company, owns all of the outstanding common stock of
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NONGC. Through GPU Capital and GPU Power, FirstEnergy owns and operates utility
transmission and distribution systems that are exempt "foreign utility
companies" ("FUCOs") under Section 33 of the Act. FE ServCo provides legal,
financial and other corporate support services to affiliated FirstEnergy
companies. As used in this Application/Declaration, the term "Non-Utility
Subsidiaries" includes the non-utility subsidiaries named immediately above and
their respective subsidiaries, as well as any other non-utility company
hereafter acquired or formed, directly or indirectly, by FirstEnergy pursuant to
Rule 58 or pursuant to an order of the Commission (including the order approving
this Application/Declaration).
The Utility Subsidiaries and Non-Utility Subsidiaries are referred to
collectively as the "Subsidiaries." FirstEnergy and the Subsidiaries are
referred to collectively as the "Applicants."
1.2 Current Financing Authorization. Under the Merger Order, in
addition to approving the merger and transactions relating to the merger, the
Commission also authorized FirstEnergy and the Subsidiaries to engage in the
following transactions for the period through and including June 30, 2003:
(a) FirstEnergy is authorized to issue and sell from time to time
additional shares of common stock, preferred securities, long-term debt,
short-term debt and other securities in an aggregate amount at any time
outstanding not to exceed $8 billion (not including shares of common stock
issued in connection with the merger or pursuant to FirstEnergy's dividend
reinvestment plan and other stock ownership plans, as described herein).
(b) FirstEnergy is authorized to issue one purchase right (a "Right")
together with each share of common stock issued in accordance with the
authorization pursuant to FirstEnergy's existing Rights Agreement ("Rights
Agreement").
(c) FirstEnergy is authorized to issue 30 million shares of common
stock pursuant to its dividend reinvestment and stock-based management incentive
and employee benefit plans ("Stock Plans").
(d) FirstEnergy is authorized to enter into and perform interest rate
hedging transactions ("Hedge Instruments") to manage volatility of interest
rates associated with its outstanding indebtedness and with respect to
anticipated debt offerings ("Anticipatory Hedges").
(e) ATSI and NONGC are authorized to issue and sell additional debt or
preferred securities on the same terms and conditions as FirstEnergy in an
aggregate amount at any time outstanding not to exceed $500 million in the case
of ATSI and $200 million in the case of NONGC.(1)
(f) To the extent not exempt under Rule 52, the Utility Subsidiaries
are authorized to enter into and perform Hedge Instruments and Anticipatory
Hedges subject to the same limitations applicable to FirstEnergy.
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(1) Under the Merger Order, these securities are included in determining
compliance with the overall financing limitation of $8 billion for
FirstEnergy referenced above.
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(g) FirstEnergy is authorized to issue guarantees and provide other
forms of credit support with respect to obligations of its Subsidiaries
("FirstEnergy Guarantees") and Non-Utility Subsidiaries are authorized to issue
guarantees and provide other forms of credit support with respect to obligations
of other Non-Utility Subsidiaries ("Non-Utility Subsidiary Guarantees") in an
aggregate amount at any time outstanding not to exceed $4 billion, exclusive of
any guarantees that are exempt under Rules 45(b) and 52(b) or that were issued
by FirstEnergy or GPU prior to the Merger.
(h) FirstEnergy is authorized to establish and fund a money pool
("Utility Money Pool") for the Utility Subsidiaries and, to the extent not
exempt under Rule 52, the Utility Subsidiaries are authorized to make borrowings
from and extend credit to each other through the Utility Money Pool. In
addition, FirstEnergy is authorized to establish and fund a separate money pool
("Non-Utility Money Pool") for the benefit of the Non-Utility Subsidiaries.
(i) FirstEnergy and the Non-Utility Subsidiaries are authorized to
make loans to less than wholly-owned Non-Utility Subsidiaries at interest rates
and maturities designed to provide a return to the lending company of not less
than its effective cost of capital.
(j) The Applicants are authorized to acquire, directly or indirectly,
the equity securities of one or more entities ("Financing Subsidiaries") created
specifically for the purpose of facilitating the financing of authorized and
exempt activities of the Applicants through the issuance of long-term debt,
preferred securities and other equity securities to third parties and to provide
guarantees and enter into expense agreements with respect to the securities or
other obligations of Financing Subsidiaries. Financing Subsidiaries are
authorized to transfer proceeds of any financing to their respective parent
companies.
(k) The Applicants are authorized to organize and acquire the
securities of one or more first-tier subsidiary companies ("Non-Utility Holding
Companies") to act as holding companies for non-utility investments and to
engage in internal reorganization transactions involving transfers of
non-utility assets and Non-Utility Subsidiaries to Non-Utility Holding
Companies.(2)
(l) The Applicants are authorized to change the capitalization of
FirstEnergy's 50% or more owned Subsidiaries.
(m) FirstEnergy and certain of the Utility Subsidiaries are authorized
to declare and pay dividends out of capital and unearned surplus in an amount up
to $155 million, and Non-Utility Subsidiaries are authorized to declare and pay
dividends out of capital and unearned surplus to the extent permitted under
state law, subject to a reservation of jurisdiction over such dividends by any
Non-Utility Subsidiary that derives a material part of its revenue from the sale
of goods, services, electricity, or natural gas to any of the Utility
Subsidiaries.
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(2) The current first-tier subsidiaries of FirstEnergy that are considered
Non-Utility Holding Companies within the meaning of the Merger Order are FE
Ventures, FEFSG, Marbel HoldCo, Inc., OES Ventures, Inc., Centerior
Communications Holdings, Inc., FE Acquisition Corp., E-L Enterprises, Inc.,
and GPU Diversified Holdings LLC.
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(n) The Commission reserved jurisdiction over the Applicants' proposal
to enter into a tax allocation agreement that would not conform in all respects
to the requirements of Rule 45(c).
(o) The Applicants are authorized to acquire, directly or indirectly,
the securities of one or more companies ("Intermediate Subsidiaries") organized
exclusively for the purpose of acquiring, holding and/or financing the
acquisition of securities of or other interests in one or more EWGs, FUCOs,
"exempt telecommunications companies" ("ETCs"), energy-related companies under
Rule 58 ("Rule 58 Subsidiaries"), and other Non-Utility Subsidiaries, and such
Intermediate Subsidiaries are authorized to engage in preliminary development
activities and administrative activities related to such entities, subject to a
limitation on expenditures for preliminary development activities of $300
million outstanding at any one time.
(p) Certain Non-Utility Subsidiaries (referred to as "Energy Related
Companies") are authorized to engage in energy management and consulting
activities anywhere outside the United States and energy marketing and related
activities in Canada and Mexico.
(q) FE ServCo and the Non-Utility Subsidiaries are authorized to sell
goods and services to associate companies at market prices determined without
regard to the seller's cost in certain specified circumstances.
(r) FEFSG is authorized to provide maintenance and repair services to
FirstEnergy's pre-merger Utility Subsidiaries (namely, Ohio Edison, Toledo
Edison, Cleveland Electric, Penn Power, NONGC and ATSI) under certain existing
arrangements, as well as any extensions, additions and replacements of such
arrangements, at market prices determined without regard to FEFSG's cost (the
"At-Market Service Arrangements").
In addition, by orders dated May 21, 2001 (Holding Co. Act Release No.
27401), May 2, 2001 (Holding Co. Act Release No. 27391), December 15, 2000
(Holding Co. Act Release No. 27302), June 22, 1999 (Holding Co. Act Release No.
26544), December 22, 1997 (Holding Co. Act Release No. 26801) and July 17, 1996
(Holding Co. Act Release No. 26544) in File No. 70-7926 (collectively, the
"Prior GPU Order"), JCP&L, Met-Ed and Penelec are currently authorized to issue
and sell from time to time through December 31, 2003 commercial paper and other
forms of short-term indebtedness having maturities of not more than nine months,
and to provide security for such indebtedness, in an aggregate principal amount
at any time outstanding not to exceed, in the case of JCP&L, the limitation on
short-term indebtedness contained in its charter ($428 million as of December
31, 2002) and $150 million in the case of each of Penelec and Met-Ed.
The order issued in this proceeding will supersede and replace the current
authorization of the Applicants under the Merger Order and the Prior GPU Order
to engage in the financing activities and related transactions described above.
1.3 Financial Information. FirstEnergy is authorized under its Amended
Articles of Incorporation (Exhibit A-1 hereto) to issue 375,000,000 shares of
common stock, par value $.10 per share ("Common Stock"), of which 297,636,276
shares were issued and outstanding as of May 9, 2003. FirstEnergy is also
authorized under its Amended Articles of Incorporation to issue 5,000,000 shares
5
of preferred stock, par value $100 per share ("Preferred Stock"), of which none
are currently issued and outstanding. In addition, at March 31, 2003,
FirstEnergy had outstanding $4,300,000,000 principal amount of senior unsecured
notes having various maturity dates through 2032, and $445 million of unsecured
borrowings under a $500 million revolving credit facility that expires in
November 2004.
FirstEnergy's consolidated capitalization (including short-term debt) at
March 31, 2003 was as follows:
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Common Stock $7,262,260,000 33.70%
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Preferred Stock $765,363,000 3.55%
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Long-term Debt $12,666,967,000 58.78%
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Short-term Debt* $855,327,000 3.97%
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Total $21,549,917,000 100.00%
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* Including current portion of Long-term Debt and Preferred Stock.
FirstEnergy's senior unsecured debt is currently rated BBB- by Standard & Poor's
Inc. ("S&P") and Baa2 by Moody's Investor Service ("Moody's").
For the twelve months ended December 31, 2002, FirstEnergy had total
operating revenues of $12,151,997,000, of which $9,165,805,000 (75.4%) were
derived from electric utility operations and $2,986,192,000 (24.6%) from
unregulated businesses. At December 31, 2002, FirstEnergy had total consolidated
assets of $33,580,773,000, including net utility plant of $11,820,797,000.
1.4 Summary of Requested Approvals. This Application/Declaration seeks
the authorization and approval of the Commission with respect to the ongoing
financing activities, the provision of intra-system services and guarantees,
certain investments and other matters pertaining to FirstEnergy and its
Subsidiaries through the period ending December 31, 2005 (the "Authorization
Period"). Specifically, it is requested that the Commission authorize:
(a) External Securities of FirstEnergy. FirstEnergy to increase its
capitalization by issuing and selling from time to time during the Authorization
Period, directly or indirectly through one or more Financing Subsidiaries: (i)
additional Common Stock and/or options, warrants, equity-linked securities or
stock purchase contracts convertible into or exercisable for Common Stock, (ii)
Preferred Stock and other forms of preferred securities (including trust
preferred securities) (collectively, "Preferred Securities"), (iii) new
long-term debt securities having maturities of one year or more up to 50 years
("Long-term Debt"), and (iv) commercial paper, promissory notes and other forms
of short-term indebtedness having maturities of less than one year ("Short-term
Debt") in an aggregate amount not to exceed $4.5 billion (excluding securities
issued for purposes of refunding or replacing other outstanding securities where
6
FirstEnergy's capitalization is not increased as a result thereof),(3) provided
that the aggregate amount of Short-term Debt at any time outstanding shall not
exceed $1.5 billion;
(b) Interest Rate Hedging Transactions. FirstEnergy to enter into and
perform Hedge Instruments and Anticipatory Hedges to manage volatility of
interest rates associated with its and its Subsidiaries' outstanding
indebtedness and anticipated debt offerings;
(c) Employee/Shareholder Plans. FirstEnergy to issue and/or purchase
on the open market for purposes of reissuance up to 30 million shares of Common
Stock and/or stock options or other stock-based awards exercisable for Common
Stock pursuant to Stock Plans maintained by FirstEnergy for the benefit of
shareholders, officers, directors and employees, all as more specifically
described below;
(d) Rights Agreement. FirstEnergy to issue one Right together with
each new share of Common Stock issued in accordance with the authority
requested;
(e) Utility Subsidiary Short-term Debt. JCP&L, Penn Power, Met-Ed,
Penelec, ATSI and NONGC to issue and sell Short-term Debt from time to time in
an aggregate principal amount at any time outstanding not to exceed (i) in the
case of JCP&L and Penn Power, the limitation on short-term indebtedness
contained in their respective charters ($428 million and $50 million,
respectively, as of December 31, 2002), (ii) $250 million in the case of each of
Penelec and Met-Ed, (iii) $500 million in the case of ATSI, and (iv) in the case
of NONGC, the lesser of (A) five percent of the par value of the other stocks,
bonds, notes or other evidences of indebtedness of NONGC and (B) $2 million;
(f) FirstEnergy Guarantees. FirstEnergy to provide FirstEnergy
Guarantees on behalf of its Subsidiaries in an aggregate amount which, taking
into account any Non-Utility Subsidiary Guarantees, will not exceed $4.0 billion
outstanding at any time;
(g) Money Pools. FirstEnergy to maintain and continue funding the
Utility Money Pool and Non-Utility Money Pool (together, the "Money Pools"),
and, to the extent not exempt under Rule 52, the Subsidiaries to borrow and
extend credit to each other through the Money Pools (and in connection
therewith, to issue and acquire demand notes evidencing such borrowings and
extensions of credit);
(h) Loans to Less Than Wholly-Owned Non-Utility Subsidiaries.
FirstEnergy and the Non-Utility Subsidiaries to make loans to less than
wholly-owned Non-Utility Subsidiaries at interest rates and maturities designed
to provide a return to the lending company of not less than its effective cost
of capital;
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(3) The Commission has previously authorized new financing requests expressed
in terms of additions or increments to capitalization. See SCANA
Corporation, Holding Company Act Release No. 27649 (Feb. 12, 2003).
FirstEnergy contemplates that up to $2 billion of the requested amount of
new equity and long-term debt financing may be used in connection with the
offer and sale from time to time of the securities registered on Form S-3
filed with the Commission on March 17, 2003 (File No. 333-103865).
7
(i) Tax Allocation Agreement. Applicants to enter into a tax
allocation agreement (the "Tax Allocation Agreement") with respect to tax year
2002 and later years that does not conform in all respects to the requirements
of Rule 45(c);
(j) Changes in Subsidiary Capitalization. Applicants to change the
capitalization of any Subsidiary 50% or more of whose stock is held by any
Applicant;
(k) Dividends from Capital or Unearned Surplus. Non-Utility
Subsidiaries to declare and pay dividends out of capital or unearned surplus,
subject to certain restrictions;
(l) Investments in Energy-Related Companies. FirstEnergy to make
future investments in Energy Related Companies(4) and certain other types of
Non-Utility Subsidiaries;
(m) Preliminary Development Activities. FirstEnergy to expend,
directly or through Non-Utility Subsidiaries, up to $300 million at any time on
preliminary development activities relating to potential new investments in
non-utility businesses;
(n) Activities Outside the United States. Energy Related Companies to
engage in certain non-utility energy activities within and outside the United
States;
(o) Consolidation of Non-Utility Subsidiaries. FirstEnergy to
consolidate the direct and indirect ownership interests in certain existing
non-utility businesses and former subsidiaries of GPU under one or more existing
or future Non-Utility Holding Companies;
(p) Exemptions from At-Cost Pricing. Non-Utility Subsidiaries to
provide services and sell goods to each other at market prices determined
without regard to cost in certain specified circumstances; and extension of the
interim exemption through December 31, 2003, from at-cost pricing to allow FEFSG
to continue to provide maintenance and repair services to FirstEnergy's
pre-merger Utility Subsidiaries (namely, Ohio Edison, Toledo Edison, Cleveland
Electric, Penn Power, NONGC and ATSI) under At-Market Service Arrangements.
1.5 Parameters Applicable to External Financing Transactions.
Authorization is requested herein to engage in certain financing transactions
during the Authorization Period for which the specific terms and conditions are
not at this time known, and which may not be covered by Rule 52, without further
prior approval by the Commission (except to the extent a specific request for
reservation of jurisdiction is made herein). The following general terms will be
applicable where appropriate to the financing transactions requested to be
authorized hereby (including, without limitation, securities issued for the
purpose of refinancing or refunding outstanding securities of the issuer):(5)
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(4) An Energy Related Company is any company that would qualify to be a Rule 58
Subsidiary but for the fact that a substantial portion of its revenues are
derived from activities outside the United States. FirstEnergy is seeking
authorization to make additional investments in Energy Related Companies in
Item 1.15.2 below.
(5) The Commission has previously authorized financing transactions subject to
these same general parameters. See SCANA Corporation, supra n. 3.
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1.5.1 Effective Cost of Money; Security. The effective cost of
money on Long-term Debt of any series will not exceed at the time of issuance
the greater of (i) 500 basis points over the yield to maturity of a U.S.
Treasury Security having a remaining term approximately equal to the term of
such series of Long-term Debt or (ii) a gross spread over a U.S. Treasury
Security that is consistent with similar securities of comparable credit quality
and maturities issued by other companies. The dividend or distribution rate on
any series of Preferred Securities will not exceed at the time of issuance the
greater of (i) 500 basis points over the yield to maturity of a U.S. Treasury
Security having a remaining term equal to the term of such series of Preferred
Securities or (ii) a rate that is consistent with similar securities of
comparable credit quality and maturities (or perpetual preferred stock) issued
by other companies. The effective cost of money on Short-term Debt will not
exceed the greater of (i) 500 basis points over the comparable term London
Interbank Offered Rate ("LIBOR") or (ii) a gross spread over LIBOR that is
consistent with similar securities of comparable credit quality and maturities
issued by other companies. All debt issued by FirstEnergy will be unsecured.
1.5.2 Maturity of Debt and Final Redemption on Preferred
Securities. The maturity of any series of Long-term Debt will not exceed 50
years. All series of Preferred Securities (other than Preferred Stock, which may
be perpetual) will be redeemed no later than 50 years after the issuance
thereof.
1.5.3 Issuance Expenses. The underwriting fees, commissions or
other similar remuneration paid in connection with the non-competitive issue,
sale or distribution of a security pursuant to this Application/Declaration (not
including any original issue discount) will not exceed 5% of the principal or
total amount of the security being issued.
1.5.4 Use of Proceeds. The proceeds from the sale of securities
in external financing transactions will be used for general corporate purposes,
including financing, in part, of the capital expenditures of FirstEnergy and its
Subsidiaries, financing of working capital requirements of FirstEnergy and its
Subsidiaries, the acquisition, retirement or redemption pursuant to Rule 42 of
securities previously issued by FirstEnergy or its Subsidiaries, and other
lawful purposes, including direct or indirect investments in EWGs, FUCOs, ETCs,
Rule 58 Subsidiaries, Energy Related Companies or other businesses approved by
the Commission. Without limiting the foregoing, FirstEnergy proposes to utilize
the full amount of its requested authority to issue Short-term Debt ($1.5
billion) in order to fund advances to the Money Pools, as described in Item 1.11
below. The Applicants represent that no such financing proceeds will be used to
acquire the securities of any new subsidiary unless such acquisition is
consummated in accordance with an order of the Commission (including the order
issued in this proceeding) or an available exemption under the Act or rules
thereunder.
Under the Merger Order, FirstEnergy was authorized to utilize the proceeds
of authorized financing to increase its "aggregate investment" in EWGs and FUCOs
to $5 billion, which includes FirstEnergy's and GPU's investments in EWGs and
FUCOs at the time of the merger ("Current Investment") and amounts relating to
certain facilities owned by Ohio Edison, Cleveland Electric, Toledo Edison, and
Penn Power that may be transferred to EWGs ("GenCo Investments"). FirstEnergy
committed that, during the authorization period under the Merger Order, new
investments in EWGs and FUCOs would not exceed $1.5 billion and requested the
Commission to reserve jurisdiction over an "aggregate investment" in EWGs and
FUCOs, other than Current Investment and GenCo Investments, in an amount over
9
$1.5 billion. FirstEnergy is requesting a continuation, without change, of these
limitations through the Authorization Period as applied to utilization of
proceeds of financing authorized in this proceeding.
1.5.5 Common Equity Ratio. FirstEnergy commits that it will
maintain common equity as a percentage of consolidated capitalization (as
reflected on the balance sheets contained in its most recent Form 10-K or Form
10-Q filed with the Commission pursuant to the Securities Exchange Act of 1934
("1934 Act"), and including short-term debt and current maturities of long-term
debt) at 30% or higher at all times during the Authorization Period.
Further, each Utility Subsidiary currently has a common equity component of
total capitalization in excess of 30%. FirstEnergy commits that each Utility
Subsidiary will maintain common equity as a percentage of consolidated
capitalization (determined in the same manner specified above) at 30% or higher
during the Authorization Period.
The consequence of failing to maintain common equity of at least 30% of
consolidated capitalization when required is that FirstEnergy and its
Subsidiaries (or if such failure were only by a Utility Subsidiary, such
company) would not be authorized to issue securities in a transaction subject to
Commission approval except for securities which would result in an increase in
such common equity percentage.
FirstEnergy requests that the Commission reserve jurisdiction over the
issuance of securities in those circumstances where FirstEnergy or a Utility
Subsidiary does not comply with the 30% common equity criteria, pending
completion of the record upon filing of a post-effective amendment hereto.
1.5.6 Investment Grade Ratings. _____ Applicants further
represent that, except for securities issued for the purpose of funding money
pool operations, no guarantees or other securities, other than Common Stock, may
be issued in reliance upon the authorization granted by the Commission pursuant
to this Application/Declaration, unless (i) the security to be issued, if rated,
is rated investment grade; (ii) all outstanding securities of the issuer that
are rated are rated investment grade; and (iii) all outstanding securities of
the top level registered holding company that are rated are rated investment
grade (collectively, the "Investment Grade Ratings Criteria"). For purposes of
this provision, a security will be deemed to be rated "investment grade" if it
is rated investment grade by at least one nationally recognized statistical
rating organization ("NRSRO"), as that term is used in paragraphs (c)(2)(vi)(E),
(F) and (H) of Rule 15c3-1 under the 1934 Act. Applicants request that the
Commission reserve jurisdiction over the issuance of any securities in reliance
upon the authorization granted by the Commission pursuant to this
Application/Declaration where one or more of the Investment Grade Ratings
Criteria are not met.
1.6 Description of Specific Types of Financing.
1.6.1 FirstEnergy External Financing. FirstEnergy requests
authorization to increase its capitalization during the Authorization Period
through the issuance of Common Stock, Preferred Securities, Long-term Debt
and/or Short-term Debt, as described below. The aggregate amount of new
financing obtained by FirstEnergy during the Authorization Period from the
10
issuance and sale of Common Stock, when combined with the amount of new
financing obtained from the issuance and sale of Preferred Securities, Long-term
Debt, and/or Short-term Debt, and other than for purposes of refunding or
replacing securities where FirstEnergy's capitalization is not increased as a
result thereof, shall not exceed $4.5 billion, provided that the aggregate
amount of Short-term Debt at any time outstanding shall not exceed $1.5 billion.
All securities issued by FirstEnergy in accordance with the authorization
requested herein, including, without limitation, securities issued for the
purpose of refunding or retiring outstanding securities, will comply with the
applicable parameters set forth in Item 1.5 above. In addition, FirstEnergy
seeks the flexibility to enter into certain hedging transactions to manage
interest rate risk associated with indebtedness.
(a) Common Stock. FirstEnergy may issue and sell Common Stock or
options, warrants, equity-linked securities or other stock purchase rights
exercisable for Common Stock. Common Stock financings may be effected pursuant
to underwriting agreements of a type generally standard in the industry. Public
distributions may be pursuant to private negotiation with underwriters, dealers
or agents as discussed below 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. All such Common Stock sales will be
at rates or prices and under conditions negotiated or based upon, or otherwise
determined by, competitive capital markets.
FirstEnergy may sell Common Stock covered by this Application/Declaration
in any one of the following ways: (i) through underwriters or dealers; (ii)
through agents; (iii) directly to a limited number of purchasers or a single
purchaser; or (iv) directly to employees (or to trusts established for their
benefit), shareholders and others through Stock Plans (as described in Item
1.6.3 below). If underwriters are used in the sale of the securities, such
securities will be acquired by the underwriters for their own account and may be
resold 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 securities may be offered to the public either through
underwriting syndicates (which may be represented by a managing underwriter or
underwriters designated by FirstEnergy) or directly by one or more underwriters
acting alone. The securities may be sold directly by FirstEnergy or through
agents designated by FirstEnergy from time to time. If dealers are utilized in
the sale of any of the securities, FirstEnergy will sell such securities to the
dealers as principals. Any dealer may then resell such securities to the public
at varying prices to be determined by such dealer at the time of resale. If
Common Stock is being sold in an underwritten offering, FirstEnergy may grant
the underwriters thereof a "green shoe" option permitting the purchase from
FirstEnergy at the same price of additional shares then being offered solely for
the purpose of covering over-allotments.
Under Rule 58 and Sections 32, 33 and 34 of the Act, FirstEnergy is or will
be authorized to acquire securities of companies engaged in functionally related
businesses, Rule 58 Subsidiaries, EWGs, FUCOs, ETCs and, to the extent approved
herein, Energy Related Companies. In connection with any such transactions,
FirstEnergy may conclude that it would be advantageous for tax or other reasons
to issue shares of Common Stock or options, warrants or other stock purchase
rights exercisable for Common Stock as consideration for the equity securities
or assets of other companies to be acquired, provided that the acquisition of
11
any such equity securities or assets has been authorized in this proceeding or
in a separate proceeding or is exempt under the Act or the rules thereunder.(6)
(b) Preferred Securities. FirstEnergy seeks to have the
flexibility to issue its authorized Preferred Stock or other types of Preferred
Securities (including, without limitation, trust preferred securities or monthly
income preferred securities) directly or indirectly through one or more
special-purpose Financing Subsidiaries organized by FirstEnergy specifically for
such purpose as described herein. The proceeds of Preferred Securities would
provide an important source of future financing for the operations of and
investments in non-utility businesses, which are exempt under the Act or have
been approved by the Commission.(7) Preferred Stock or other types of Preferred
Securities may be issued in one or more series with such rights, preferences and
priorities as may be designated in the instrument creating each such series, as
determined by FirstEnergy's Board of Directors. Dividends or distributions on
Preferred Securities will be made periodically and to the extent funds are
legally available for such purpose, but may be made subject to terms which allow
the issuer to defer dividend payments for specified periods. Preferred
Securities may be convertible or exchangeable into shares of FirstEnergy Common
Stock or indebtedness.
Preferred Securities may be sold directly through underwriters or dealers
in connection with an acquisition.
(c) Long-Term Debt. Long-term Debt may be issued directly by
FirstEnergy or indirectly through one or more Financing Subsidiaries organized
by FirstEnergy in the form of bonds, notes, medium-term notes or debentures
under one or more indentures (each, the "FirstEnergy Indenture") or long-term
indebtedness under agreements with banks or other institutional lenders. Each
series of Long-term Debt would have such designation, aggregate principal
amount, maturity, interest rate(s) or methods of determining the same, terms of
payment of interest, redemption provisions, sinking fund terms and other terms
and conditions as FirstEnergy may determine at the time of issuance. Any
Long-term Debt (a) may be convertible into any other securities of FirstEnergy,
(b) will have maturities ranging from one to 50 years, (c) may be subject to
optional and/or mandatory redemption, in whole or in part, at par or at various
premiums above the principal amount thereof, (d) may be entitled to mandatory or
optional sinking fund provisions, (e) may provide for reset of the coupon
pursuant to a remarketing arrangement, (f) may be subject to tender or the
obligation of the issuer to repurchase at the election of the holder or upon the
occurrence of a specified event, (g) may be called from existing investors by a
third party and (h) may be entitled to the benefit of affirmative or negative
financial or other covenants.
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(6) The Commission has previously approved the issuance of common stock as
consideration for the acquisition of a new business in an exempt
transaction or transaction that has been approved in a separate proceeding.
In addition to the Merger Order, see, e.g., SCANA Corporation, Holding Co.
Act Release No. 27137 (Feb, 14, 2000).
(7) The Commission has previously approved similar proposals to issue preferred
securities and long-term debt securities directly or indirectly through
special-purpose financing entities. In addition to the Merger Order, see
The Southern Company, Holding Co. Act Release No. 27134 (Feb. 9, 2000) and
Pepco Holdings Inc., et al., Holding Co. Act release No. 27557 (July 31,
2002).
12
The maturity dates, interest rates, redemption and sinking fund provisions,
tender or repurchase and conversion features, if any, with respect to the
Long-term Debt of a particular series, as well as any associated placement,
underwriting or selling agent fees, commissions and discounts, if any, will be
established by negotiation or competitive bidding. Specific terms of any
Long-term Debt will be determined by FirstEnergy at the time of issuance and
will comply in all regards with the parameters on financing authorization set
forth in Item 1.5 above.
(d) Short-Term Debt. FirstEnergy seeks authority to issue
Short-term Debt in the form of commercial paper, promissory notes and/or other
forms of short-term indebtedness in an aggregate principal amount at any time
outstanding not to exceed $1.5 billion.
FirstEnergy proposes to establish from time to time new committed bank
lines of credit, provided that only the principal amount of any borrowings
outstanding thereunder will be counted against the proposed Short-term Debt
limit. Credit lines may be set up for use by FirstEnergy for general corporate
purposes in addition to credit lines to support commercial paper as described in
this subsection. FirstEnergy will borrow and repay under such lines of credit,
from time to time, as it is deemed appropriate or necessary. All borrowings
under such credit lines will mature in less than one year. FirstEnergy may also
engage in other types of short-term financing, including borrowings under
uncommitted lines, generally available to borrowers with comparable credit
ratings as it may deem appropriate in light of its needs and market conditions
at the time of issuance.
FirstEnergy may also sell commercial paper in established domestic or
European commercial paper markets from time to time. Such commercial paper would
be sold to dealers at the discount rate or the coupon rate per annum prevailing
at the date of issuance for commercial paper of comparable quality and
maturities sold to commercial paper dealers generally. It is expected that the
dealers acquiring commercial paper from FirstEnergy will reoffer such paper at a
discount to corporate, institutional and, with respect to European commercial
paper, individual investors. Institutional investors are expected to include
commercial banks, insurance companies, pension funds, investment trusts,
foundations, colleges and universities and finance companies.
1.6.2 Hedging Transactions.
(a) Interest Rate Hedges. FirstEnergy requests a continuation of
its authority to enter into and perform Hedge Instruments in order to reduce or
manage the volatility of interest rates on its or its Subsidiaries' outstanding
indebtedness, including but not limited to interest rate swaps, caps, floors,
collars and forward agreements or any other similar agreements. Hedge
Instruments may also include issuance of structured notes (i.e., a debt
instrument in which the principal and/or interest payments are indirectly linked
to the value of an underlying asset or index), or transactions involving the
purchase or sale, including short sales, of U.S. Treasury or Agency (e.g., FNMA)
obligations or LIBOR-based swap instruments. The transactions would be for fixed
periods and stated notional amounts. FirstEnergy would employ Hedge Instruments
as a means of prudently managing the risk associated with any of its or its
Subsidiaries' outstanding debt issued pursuant to this authorization or an
applicable exemption by, in effect, synthetically (i) converting variable rate
debt to fixed rate debt, (ii) converting fixed rate debt to variable rate debt
and (iii) limiting the impact of changes in interest rates resulting from
variable rate debt. In no case will the notional principal amount of any
13
interest rate swap exceed the greater of the value of the underlying debt
instrument or the present market value of the underlying debt instrument and
related interest rate exposure. Each Hedge Instrument will be entered into for a
fixed or determinable period. Thus, FirstEnergy will not engage in speculative
transactions. FirstEnergy will only enter into agreements with counterparties
("Approved Counterparties") whose senior debt ratings, as published by a
national recognized rating agency, are greater than or equal to "BBB," or an
equivalent rating.
(b) Anticipatory Hedges. In addition, FirstEnergy requests
authorization to enter into and perform Anticipatory Hedges with respect to its
or its Subsidiaries' anticipated debt offerings, subject to certain limitations
and restrictions. Such Anticipatory Hedges would only be entered into with
Approved Counterparties, and would be utilized to fix and/or limit the interest
rate risk associated with any new issuance through (i) a forward sale of
exchange-traded Hedge Instruments (a "Forward Sale"), (ii) the purchase of put
options on Hedge Instruments (a "Put Options Purchase"), (iii) a Put Options
Purchase in combination with the sale of call options Hedge Instruments (a "Zero
Cost Collar"), (iv) transactions involving the purchase or sale, including short
sales, of Hedge Instruments, or (v) some combination of a Forward Sale, Put
Options Purchase, Zero Cost Collar and/or other derivative or cash transactions,
including, but not limited to, structured notes, caps and collars, appropriate
for the Anticipatory Hedges. Anticipatory Hedges may be executed on-exchange
("On-Exchange Trades") with brokers through the opening of futures and/or
options positions traded on the Chicago Board of Trade ("CBOT"), the opening of
over-the-counter positions with one or more counterparties ("Off-Exchange
Trades"), or a combination of On-Exchange Trades and Off-Exchange Trades.
FirstEnergy or the appropriate Subsidiary will determine the optimal structure
of each Anticipatory Hedge transaction at the time of execution. FirstEnergy or
the appropriate Subsidiary may decide to lock in interest rates and/or limit its
exposure to interest rate increases.
FirstEnergy will comply with Statement of Financial Accounting Standards
("SFAS") 133 ("Accounting for Derivative Instruments and Hedging Activities")
and SFAS 138 ("Accounting for Certain Derivative Instruments and Certain Hedging
Activities") or such other standards relating to accounting for derivative
transactions as are adopted and implemented by the Financial Accounting
Standards Board ("FASB"). The Hedge Instruments and Anticipatory Hedges approved
hereunder will qualify for hedge accounting treatment under the current FASB
standards in effect and as determined at the date such Hedge Instruments or
Anticipatory Hedges are entered into. FirstEnergy also requests authority to
enter into Hedge Instruments and Anticipatory Hedges which do not qualify for
hedge accounting treatment by the FASB, and requests that the Commission reserve
jurisdiction on this request until the record is complete.(8)
1.6.3 Issuance of Common Stock Pursuant to Stock Plans.
FirstEnergy proposes, from time to time during the Authorization Period, to
issue and/or acquire in open market transactions or by some other method which
complies with applicable law and Commission interpretations then in effect for
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(8) The proposed terms and conditions of the Hedge Instruments and Anticipatory
Hedges are the same as authorized under the Merger Order and consistent
with approvals that the Commission has granted in other cases. See e.g.
SCANA Corporation, supra n. 3.
14
the purpose of reissuance up to 30 million additional shares of Common Stock
pursuant to the FirstEnergy Stock Investment Plan ("SIP") and other Stock Plans
described below. Any newly issued shares of Common Stock will be counted against
the overall $4.5 billion limit on new external financing; shares of Common Stock
purchased in the open market or otherwise acquired for the purpose of reissuance
under Stock Plans will not be counted against the overall $4.5 billion limit on
new external financing.
The SIP provides a way for shareholders and employees of FirstEnergy and
its Subsidiaries, as well as others, to purchase shares of Common Stock. Holders
of preferred stock of FirstEnergy's Utility Subsidiaries are also eligible to
participate in the SIP. Participants in the SIP may:
(1) Reinvest all or a portion of cash dividends paid on stock of
FirstEnergy or its Subsidiaries that is registered in their names, as well as
any Common Stock credited to their plan accounts, to purchase shares of Common
Stock.
(2) Make an initial investment in Common Stock with a cash payment of at
least $250 or, if already a shareholder or employee of FirstEnergy or its
Subsidiaries, make an investment in Common Stock with optional cash investments
at any time of at least $25 per payment. After non-shareholders or non-employees
make the initial investment, such persons can also make additional optional cash
investments of at least $25. Cash investments are limited to a maximum of
$100,000 per calendar year.
(3) Receive certificates for whole shares of Common Stock credited to their
plan accounts upon request.
(4) Deposit certificates representing Common Stock into the SIP for
safekeeping.
(5) Sell shares of Common Stock credited to their plan accounts through the
SIP.
Cash dividends and cash investments under the SIP may be used to purchase
shares of Common Stock which, at FirstEnergy's option, either will be purchased
on behalf of plan participants in the open market by Morgan Stanley & Co.
Incorporated, as the Independent Agent, or will be newly issued shares. The
price of shares purchased in the open market under the SIP will be the weighted
average price paid by the Independent Agent for the shares over the purchase
period. The price of newly issued shares acquired under the SIP will be the
average of the high and low prices of Common Stock as reported in The Wall
Street Journal's report of New York Stock Exchange Composite Transactions for
the investment date. In both cases, the purchase price will include a
transaction fee to cover FirstEnergy's administrative costs and, if shares are
purchased in the open market, the fees of the Independent Agent for its services
in executing those purchases.
FirstEnergy also currently has in force several employee and director
stock-based plans. These include an Executive and Director Incentive
Compensation Plan, an Executive Deferred Compensation Plan, a Deferred Plan for
Directors, two employee Savings Plans and two plans that were assumed by
FirstEnergy in connection with the merger between Ohio Edison and Centerior
Energy Corporation ("Centerior") that resulted in the formation of FirstEnergy.
15
Under the Executive and Director Incentive Compensation Plan, employees can
receive stock options, stock appreciation rights, restricted stock, performance
shares and/or cash awards and directors can receive stock options and restricted
stock. Under the Executive Deferred Compensation Plan and the Deferred Plan for
Directors, participants may elect to defer part of their salary or incentive
awards, or fees in the case of directors, into a deferred cash or stock account.
Under the two Savings Plans, money that is invested, including employer matching
contributions, may be allocated to the purchase of Common Stock. Under the two
Centerior plans no further awards can be made; existing options, however, may be
exercised until February 26, 2007.
FirstEnergy requests authority to issue shares of Common Stock and/or
options, warrants, stock appreciation rights and similar securities, under the
authorization and within the limitations set forth herein in order to satisfy
its obligations under the existing Stock Plans described above. Shares of Common
Stock for use under these Stock Plans may either be newly issued shares or
shares purchased on the open market. FirstEnergy will make any open-market
purchases of Common Stock in accordance with the terms of or in connection with
the operation of the Stock Plans pursuant to Rule 42. FirstEnergy also proposes
to issue and/or purchase shares of Common Stock and/or options, warrants, stock
appreciation rights and similar securities, pursuant to these Stock Plans, as
they may be amended or extended, and similar plans or plan funding arrangements
hereafter adopted without any additional prior Commission order.
1.6.4 Rights. Under the Merger Order, the Commission authorized
FirstEnergy to implement the terms of a Rights Agreement, dated as of November
18, 1997, between FirstEnergy and The Bank of New York, as rights agent (the
"Rights Agreement"). Under the Rights Agreement (Exhibit B-4 hereto),
FirstEnergy assigned one Right for each outstanding share of Common Stock. The
Rights expire on November 28, 2007. Each Right entitles the registered holder of
the associated share of Common Stock to purchase from FirstEnergy one share of
Common Stock at a price of $70 per share (the "Purchase Price") when the Rights
become exercisable, subject to adjustment following certain specified takeover
events such that a holder of a Right (other than any "Acquiring Persons," as
defined in the Rights Agreement) would have the right to receive, upon exercise
thereof, shares of Common Stock having a current value equal to double the
Purchase Price. FirstEnergy requests a continuation through the Authorization
Period of its authority under the Merger Order to implement the Rights
Agreement. Any shares of Common Stock issued upon exercise of the Rights will
not be counted against the proposed $4.5 billion limit on new external financing
by FirstEnergy.
1.7 Financing Subsidiaries. FirstEnergy and the Subsidiaries request
authority to acquire, directly or indirectly, the equity securities of one or
more Financing Subsidiaries. Financing Subsidiaries may be corporations, trusts,
partnerships or other entities created specifically for the purpose of
facilitating the financing of the authorized and exempt activities (including
exempt and authorized acquisitions) of FirstEnergy and the Subsidiaries through
the issuance of Long-term Debt or Preferred Securities, to third parties and the
transfer of the proceeds of such financings to FirstEnergy or such Subsidiaries.
FirstEnergy and, to the extent not exempt under Rule 52, Subsidiaries also
request authorization to issue their subordinated unsecured notes ("Subordinated
Notes") to any Financing Subsidiary to evidence the loan of financing proceeds
by a Financing Subsidiary to its parent company. The principal amount, maturity
and interest rate on any such Subordinated Notes will be designed to parallel
the amount, maturity and interest or distribution rate on the securities issued
by a Financing Subsidiary in respect of which the Subordinated Note is issued.
16
The amount of securities issued by any Financing Subsidiary to third parties
pursuant to the authorization requested herein will be included in the overall
external financing limitation, if any, authorized for the immediate parent
company of such Financing Subsidiary. However, the amount of Subordinated Notes
issued by a parent company to its Financing Subsidiary will not be counted
against such external financing limitation. Securities issued by any Financing
Subsidiary to third parties shall be exempt pursuant to Rule 52 (and therefore
reportable on Form U-6B-2) only if such securities, if issued directly by the
parent company of such the Financing Subsidiary, would be exempt under Rule 52.
FirstEnergy or a Subsidiary may, if required, guarantee or enter into
support or expense agreements in respect of the obligations of any such
Financing Subsidiaries. Subsidiaries may also provide guarantees and enter into
support or expense agreements, if required, on behalf of such entities. However,
to avoid double counting, the guarantees of securities issued by Financing
Subsidiaries shall not be counted against the $4 billion limitation on
FirstEnergy Guarantees and Non-Utility Subsidiary Guarantees (see Item 1.10
below).(9)
1.8 Utility Subsidiary Financing.
1.8.1. General. The capitalization of each of the Primary Utility
Subsidiaries as of March 31, 2003 is shown on Exhibit H-1 hereto. ATSI and NONGC
do not have any outstanding securities other than common stock. Rule 52 provides
an exemption from the prior authorization requirements of the Act for most of
the issuances and sales of securities by the Utility Subsidiaries because such
transactions must be approved by the relevant state public utility commission.
In general, all securities issuances of the Utility Subsidiaries must be
approved by the applicable state commission except as noted below.
Ohio. The Public Utilities Commission of Ohio ("PUCO") regulates the
issuance of all securities by public utility companies except for securities
with a maturity of less than 12 months in an amount not greater than five
percent of the par value of the other stocks, bonds, notes or other evidences of
indebtedness of such companies and securities subject to an order of approval
under the Act. Ohio Rev. Code ss. 4905.401. Ohio Edison, Toledo Edison and
Cleveland Electric each have approval from the PUCO to issue short term
indebtedness in excess of the five percent basket. Accordingly, Ohio Edison,
Toledo Edison and Cleveland Electric will rely on Rule 52(a) for any securities
issuance in the future (other than Hedge Instruments and Anticipatory Hedges).
Pennsylvania. The Pennsylvania Public Utilities Commission ("PPUC")
regulates all securities issuances other than securities with a maturity of one
year or less or having no fixed maturity but payable on demand. 66 Pa. C.S.
ss.ss. 1901(b)(4) and (5).
New Jersey. The New Jersey Board of Public Utilities ("NJBPU") has
jurisdiction over the issuance and sale of securities by public utilities except
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(9) The authorization sought herein with respect to financing entities is the
same as granted under the Merger Order and consistent with orders issued to
other holding companies. See e.g., Pepco Holdings, Inc., et al., supra n. 7
and Ameren Corporation, et al., Holding Co. Act Release No. 27645 (Jan. 29,
2003).
17
with respect to indebtedness having a maturity of less than 12 months from the
date of issuance. N.J. Stat. Ann. ss.ss. 48:3-9.
1.8.2 Short-term Debt of JCP&L, Penn Power, Penelec, Met-Ed, ATSI
and NONGC. JCP&L, Penn Power, Penelec, Met-Ed, ATSI and NONGC will rely on Rule
52 for all securities issuances except for the issuance of short-term debt
securities, which is exempt from approval in the applicable states and therefore
is subject to Commission approval under the Act. As previously indicated, JCP&L,
Penelec and Met-Ed are currently authorized under the Prior GPU Order to issue
and sell short-term indebtedness from time to time through December 31,
2003.(10) In this proceeding, JCP&L, Penelec and Met-Ed are requesting authority
to increase and extend their current authorization to issue short-term debt
securities through the Authorization Period. The order issued in this proceeding
will therefore supersede and replace the Prior GPU Order.
Specifically, JCP&L, Penn Power, Met-Ed, Penelec, ATSI and NONGC propose to
issue and sell Short-term Debt in the form of commercial paper, promissory notes
and/or other forms of short-term indebtedness in an aggregate principal amount
at any time outstanding not to exceed (i) in the case of JCP&L and Penn Power,
the limitation on short-term indebtedness contained in their respective charters
($428 million and $50 million, respectively, as of December 31, 2002), (ii) $250
million in the case of each of Penelec and Met-Ed, (iii) $500 million in the
case of ATSI, and (iv) in the case of NONGC, the lesser of (A) five percent of
the par value of the other stocks, bonds, notes or other evidences of
indebtedness of NONGC and (B) $2 million. Commercial paper may be sold to
dealers in established domestic or European commercial paper markets from time
to time in the manner described in Item 1.6.1 above. In addition, JCP&L, Penn
Power, Penelec, Met-Ed, ATSI and NONGC may establish and renew from time to time
committed bank lines of credit, and engage in other types of short-term
financing, including borrowings under uncommitted lines, generally available to
borrowers with comparable credit ratings as they deem appropriate in light of
their needs and market conditions at the time of borrowing. All Short-term Debt
issued by JCP&L, Penn Power, Penelec, Met-Ed, ATSI and NONGC will comply with
the parameters for Short-term Debt set forth in Item 1.5 above.
The proceeds of short-term securities issued by JCP&L, Penn Power, Penelec,
Met-Ed, ATSI and NONGC will be used only for the financing, in part, of their
respective capital expenditures for their existing utility business, financing
of their respective working capital requirements, the acquisition, retirement or
redemption pursuant to Rule 42 of securities previously issued by them,
respectively (but not the securities of the other) and other lawful purposes,
excluding direct or indirect investment in EWGs, FUCOs, ETCs or other
non-utility subsidiaries.
1.8.3 Financing Risk Management Devices. To the extent not exempt
under Rule 52, the Utility Subsidiaries request authority to enter into and
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(10) York Haven and Waverly Electric will continue to obtain financing through
intercompany borrowings from their parent corporations or otherwise through
the Utility Money Pool and likely will not engage in third-party financing.
18
perform Hedge Instruments and Anticipatory Hedges subject to the limitations and
requirements applicable to FirstEnergy described in Item 1.6.2 above.
1.9 Non-Utility Subsidiary Financings. The Non-Utility Subsidiaries
are engaged in and expect to continue to be active in the development and
expansion of their existing energy-related or otherwise functionally-related,
non-utility businesses. They will be competing with large, well-capitalized
companies in different sectors of the energy industry and other industries. In
order to quickly and effectively invest in such competitive arenas, it will be
necessary for the Non-Utility Subsidiaries to have the ability to engage in
financing transactions which are commonly accepted for such types of
investments. These financings will include issuance by Non-Utility Subsidiaries
of common stock or other equity securities, preferred securities or debt in
capital raising transactions and to be used to acquire stock or assets in then
existing unaffiliated companies which will become "affiliates" (within the
meaning of the Act) or Subsidiaries so long as such acquisitions are consistent
with the Non-Utility Subsidiaries' then existing businesses in accordance with
Rule 52(b) and Rule 58. The majority of such financings will be exempt from
prior Commission authorization pursuant to Rule 52(b).
In order to be exempt under Rule 52(b), any loans by FirstEnergy to a
Non-Utility Subsidiary or by one Non-Utility Subsidiary to another must have
interest rates and maturities that are designed to parallel the lending
company's effective cost of capital. However, in the limited circumstances where
the Non-Utility Subsidiary making the borrowing is not wholly owned by
FirstEnergy, directly or indirectly, authority is requested under the Act for
FirstEnergy or a Non-Utility Subsidiary, as the case may be, to make such loans
to such less than wholly-owned Subsidiaries at interest rates and maturities
designed to provide a return to the lending company of not less than its
effective cost of capital.(11) If such loans are made to a less than
wholly-owned Non-Utility Subsidiary, such company will not sell any services to
any Subsidiary unless such purchasing company falls within one of the categories
of companies to which goods and services may be sold on a basis other than "at
cost" as described in Item 1.18.1 below. Furthermore, in the event any such
loans are made, FirstEnergy will include in the next certificate filed pursuant
to Rule 24 in this proceeding substantially the same information as that
required on Form U-6B-2 with respect to such transaction.
1.10 Guarantees.
1.10.1 FirstEnergy Guarantees. FirstEnergy requests a
continuation of its current authorization to provide FirstEnergy Guarantees with
respect to the obligations of its Subsidiaries as may be appropriate or
necessary to enable such Subsidiaries to carry on in the ordinary course of
their respective businesses, including guarantees of non-affiliated third-party
obligations in the ordinary course of FirstEnergy's business,(12) in an
aggregate amount which, together with Non-Utility Subsidiary Guarantees (defined
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(11) The Commission has previously authorized substantially similar proposals.
In addition to the Merger Order, see Pepco Holdings, Inc., et al., supra n.
7 and National Fuel Gas Company, et al., Holding Co. Act Release No. 27600
(Nov. 12, 2002).
(12) Guarantees of third-party obligations were approved in the Merger Order and
in Exelon Corporation, Holding Co. Act Release No. 27266 (Nov. 2, 2000).
FirstEnergy requests that the Commission reserve jurisdiction over the
issuance of guarantees for the benefit of non-affiliated third parties.
19
below), shall not exceed $4.0 billion outstanding at any one time (including
obligations exempt pursuant to Rule 45 and guarantees and other forms of credit
support provided by FirstEnergy or any Non-Utility Subsidiary that are
outstanding on the effective date of the order issued in this proceeding).
As part of normal business activities, FirstEnergy enters into various
agreements on behalf of its Subsidiaries to provide financial or performance
assurances to third parties. Such agreements include contract guarantees, surety
bonds and rating-contingent collateralization provisions. As of March 31, 2003,
the maximum potential future payments under outstanding guarantees and other
assurances totaled $960.2 million.
FirstEnergy Guarantees may be provided from time to time with respect to
obligations of Subsidiaries that are not capable of exact quantification. In
such cases, FirstEnergy will determine the exposure under such guarantee for
purposes of measuring compliance with the $4.0 billion limitation by appropriate
means including estimation of exposure based on loss experience or projected
potential payment amounts. If appropriate, such estimates will be made in
accordance with GAAP. Such estimation will be reevaluated periodically. Any
FirstEnergy Guarantees shall also be subject to the limitations of Rule 53(a)(1)
or Rule 58(a)(1), as applicable. FirstEnergy may charge each Subsidiary a fee
for each guarantee provided on its behalf that is not more than that obtainable
by the beneficiary of the guarantee from third parties. Any guarantees or other
credit support arrangements outstanding at the end of the Authorization Period
will remain in place and expire or terminate in accordance with their terms.
1.10.2 Non-Utility Subsidiary Guarantees. In addition to
guarantees that may be provided by FirstEnergy, the Non-Utility Subsidiaries
request authority during the Authorization Period to provide to other
Non-Utility Subsidiaries guarantees and other forms of credit support
("Non-Utility Subsidiary Guarantees"). The Non-Utility Subsidiary Guarantees,
together with FirstEnergy Guarantees, will not exceed $4.0 billion outstanding
at any one time. The Non-Utility Subsidiary providing any such credit support
may charge its associate company a fee for each guarantee provided on its behalf
determined in the same manner as specified above. Any guarantees or other credit
support arrangements outstanding at the end of the Authorization Period will
remain in place and expire or terminate in accordance with their terms.
1.11 Continuation of the Money Pools. FirstEnergy and the Utility
Subsidiaries hereby request authorization to continue to maintain and fund the
Utility Money Pool, and the Utility Subsidiaries, to the extent not exempted by
Rule 52, also request authorization to make unsecured short-term borrowings from
the Utility Money Pool and to contribute surplus funds to the Utility Money Pool
and to lend and extend credit to (and acquire promissory notes from) one another
through the Utility Money Pool.
In addition, FirstEnergy and the remaining Subsidiaries, all of which are
Non-Utility Subsidiaries, hereby request authorization to continue to maintain
and fund the Non-Utility Money Pool. Borrowings and extensions of credit under
the Non-Utility Money Pool by the Non-Utility Subsidiaries are exempt from the
prior approval requirements of the Act under Rules 45(b) and 52. To the extent
not exempt under Rules 45(b) and 52, FirstEnergy is requesting authorization to
contribute surplus funds and to lend and extend credit to (i) the Utility
Subsidiaries through the Utility Money Pool and (ii) the Non-Utility
Subsidiaries through the Non-Utility Money Pool.
20
The Applicants believe that the cost of the proposed borrowings through the
two Money Pools will generally be more favorable to the borrowing participants
than the comparable cost of external short-term borrowings, and the yield to the
participants contributing available funds to the two Money Pools will generally
be higher than the typical yield on short-term investments.
1.11.1 Utility Money Pool. Under the Utility Money Pool Agreement
(Exhibit B-1 hereto), short-term funds are available from the following sources
for short-term loans to the Utility Subsidiaries from time to time: (1) surplus
funds in the treasuries of Utility Money Pool participants other than
FirstEnergy; (2) surplus funds in the treasury of FirstEnergy (such funds in
clauses (1) and (2) being referred to as "Internal Funds"); and (3) proceeds
from bank borrowings by Utility Money Pool participants or the sale of
commercial paper by FirstEnergy or the Utility Subsidiaries for loan to the
Utility Money Pool (such funds being referred to as "External Funds"). Funds are
made available from such sources in such order as the administrator of the
Utility Money Pool, FE ServCo, may determine would result in a lower cost of
borrowing, consistent with the individual borrowing needs and financial standing
of the companies providing funds to the pool. The determination of whether a
Utility Money Pool participant at any time has surplus funds to lend to the
Utility Money Pool or shall lend funds to the Utility Money Pool would be made
by such participant's chief financial officer or treasurer, or by a designee
thereof, on the basis of cash flow projections and other relevant factors, in
such participant's sole discretion.
Utility Money Pool participants that borrow would borrow pro rata from each
company that lends, in the proportion that the total amount loaned by each such
lending company bears to the total amount then loaned through the Utility Money
Pool. On any day when more than one fund source (e.g., if there are External
Funds as well as Internal Funds), with different rates of interest, is used to
fund loans through the Utility Money Pool, each borrower would borrow pro rata
from each such fund source in the Utility Money Pool in the same proportion that
the amount of funds provided by that fund source bears to the total amount of
short-term funds available to the Utility Money Pool. Borrowings under the
Utility Money Pool by the Primary Utility Subsidiaries have been authorized by
each of the applicable state commissions and are therefore exempt pursuant to
Rule 52(a). ATSI, NONGC, Waverly Electric and York Haven each requests
authorization to borrow up to $50 million at any time outstanding under the
Utility Money Pool.
Borrowings from the Utility Money Pool require authorization by the
borrower's chief financial officer or treasurer, or by a designee thereof. No
party is required to effect a borrowing through the Utility Money Pool if it is
determined that it could (and had authority to) effect a borrowing at lower cost
directly from banks or through the sale of its own commercial paper. No loans
through the Utility Money Pool may be made to, and no borrowings through the
Utility Money Pool may be made by, FirstEnergy.
The cost of compensating balances, if any, and fees paid to banks to
maintain credit lines and accounts by Utility Money Pool participants lending
External Funds to the Utility Money Pool would initially be paid by the
participant maintaining such line. A portion of such costs - or all of such
costs in the event a Utility Money Pool participant establishes a line of credit
solely for purposes of lending any External Funds obtained thereby into the
Utility Money Pool - would be retroactively allocated every month to the
companies borrowing such External Funds through the Utility Money Pool in
21
proportion to their respective daily outstanding borrowings of such External
Funds.
If only Internal Funds make up the funds available in the Utility Money
Pool, the interest rate applicable and payable to or by Utility Subsidiaries for
all loans of such Internal Funds will be the greater of the 30-day LIBOR rate as
quoted in The Wall Street Journal or the money market rate that a lending
participant could have obtained if it placed its excess cash in such an
investment.
If only External Funds comprise the funds available in the Utility Money
Pool, the interest rate applicable to loans of such External Funds would be
equal to the lending company's cost for such External Funds (or, if more than
one Utility Money Pool participant had made available External Funds on such
day, the applicable interest rate would be a composite rate equal to the
weighted average of the cost incurred by the respective Utility Money Pool
participants for such External Funds).
In cases where both Internal Funds and External Funds are concurrently
borrowed through the Utility Money Pool, the rate applicable to all loans
comprised of such "blended" funds would be a composite rate equal to the
weighted average of (a) the cost of all Internal Funds contributed by Utility
Money Pool participants (as determined pursuant to the second-preceding
paragraph above) and (b) the cost of all such External Funds (as determined
pursuant to the immediately preceding paragraph above). In circumstances where
Internal Funds and External Funds are available for loans through the Utility
Money Pool, loans may be made exclusively from Internal Funds or External Funds,
rather than from a "blend" of such funds, to the extent it is expected that such
loans would result in a lower cost of borrowings.
Funds not required by the Utility Money Pool to make loans (with the
exception of funds required to satisfy the Utility Money Pool's liquidity
requirements) would ordinarily be invested in one or more short-term
investments, including: (i) interest-bearing accounts with banks; (ii)
obligations issued or guaranteed by the U.S. government and/or its agencies and
instrumentalities, including obligations under repurchase agreements; (iii)
obligations issued or guaranteed by any state or political subdivision thereof,
provided that such obligations are rated not less than "A" by a nationally
recognized rating agency; (iv) commercial paper rated not less than "A-1" or
"P-1" or their equivalent by a nationally recognized rating agency; (v) money
market funds; (vi) bank certificates of deposit; (vii) Eurodollar funds; and
(viii) such other investments as are permitted by Section 9(c) of the Act and
Rule 40 thereunder.
The interest income and investment income earned on loans and investments
of surplus funds would be allocated among the participants in the Utility Money
Pool in accordance with the proportion each participant's contribution of funds
bears to the total amount of funds in the Utility Money Pool and the cost of
funds provided to the Utility Money Pool by such participant.
Each Utility Subsidiary receiving a loan through the Utility Money Pool
would be required to repay the principal amount of such loan, together with all
interest accrued thereon, on demand and in any event not later than one year
after the date of such loan. All loans made through the Utility Money Pool may
be prepaid by the borrower without premium or penalty.
22
1.11.2 Non-Utility Money Pool. The Non-Utility Money Pool is
operated on the same terms and conditions as the Utility Money Pool, except that
FirstEnergy funds made available to the two money pools are made available to
the Utility Money Pool first and thereafter to the Non-Utility Money Pool. Under
the Non-Utility Money Pool Agreement (Exhibit B-3 hereto), no loans may be made
to, and no borrowings may be made by, FirstEnergy. All contributions to, and
borrowings from, the Non-Utility Money Pool are exempt pursuant to the terms of
Rule 52 under the Act. Under the Merger Order, all existing Non-Utility
Subsidiaries of FirstEnergy and GPU at the time of the merger were authorized to
participate in the Non-Utility Money Pool.
1.11.3 Other Contributions to Money Pool. FirstEnergy and the
Utility Subsidiaries may contribute funds to the Utility Money Pool from the
issuance of short-term debt as authorized above or pursuant to an exemption
under the Act. FirstEnergy may contribute funds from the issuance of Short-term
Debt to the Non-Utility Money Pool and the Non-Utility Subsidiaries may
contribute funds from the issuance of short-term debt to the Non-Utility Money
Pool.
1.11.4 Operation of the Money Pools and Administrative Matters.
Operation of the Utility and Non-Utility Money Pools, including record keeping
and coordination of loans, will continue to be handled by FE ServCo under the
authority of the appropriate officers of the participating companies. FE ServCo
will continue to administer the Utility and Non-Utility Money Pools on an "at
cost" basis and will maintain separate records for each money pool. Surplus
funds of the Utility Money Pool and the Non-Utility Money Pool may be combined
in common short-term investments, but separate records of such funds shall be
maintained by FE ServCo as administrator of the pools, and interest thereon
shall be separately allocated, on a daily basis, to each money pool in
accordance with the proportion that the amount of each money pool's surplus
funds bears to the total amount of surplus funds available for investment from
both money pools.
1.11.5 Use of Proceeds. Proceeds of any short term borrowings
under the Utility and Non-Utility Money Pools may be used by the borrowing
Subsidiary: (i) for the interim financing of its construction and capital
expenditure programs; (ii) for its working capital needs; (iii) for the
repayment, redemption or refinancing of its debt and preferred stock; (iv) to
meet unexpected contingencies, payment and timing differences, and cash
requirements; and (v) to otherwise finance its own business and for other lawful
general corporate purposes.
1.12 Tax Allocation Agreement. FirstEnergy financed the cash portion
of the consideration paid in connection with the merger with GPU, approximately
$2.2 billion, with borrowings under a credit agreement with a group of banks
(the "Bank Bridge Loan"). Amounts outstanding under the Bank Bridge Loan were to
be repaid by October 1, 2002 and carried an initial interest rate of LIBOR plus
1.25% per annum. Additional funds from the Bank Bridge Loan were used to repay
approximately $1.5 billion of the short-term indebtedness of GPU and its
subsidiaries outstanding immediately prior to the consummation of the Merger and
to repay approximately $300 million of FirstEnergy's short-term indebtedness.
Subsequently, on November 15, 2001, FirstEnergy issued $4 billion aggregate
principal amount of unsecured notes ("Notes") having maturities of 2006 through
2031, the proceeds of which were used to repay in full the amounts outstanding
under the Bank Bridge Loan.
23
As used herein, the term "Acquisition Debt" includes that portion of the
proceeds of the Notes used to repay the portions of the Bank Bridge Loan related
to the $2.2 billion merger-related cash consideration and the $1.5 billion
GPU-related short-term indebtedness. The term also includes indebtedness that
may be incurred by FirstEnergy during the Authorization Period for the purposes
of refinancing any of the foregoing indebtedness.
Filed herewith as Exhibit I is a table identifying each component of the
Acquisition Debt and the interest expenses incurred on each component. As shown
on Exhibit I, the interest expense on the Acquisition Debt in 2002 was $286.5
million. Because FirstEnergy and its consolidated subsidiaries will file a
consolidated income tax return, the interest expense on the Acquisition Debt
will offset the group's consolidated taxable income and therefore reduce the
overall tax liability of the group. By applying a hypothetical 35% tax rate to
the consolidated taxable income of the group, the interest expense on the
Acquisition Debt for 2002 will reduce the group's tax liability by about $100.3
million. However, as discussed below, unless the relief requested in this
Application/Declaration is granted, FirstEnergy would not be able to retain, or
share in, the tax benefit (i.e., the reduction in the group's income tax
liability) that is associated with the interest it pays on the Acquisition Debt.
Rather, under Rule 45(c), the benefit of the interest expense would have to be
allocated to other members of the group with a positive allocation of tax
(primarily the Utility Subsidiaries).
The Applicants hereby request that the Commission authorize FirstEnergy and
its Subsidiaries to enter into and allocate consolidated income taxes in
accordance with the Tax Allocation Agreement that is filed herewith as Exhibit
B-3. Under the proposed Tax Allocation Agreement, the consolidated tax would be
allocated among the members of the group in proportion to the separate return
tax liability of each member, provided that the tax apportioned to any
subsidiary company of FirstEnergy will not exceed the "separate return tax"
liability of such subsidiary.(13) This is the method of allocation permitted
under Rule 45(c)(2)(ii).
The Tax Allocation Agreement further provides that FirstEnergy will retain
the benefit (in the form of the reduction in consolidated tax) that is
attributable to the interest expense on the Acquisition Debt, rather than
reallocate that tax savings to its subsidiary companies. In this respect, the
proposed Tax Allocation Agreement does not comply with all of the requirements
of Rule 45(c). The proposed Tax Allocation Agreement will therefore have the
effect of assigning the tax benefit associated with the interest expense on the
Acquisition Debt to the entity that is legally obligated for its payment -
FirstEnergy, as issuer of the Acquisition Debt. At the same time, in accordance
with Rule 45(c)(2), the portion of the consolidated tax allocated to any of
FirstEnergy's subsidiaries will not exceed the "separate return tax" liability
of such subsidiary (the "separate return limitation"). Thus, the proposed Tax
Allocation Agreement will not have the effect of shifting a larger portion of
the group's tax liability to any member of the group than such company would
otherwise pay on a separate return basis. Exhibit J hereto illustrates the
difference between the Rule 45(c) method and the proposed method in the amounts
of tax that would be allocated to the members of the FirstEnergy group.
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(13) Under Rule 45(c), the "separate return tax" is defined to mean "the tax on
the corporate taxable income of an associate company computed as though
such company were not a member of a consolidated group."
24
FirstEnergy will file, as an exhibit to its Annual Report on Form U5S,
beginning with its Annual Report for 2002, a table in the form of Exhibit I
hereto that identifies each component of the Acquisition Debt, the associated
interest expense, and the amounts and dates of any prepayments or retirements in
the outstanding balance thereof. Further, FirstEnergy will file, by an amendment
to its Annual Report on Form U5S within 30 days of the date on which it files
its consolidated tax return, a spreadsheet that shows the actual allocation of
income taxes to each of the members of the consolidated group and that portion
of tax (or negative tax) that is attributable to the interest expense on the
Acquisition Debt.
The Commission has previously approved the use of tax allocation agreements
that are substantially identical to the proposed Tax Allocation Agreement in
cases in which new registered holding companies have incurred substantial
amounts of debt in order to finance a portion of the consideration paid to
acquire another utility or holding company.(14)
1.13 Changes in Capital Stock of Majority Owned Subsidiaries. The
portion of an individual Subsidiary's aggregate financing to be effected through
the sale of stock to FirstEnergy or other immediate parent company during the
Authorization Period pursuant to Rule 52 and/or pursuant to an order issued
pursuant to this filing cannot be ascertained at this time. It may happen that
the proposed sale of capital securities (i.e., common stock or preferred stock)
may in some cases exceed the then authorized capital stock of such Subsidiary.
In addition, the Subsidiary may choose to use capital stock with no par value.
As needed to accommodate such proposed transactions and to provide for
future issues, request is made for authority to change the terms of any 50% or
more owned Subsidiary's authorized capital stock capitalization or other equity
interests by an amount deemed appropriate by FirstEnergy or other intermediate
parent company; provided that the consents of all other shareholders have been
obtained for the proposed change. This request for authorization is limited to
FirstEnergy's 50% or more owned Subsidiaries and will not affect the aggregate
limits or other conditions contained herein. A Subsidiary would be able to
change the par value, or change between par value and no-par stock, or change
the form of such equity from common stock to limited partnership or limited
liability company interests or similar instruments, or from such instruments to
common stock, without additional Commission approval. Any such action by a
Utility Subsidiary would be subject to and would only be taken upon the receipt
of any necessary approvals by the state commission in the state or states where
the Utility Subsidiary is incorporated and doing business.(15) FirstEnergy will
be subject to all applicable laws regarding the fiduciary duty of fairness of a
majority shareholder to minority shareholders in any such 50% or more owned
Subsidiary and will undertake to ensure that any change implemented under this
paragraph comports with such legal requirements.
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(14) See The National Grid Group plc, Holding Co. Act Release No. 27154 (Mar.
15, 2000). Accord NiSource Inc., Holding Co. Act. Release No. 27567 (Sept.
12, 2002) and Progress Energy, Inc., et al., Holding Co. Act Release No.
27522 (Apr. 18, 2002).
(15) The Commission has previously approved substantially similar proposals. In
addition to the Merger Order, see National Fuel Gas Company, supra n. 7 and
Reliant Energy, Inc., et al., Holding Co. Act Release No. 27548 (July 5,
2002).
25
1.14 Payment of Dividends and other Payments Out of Capital or
Unearned Surplus.
FirstEnergy proposes, on behalf of every direct or indirect Non-Utility
Subsidiary, that such companies be permitted to pay dividends with respect to
the securities of such companies and/or acquire, retire or redeem any securities
of such companies that are held by and associate company or affiliate, from time
to time, through the Authorization Period, out of capital or unearned surplus,
to the extent permitted under applicable corporate law. Without further approval
of the Commission, no Non-Utility Subsidiary will declare or pay any dividend
and/or acquire, retire or redeem any security of such company held by any
associate company or affiliate out of capital or unearned surplus if that
Non-Utility Subsidiary derives any material part of its revenues from sales of
goods, services, electricity or natural gas to any of the Utility
Subsidiaries.(16)
1.15 Investment in Non-Utility Subsidiaries. First Energy seeks
approvals to engage in certain activities described in this Item 1.15 relating
to EWGs, FUCOs, ETCs (collectively, "Exempt Subsidiaries"), Rule 58 Subsidiaries
and Energy Related Companies and make additional investments in other
Non-Utility Subsidiaries approved by the Commission as requested in this Item
1.15 (collectively, "Non-Exempt Subsidiaries"). To the extent any of the
activities described in this Item 1.15 constitute the providing of goods,
services or construction from one associate company to another in the
FirstEnergy system which would be subject to Section 13 of the Act, such goods,
services or construction will be provided at cost as defined in Rules 90 and 91
unless an exemption from the at cost requirement is available under Rule 90(d)
or otherwise approved in the Commission's order in this proceeding as requested
in Item 1.18.1 below.
1.15.1 Development Activities. In connection with existing and
future non-utility businesses, FirstEnergy will engage directly or through
Subsidiaries in preliminary development activities ("Development Activities")
and administrative and management activities ("Administrative Activities")
associated with such investments. Development Activities will be limited to: due
diligence and design review; market studies; preliminary engineering; site
inspection; preparation of bid proposals, including, in connection therewith,
posting of bid bonds; application for required permits and/or regulatory
approvals; acquisition of site options and options on other necessary rights;
negotiation and execution of contractual commitments with owners of existing
facilities, equipment vendors, construction firms, power purchasers, thermal
"hosts," fuel suppliers and other project contractors; negotiation of financing
commitments with lenders and other third-party investors; and such other
preliminary activities as may be required in connection with the purchase,
acquisition or construction of facilities or the securities of other companies.
FirstEnergy proposes to expend directly or through Non-Utility Subsidiaries up
to $300 million in the aggregate outstanding at any time during the
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(16) The Commission has previously approved substantially similar proposals. In
addition to the Merger Order, see Entergy Corporation, et al., Holding Co.
Act Release No. 27626 (Dec. 20, 2002) and Alliant Energy Corporation, et
al., Holding Co. Act Release No. 27448 (Oct. 3, 2001).
26
Authorization Period on all such Development Activities.(17) Administrative
Activities will include ongoing personnel, accounting, engineering, legal,
financial and other support activities necessary to manage Development
Activities and investments in Subsidiaries.
1.15.2 Additional Investments in Energy-Related Companies. In the
future, FirstEnergy proposes to make additional investments in Energy-Related
Companies (which, but for non-U.S. activities, would be Rule 58 Subsidiaries) in
the form of purchases of common stock and other securities, capital
contributions, loans or open account advances, guarantees, or any combination of
the foregoing. It is also contemplated that Energy-Related Companies may issue
securities from time to time pursuant to the exemption provided under Rule 52 to
investors other than FirstEnergy for the purpose of financing their operations.
Direct or indirect investments by FirstEnergy in Energy Related Companies would
be subject to the limitations applicable to investments in Rule 58 Subsidiaries.
1.15.3 Intermediate Subsidiaries. FirstEnergy proposes to acquire
directly or indirectly the securities of one or more corporations, trusts,
partnerships, limited liability companies or other entities (collectively,
"Intermediate Subsidiaries"), which would be organized exclusively for the
purpose of acquiring, holding and/or financing the acquisition of the securities
of or other interest in one or more Exempt Subsidiaries, Rule 58 Subsidiaries,
Energy Related Companies or other Non-Exempt Subsidiaries, provided that
Intermediate Subsidiaries may also engage in Development Activities and
Administrative Activities. To the extent such transactions are not exempt from
the Act or otherwise authorized or permitted by rule, regulation or order of the
Commission issued thereunder, FirstEnergy requests authority for Intermediate
Subsidiaries to engage in the activities described herein.
There are several legal and business reasons for the use of limited purpose
entities such as the Intermediate Subsidiaries in connection with making
investments in Exempt Subsidiaries, Rule 58 Subsidiaries, Energy Related
Companies and other Non-Exempt Subsidiaries. For example, the formation and
acquisition of limited purpose entities is often necessary or desirable to
facilitate financing the acquisition and ownership of a FUCO, an EWG or another
non-utility enterprise. Furthermore, the laws of some foreign countries may
require that the bidder in a privatization program be organized in that country.
In such cases, it would be necessary to form a foreign Subsidiary as the entity
(or participant in the entity) that submits the bid or other proposal. In
addition, the interposition of one or more Intermediate Subsidiaries may allow
FirstEnergy to defer the repatriation of foreign source income, or to take full
advantage of favorable tax treaties among foreign countries, or otherwise to
secure favorable U.S. income tax treatment that would not otherwise be
available. Intermediate Subsidiaries would also serve to isolate business risks,
facilitate subsequent adjustments to, or sales of, ownership interests by or
among the members of the ownership group, or to raise debt or equity capital in
domestic or foreign markets.
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(17) Amounts expended in the development of projects leading to an investment in
an Exempt Subsidiary will not count against the limitation on expenditures
for Development Activities. Amounts will be restored to the authorized
Development Activities amount when a Subsidiary for which such amounts were
expended becomes an Exempt Subsidiary.
27
An Intermediate Subsidiary may be organized, among other things: (1) in
order to facilitate the making of bids or proposals to develop or acquire an
interest in any EWG, FUCO, ETC or other non-utility company which, upon
acquisition, would qualify as a Rule 58 Subsidiary, Energy Related Company or
other Non-Exempt Subsidiary; (2) after the award of such a bid proposal, in
order to facilitate closing on the purchase or financing of such acquired
company; (3) at any time subsequent to the consummation of an acquisition of an
interest in any such company in order, among other things, to effect an
adjustment in the respective ownership interests in such business held by
FirstEnergy and non-affiliated investors; (4) to facilitate the sale of
ownership interests in one or more acquired Non-Utility Subsidiaries; (5) to
comply with applicable laws of foreign jurisdictions limiting or otherwise
relating to the ownership of domestic companies by foreign nationals; (6) as a
part of tax planning in order to limit FirstEnergy's exposure to U.S. and
foreign taxes; (7) to further insulate FirstEnergy and the Utility Subsidiaries
from operational or other business risks that may be associated with investments
in non-utility companies; or (8) for other lawful business purposes.
Investments in Intermediate Subsidiaries may take the form of any
combination of the following: (1) purchases of capital shares, partnership
interests, member interests in limited liability companies, trust certificates
or other forms of voting or non-voting equity interests; (2) capital
contributions; (3) open account advances without interest; (4) loans; and (5)
guarantees issued, provided or arranged in respect of the securities or other
obligations of any Intermediate Subsidiaries. Funds for any direct or indirect
investment in any Intermediate Subsidiary will be derived from (a) borrowings,
sales of common stock and guarantees authorized in the proceeding; (b) any
appropriate future debt or equity securities issuance authorization obtained by
FirstEnergy from the Commission; and (c) other available cash resources,
including proceeds of securities sales by Non-Utility Subsidiaries pursuant to
Rule 52. To the extent that FirstEnergy provides funds directly or indirectly to
an Intermediate Subsidiary which are used for the purpose of making an
investment in any EWG or FUCO, a Rule 58 Subsidiary or an Energy Related
Company, the amount of such funds will be included in FirstEnergy's "aggregate
investment" in such entities, as calculated in accordance with Rule 53 or Rule
58, as applicable.(18)
1.16 Sale of Certain Goods and Services Outside the United
States.Energy Related Companies request authority to sell goods and services to
customers not only within the United States as permitted by Rule 58 but also
outside the United States.19
Approval is sought to engage in sales of the following goods and services
outside the United States:
o "Energy Management Services." Energy management services,
including the marketing, sale, installation, operation and
maintenance of various products and services related to energy
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(18) Intermediate Subsidiaries have been approved by the Commission in a number
of instances. In addition to the Merger Order, see Cinergy Corp., Holding
Co. Act Release No. 27124 (Jan. 11, 2000) and Alliant Energy Corporation,
et al., Holding Co. Act Release No. 27448 (Oct. 3, 2001).
(19) The Commission has heretofore authorized non-utility subsidiaries of a
registered holding company to provide various services outside the United
States. In addition to the Merger Order, see American Electric Power
Company, Inc., Holding Co. Act Release No. 27062 (Aug. 19, 1999) and
Alliant Energy Corporation, et al., supra n. 18.
28
management and demand-side management, including: energy and
efficiency audits; meter data management, facility design and
process control and enhancements; construction, installation,
testing, sales and maintenance of (and training client personnel
to operate) energy conservation equipment; design,
implementation, monitoring and evaluation of energy conservation
programs; development and review of architectural, structural and
engineering drawings for energy efficiencies, design and
specification of energy consuming equipment; general advice on
programs; the design, construction, installation, testing, sales,
operation and maintenance of new and retrofit heating,
ventilating, and air conditioning ("HVAC"), electrical and power
systems, fuel cells, uninterruptible power systems, alarm,
security, access control and warning systems, motors, pumps,
lighting, water, water-purification and plumbing systems,
building automation and temperature controls, installation and
maintenance of refrigeration systems, building infrastructure
wiring supporting voice, video, data and controls networks,
environmental monitoring and control, ventilation system
calibration and maintenance, piping and fire protection systems,
and design, sale, engineering, installation, operation and
maintenance of emergency or distributed power generation systems,
and related structures, in connection with energy-related needs;
and the provision of services and products designed to prevent,
control, or mitigate adverse effects of power disturbances on a
customer's electrical systems.
o "Consulting Services." Consulting services with respect to
energy- and gas-related matters for associate and nonassociate
companies, as well as for individuals. Such consulting services
would include technical and consulting services involving
technology assessments, power factor correction and harmonics
mitigation analysis, meter reading and repair, rate schedule
design and analysis, environmental services, engineering
services, billing services (including consolidation or
centralized billing, bill disaggregation tools and bill inserts),
risk management services, communications systems, information
systems/data processing, system planning, strategic planning,
finance, feasibility studies, and other similar related services.
o "Energy Marketing." The brokering and marketing of electricity,
natural gas and other energy commodities, as well as providing
incidental related services, such as fuel management, storage and
procurement.
o "Infrastructure Services." Utility infrastructure services,
including the services provided by MYR, such as installing and
maintaining underground communications and energy networks, high
voltage transmission and distribution lines, substations and
towers for electric and telecommunications companies,
construction and ongoing maintenance services to industrial and
municipal owners of complex electric and communications
infrastructures on a nationwide basis, management of large
volumes of technical service and repair work for communications
and energy utilities and new residential design and construction
services, permitting a single point of contact for the design and
29
construction of all utility infrastructures (including electric,
gas, water, sewer, cable and telephone) and outdoor lighting.
In addition, FirstEnergy requests authority to provide through Subsidiaries
other energy-related goods and services. These include incidental goods and
services closely related to the consumption of energy and the maintenance of
energy consuming property by customers. The need for these goods and services
would arise as a result of, or evolve out of, the goods and services described
above and do not differ materially from those goods and services. The proposed
incidental goods and services would not involve the manufacture of energy
consuming equipment but could be related to, among other things, the
maintenance, financing, sale or installation of such equipment.(20)
FirstEnergy requests the Commission (i) approve the Energy Management
Services and Consulting Services anywhere outside the United States, (ii)
approve Energy Marketing in Canada and Mexico and retain jurisdiction with
respect to Energy Marketing elsewhere outside the United States, and (iii)
retain jurisdiction over Infrastructure Services anywhere outside the United
States. The descriptions of these activities and the terms of the requests for
reservation of jurisdiction are the same as in the Merger Order.
1.17 Approval For Subsidiary Reorganizations. FirstEnergy currently
engages directly and indirectly in various non-utility businesses described in
Item 1.1 above. FirstEnergy requests authority, to the extent needed,(21) to
sell or otherwise transfer (i) such businesses, (ii) the securities of current
Subsidiaries engaged in some or all of these businesses or (iii) investments
which do not involve a Subsidiary (i.e., less than 10% voting interest) to a
Non-Utility Holding Company or a Subsidiary of Non-Utility Holding Company, and,
to the extent approval is required, such Non-Utility Holding Company or any such
Subsidiary of a Non-Utility Holding Company requests authority to acquire the
assets of such businesses, securities or other investment interests.
Alternatively, transfers of such securities or assets may be effected by share
exchanges, share distributions or dividends followed by contribution of such
securities or assets to the receiving entity. The transactions proposed in this
Item 1.17 will not involve the sale or other disposition of any utility assets
of the Utility Subsidiaries and will not involve any corporate reorganization
involving the Utility Subsidiaries. The approval sought in this Item 1.17 does
not extend to the acquisitions of any new businesses or activities.
In the future, following its direct or indirect acquisition of the
securities of new Non-Utility Subsidiaries, FirstEnergy may determine to
transfer such securities or the assets of such Non-Utility Subsidiaries and/or
Non-Utility Subsidiaries existing as of the date of the Merger, to other direct
or indirect Non-Utility Subsidiaries or to liquidate or merge Non-Utility
Subsidiaries. Such internal transactions would be undertaken in order to
eliminate corporate complexities, to combine related business segments for
staffing and management purposes, to eliminate administrative costs, to achieve
tax savings, or for other ordinary and necessary business purposes. FirstEnergy
----------
(20) See Columbia Energy Group, Holding Co. Act Release No. 26868 (May 6, 1998)
(approving customer financing related to energy management services and
consulting services outside the United States).
(21) The sale of securities, assets or an interest in other businesses to an
associate company may, in some cases, be exempt pursuant to Rule 43(b).
30
requests authority to engage in such transactions, to the extent that they are
not exempt under the Act and rules thereunder, through the Authorization Period.
The Commission has given approval for such general corporate
reorganizations in prior cases.(22)
1.18 Exemption From Section 13(b).
1.18.1 Transactions Involving Certain Categories of Non-Utility
Companies. The Applicants request authorization for FE ServCo and the
Non-Utility Subsidiaries to enter into agreements to provide construction, goods
or services to certain associate companies enumerated below at fair market
prices determined without regard to cost and therefore requests an exemption (to
the extent that Rule 90(d) of the Act does not apply)(23) under Section 13(b)\
from the cost standards of Rules 90 and 91.
In recent decisions,(24) the Commission has approved such relief allowing
"at market" pricing for substantially the following transactions, and
FirstEnergy requests similar relief, if the client company is:
(1) a FUCO or an EWG that derives no part of its income, directly or
indirectly, from the generation, transmission, or distribution of
electric energy for sale within the United States;
(2) an EWG that sells electricity at market-based rates which have
been approved by FERC or an appropriate state public utility
commission, provided that the purchaser of the EWG's electricity
is not an affiliated public utility or an affiliate that re-sells
such power to an affiliated public utility;
(3) a QF that sells electricity exclusively at rates negotiated at
arm's length to one or more industrial or commercial customers
purchasing such electricity for their own use and not for resale,
or to an electric utility company other than an affiliated
electric utility at the purchaser's "avoided cost" determined
under PURPA;
----------
(22) In addition to the Merger Order, see Reliant Energy, Inc., et al., supra n.
15 and Entergy Corporation, Holding Co. Act Release No. 27626 (Dec. 20,
2002).
(23) Under Rule 90(d)(1), the price of services, construction or goods is not
limited to cost if neither the buyer nor the seller of such services,
construction or goods is (i) a public-utility holding company, (ii) an
investment or similar company as defined in the Rule, (iii) a company in
the business of selling goods to associate companies or performing services
or construction (i.e., a "service company") or (iv) any company controlling
an entity described in (i), (ii) or (iii). In general, therefore, goods,
services or construction provided from one Non-Utility Subsidiary to other
Non-Utility Subsidiaries (other than any service company) are not subject
to the cost restrictions and may be priced at market, which may be above or
below cost. A Non-Utility Subsidiary would generally be permitted to make
such sales of goods, services or construction to another Non-Utility
Subsidiary under Rule 87(b).
(24) In addition to the Merger Order, see Entergy Corporation, supra n. 22, and
Alliant Energy Corporation, et al., supra n. 18).
31
(4) an EWG or a QF that sells electricity at rates based upon its
costs of service, as approved by FERC or any state public utility
commission having jurisdiction, provided that the purchaser of
the electricity is not an affiliated public utility; or
(5) a Rule 58 Subsidiary or any other Non-Utility Subsidiary that (a)
is partially owned, provided that the ultimate purchaser of goods
or services is not a Utility Subsidiary, (b) is engaged solely in
the business of developing, owning, operating and/or providing
services or goods to Non-Utility Companies described in (1)
through (4) above or (c) does not derive, directly or indirectly,
any part of its income from sources within the United States and
is not a public-utility company operating within the United
States.
1.18.2 Continuation of Interim Exemption. As indicated, under the
Merger Order, FEFSG is authorized to provide maintenance and repair services to
FirstEnergy's pre-merger Utility Subsidiaries (namely, Ohio Edison, Toledo
Edison, Cleveland Electric, Penn Power, NONGC and ATSI) under certain At-Market
Service Arrangements, and in connection therewith granted an interim exemption
under Section 13(b) of the Act permitting FEFSG to provide such services at
market rates determined without regard to cost. This interim exemption will
expire on June 30, 2003. Several of the longer-term At-Market Service
Arrangements have terms that will extend past June 30, 2003. Accordingly, FEFSG
is requesting that the Commission extend such interim exemption from June 30,
2003 to December 31, 2003. FEFSG will not undertake to provide any new
maintenance and repair services to the Utility Subsidiaries after December 31,
2003 except in accordance with Rules 90 and 91, and will either terminate the
At-Market Service Arrangements effective December 31, 2003 or amend such
agreements to provide that the prices charged for maintenance and repair
services after December 31, 2003 are in accordance with the requirements of
Rules 90 and 91.
1.19 Reports Pursuant to Rule 24.
1.19.1 Reports by First Energy. It is proposed that, with respect
to FirstEnergy, the reporting systems of the 1934 Act be integrated with the
reporting system under the Act. This would eliminate duplication of filings with
the Commission that cover essentially the same subject matters, resulting in a
reduction of expense for both the Commission and FirstEnergy. To effect such
integration, the portion of the filings under the Securities Act of 1933 (the
"1933 Act") and the 1934 Act reports containing or reflecting disclosures of
transactions occurring pursuant to the authorizations granted in this proceeding
would be incorporated by reference into this proceeding through Rule 24
certificates of notification. The certificates would also contain all other
information required by Rule 24, including the certification that each
transaction being reported on had been carried out in accordance with the terms
and conditions of and for the purposes represented in this
Application/Declaration. Such certificates of notification would be filed within
60 days after the end of the first three calendar quarters and 90 days after the
end of the last calendar quarter, in which transactions occur commencing with
the first calendar quarter ended at least 45 days following the date of the
Commission's order in this proceeding.
32
A copy of relevant documents (e.g., underwriting agreements, indentures,
bank agreements) for the relevant quarter will be filed with, or incorporated by
reference from, 1933 Act or 1934 Act filings in such Rule 24 certificates.
The Rule 24 certificates will contain the following information as of the
end of the applicable quarter (unless otherwise stated below) :
(a) The sales of any Common Stock or Preferred Securities by
FirstEnergy and the purchase price per share and the market price per share at
the date of the agreement of sale;
(b) The total number of shares of Common Stock issued or issuable
pursuant to options granted during the quarter under employee benefit plans and
dividend reinvestment plans, including any employee benefit plans or dividend
reinvestment plans hereafter adopted;
(c) If Common Stock has been transferred to a seller of
securities of a company being acquired, the number of shares so issued, the
value per share and whether the shares are restricted in the hands of the
acquiror;
(d) The amount and terms of any Long-term Debt, Preferred
Securities and Short-term Debt issued by FirstEnergy during the quarter;
(e) The amount and terms of any Short-term Debt issued by JCP&L,
Penn Power, Penelec, Met-Ed, ATSI or NONGC during the quarter, and the principal
balance of borrowings by each Utility Subsidiary under the Utility Money Pool at
the end of the quarter and average interest rate on Utility Money Pool
borrowings during the quarter;
(f) The amount and terms of any financings consummated by any
Non-Utility Subsidiary that are not exempt under Rule 52;
(g) If a FirstEnergy Guarantee or Non-Utility Subsidiary
Guarantee is issued during the quarter, the name of the guarantor, the name of
the beneficiary of the guarantee and the amount, terms and purpose of the
guarantee;
(h) The notional amount and principal terms of any Hedge
Instruments or Anticipatory Hedges entered into during the quarter and the
identity of the other parties thereto;
(i) The name, parent company and amount invested in any
Intermediate Subsidiary or Financing Subsidiary during the quarter and the
amount and terms of any securities issued by such Subsidiaries during the
quarter;
(j) A list of U-6B-2 forms filed with the Commission during the
quarter, including the name of the filing entity and the date of filing;
33
(k) Consolidated balance sheets as of the end of the quarter and
separate balance sheets as of the end of the quarter for each company, including
FirstEnergy, that has engaged in jurisdictional financing transactions during
the quarter;
(l) A table showing, as of the end of the quarter, the dollar and
percentage components of the capital structure of FirstEnergy on a consolidated
basis and each Primary Utility Subsidiary; and
(m) A retained earnings analysis of FirstEnergy on a consolidated
basis and each Primary Utility Subsidiary detailing gross earnings, dividends
paid out of each capital account (specifying separately the paid-in, surplus,
retained earnings and other capital accounts) and the resulting capital account
balances at the end of the quarter.
(n) Notification of any change in the ratings provided by
nationally recognized rating agencies of any security issued by FirstEnergy or
its Utility Subsidiaries occurring during the applicable quarter.
(o) A computation in accordance with Rule 53(a) setting forth
FirstEnergy's "aggregate investment" in all EWGs and FUCOs, its "consolidated
retained earnings," and a calculation of the amount remaining under the Modified
Rule 53 Test as then in effect;
(p) A breakdown showing FirstEnergy's aggregate investment in
each individual EWG/FUCO project covered by the Modified Rule 53 Test (as
defined in Item 3.2 below);
(q) Consolidated capitalization ratio of FirstEnergy as of the
end of that quarter, with consolidated debt to include all short-term debt and
non-recourse debt of all EWGs and FUCOs;
(r) The market-to-book ratio of FirstEnergy's Common Stock;
(s) Identification of any new EWG/FUCO project covered by the
Modified Rule 53 Test in which FirstEnergy has invested or committed to invest
during the preceding quarter;
(t) Analysis of the growth in consolidated retained earnings
which segregates total earnings growth of EWGs and FUCOs from that attributable
to other Subsidiaries of FirstEnergy; and
(u) A statement of revenues and net income for each EWG and FUCO
for the 12 months ending as of the end of that quarter.
Future Registration Statements filed under the 1933 Act with respect to
securities that are subject of the Application/Declaration will be filed or
incorporated by reference as exhibits to the next certificate filed pursuant to
Rule 24.
34
1.19.2 Reports by Non-Utility Holding Companies. The Non-Utility
Holding Companies will continue to file a single consolidated quarterly report
pursuant to Rule 24 of all investments in Subsidiaries. Such reports will be
filed within 60 days after the end of the first three calendar quarters and 90
days after the end of the last calendar quarter, in which transactions occur
commencing with the first calendar quarter ended at least 45 days following the
date of the Commission's order in this proceeding. Concurrently with the filing
of such report, a copy thereof will be furnished to each state commission having
jurisdiction over retail rates of the Utility Subsidiaries.(25) It is proposed
that such combined report also be in lieu of any separate notification on Form
U-6B-2 that would otherwise be required with respect to exempt securities
issuances. The Rule 24 report shall include:
(a) A copy of the balance sheet and income statement for
Non-Utility Holding Company and its consolidated Subsidiaries;
(b) A narrative description of Development Activities and of any
investments during the quarter just ended, organized by category (Exempt
Subsidiaries, Rule 58 Subsidiaries, Energy Related Companies and other
Non-Exempt Subsidiaries);
(c) Amounts and forms of guarantees of, and similar provisions
and arrangements concerning, performing and undertaking of other obligations by
a Non-Utility Holding Company or any direct or indirect Rule 58 Subsidiary,
Energy Related Company or Non-Exempt Subsidiary on behalf of other direct or
indirect Subsidiaries of a Non-Utility Holding Company;
(d) A description of services obtained by Non-Utility Holding
Company, or any direct or indirect Subsidiary of a Non-Utility Holding Company,
from the Utility Subsidiaries, specifying the type of service, the number of
personnel from each associate company providing services during the quarter and
the total dollar value of such services;
(e) An organization chart in the form of Exhibit E hereto,
showing, as of the end of such quarterly period, all associated companies of
FirstEnergy, in addition to each Non-Utility Holding Company, that are Exempt
Subsidiaries (identifying each as an EWG, FUCO or ETC, as applicable), Rule 58
Subsidiaries, Energy Related Companies and other Non-Exempt Subsidiaries
(identifying each as an Intermediate Subsidiary or Financing Subsidiary, as
applicable); and FirstEnergy's percentage equity ownership in each such entity;
(f) A description of the type and amount and, if a debt
instrument, the maturity and interest rate, of any securities (including
guarantees) issued by a Non-Utility Holding Company and each Non-Exempt
Subsidiary pursuant to Rule 52 or Rule 45(b), as applicable; and
----------
(25) Subsidiaries that are Rule 58 Subsidiaries will also continue to file
quarterly reports on Form U-9C-3. In addition, FirstEnergy will provide
such information as may be required by Form U5S with respect to any EWGs or
FUCOs in which it may acquire an interest.
35
(g) The notional amount, identity of counterparty, and principal
terms of any Anticipatory Hedge transaction entered into by Non-Utility Holding
Company, or any direct or indirect Non-Exempt Subsidiary of Non-Utility Holding
Company.
ITEM 2. FEES, COMMISSIONS AND EXPENSES
------------------------------
The fees, commissions and expenses incurred or to be incurred in
connection with the preparation and filing of this Application/Declaration will
not exceed $50,000. The fees, commissions and expenses to be incurred in
connection with any specific financing transaction proposed herein will be
within the parameters set forth in Item 1.5 above.
ITEM 3. APPLICABLE STATUTORY PROVISIONS
-------------------------------
3.1 General. Sections 6(a), 7, 9(a), 10, 12 and 13(b) of the Act and
Rules 26(c), 42, 43, 45, 46, 53, 54, 87(b), and 90 - 92 thereunder are
considered applicable to the proposed transactions.
3.2 Rules 53 and 54. The proposed transactions are also subject to the
requirements of Rules 53 and Rule 54. Under Rule 53(a), the Commission shall not
make certain specified findings under Sections 7 and 12 in connection with a
proposal by a holding company to issue securities for the purpose of acquiring
the securities of or other interest in an EWG, or to guarantee the securities of
an EWG, if each of the conditions in paragraphs (a)(1) through (a)(4) thereof
are met, provided that none of the conditions specified in paragraphs (b)(1)
through (b)(3) of Rule 53 exists. Rule 54 provides that the Commission shall not
consider the effect of the capitalization or earnings of subsidiaries of a
registered holding company that are EWGs or FUCOs in determining whether to
approve other transactions if Rule 53(a), (b) and (c) are satisfied.
FirstEnergy currently meets all of the conditions of Rule 53(a), except for
clause (1). In the Merger Order, the Commission, among other things, authorized
FirstEnergy to invest in EWGs and FUCOs so that FirstEnergy's "aggregate
investment," as defined in Rule 53(a)(1), in EWGs and FUCOs does not exceed $5
billion, which $5 billion amount is greater than the amount which would be
permitted by clause (1) of Rule 53(a) which, based on FirstEnergy's consolidated
retained earning of $1.84 billion as of March 31, 2003, would be $920 million.
The Merger Order also specifies that this $5 billion amount may include amounts
invested in EWGs and FUCOs by FirstEnergy and GPU at the time of the Merger
Order ("Current Investments") and amounts relating to possible transfers to EWGs
of certain generating facilities owned by certain of FirstEnergy's operating
utilities ("GenCo Investments"). FirstEnergy has made the commitment that
through June 30, 2003, its aggregate investment in EWGs and FUCOs other than the
Current Investments and GenCo Investments ("Other Investments") will not exceed
$1.5 billion (the "Modified Rule 53 Test"). FirstEnergy requests that the
Commission continue to reserve jurisdiction over Other Investments that exceed
such $1.5 billion amount.
36
As of March 31, 2003, and on the same basis as set forth in the Merger
Order, FirstEnergy's aggregate investment in EWGs and FUCOs was approximately
$1.31 billion,(26) an amount significantly below the $5 billion amount
authorized in the Merger Order. Additionally, as of March 31, 2003, consolidated
retained earnings were $1.84 billion. By way of comparison, FirstEnergy's
consolidated retained earnings as of December 31, 2001 were $1.52 billion.
In any event, even taking into account the capitalization of and earnings
from EWGs and FUCOs in which FirstEnergy currently has an interest, there would
be no basis for the Commission to withhold approval of the transactions proposed
herein. With respect to capitalization, since the date of the Merger Order,
there has been no material adverse impact on FirstEnergy's consolidated
capitalization resulting from FirstEnergy's investments in EWGs and FUCOs. As of
December 31, 2002, FirstEnergy's consolidated capitalization consisted of 33%
common equity, 1.7% cumulative preferred stock, 1.9% subsidiary - obligated
mandatorily redeemable preferred securities, 58.3% long-term debt and 5.1% notes
payable. As of December 31, 2001, those ratios were as follows: 30.3% common
equity, 3.1% cumulative preferred stock, 2.2% subsidiary-obligated mandatorily
redeemable preferred securities, 60.9% long term debt and 3.5% notes payable.
Additionally, the proposed transactions will not have any material impact on
FirstEnergy's capitalization. Further, since the date of the Merger Order,
FirstEnergy's investments in EWGs and FUCOs have contributed positively to its
level of earnings, other than for the negative impact on earnings due to
FirstEnergy's writedowns of its investments in Avon Energy Partners Holdings
("Avon") and GPU Empresa Distribuidora Electrica Regional S.A. ("Emdersa").(27)
Further, since the date of the Merger Order, and, after taking into account
the effects of the Merger, there has been no material change in FirstEnergy's
level of earnings from EWGs and FUCOs.
The Utility Subsidiaries are financially sound companies as indicated by
their investment grade ratings from the nationally recognized rating agencies
for their senior unsecured debt. The following chart includes a breakdown of the
----------
(26) This $1.31 billion amount represents Current Investments only. As of March
31, 2003, FirstEnergy had no Genco Investments.
(27) At the time of the Merger Order, FirstEnergy identified certain former GPU
EWG and FUCO investments for divestiture within one year. Among those
identified were Avon, a holding company for Midlands Electricity plc, an
electric distribution business in the United Kingdom and Emdersa and
affiliates, an electric distribution business in Argentina. In May 2002,
FirstEnergy sold 79.9% of its interest in Avon, and in the fourth quarter
of 2002, recorded a $50 million charge ($32.5 million net of tax) to reduce
the carrying value of its remaining 20.1% interest. Additionally,
FirstEnergy did not reach a definitive agreement to sell Emdersa as of
December 31, 2002, and therefore, the Emdersa assets could no longer be
treated as "assets pending sale" on the FirstEnergy consolidated balance
sheets. On November 1, 2002, FirstEnergy began consolidating the results of
Emdersa's operations in its financial statements. In the fourth quarter of
2002, FirstEnergy recorded a one-time, after-tax charge of $88.8 million
(comprised of $104.1 million in currency transaction losses arising
principally from U.S. dollar denominated debt, offset by $15.3 million of
operating income). In addition to the currency transaction losses,
FirstEnergy recognized a currency translation adjustment in other
comprehensive income of $91.5 million as of December 31, 2002. These
accounting charges, in the aggregate, resulted in a $212.8 million decrease
in FirstEnergy's consolidated capitalization of $21.55 billion as of
December 31, 2002, which amount includes short-term borrowings.
37
senior, unsecured credit ratings for those Utility Subsidiaries that have
ratings:
Subsidiary Standard & Poors(28) Moody's(29) Fitch(30)
Ohio Edison BBB- Baa2 ---
Cleveland Electric BBB- Baa3 ---
Toledo Edison BBB- Baa3 BB
Penn Power BBB- Baa2 ---
JCP&L BBB --- ---
Met-Ed BBB --- ---
Penelec BBB A2 BBB+
FirstEnergy satisfies all of the other conditions of paragraphs (a) and (b)
of Rule 53. With respect to Rule 53(a)(2), FirstEnergy maintains books and
records in conformity with, and otherwise adheres to, the requirements thereof.
With respect to Rule 53(a)(3), no more than 2% of the employees of FirstEnergy's
domestic public utility companies render services, at any one time, directly or
indirectly, to EWGs or FUCOs in which FirstEnergy directly or indirectly holds
an interest. With respect to Rule 53(a)(4), FirstEnergy will continue to provide
a copy of each application and certificate relating to EWGs and FUCOs and
relevant portions of its Form U5S to each regulator referred to therein, and
will otherwise comply with the requirements thereof concerning the furnishing of
information. With respect to Rule 53(b), none of the circumstances enumerated in
subparagraphs (1), (2) and (3) thereunder have occurred.
ITEM 4. REGULATORY APPROVALS
--------------------
Set forth below is a summary of the regulatory approvals Applicants
have obtained or expect to obtain in connection with the authorizations sought
herein. Except as set forth below, no other state or local regulatory body or
agency, and no other federal commission or agency, has jurisdiction over such
transactions.
4.1 External Financing. No state or federal regulatory body, agency or
commission, other than the Commission, has jurisdiction over the external
financing transactions for which FirstEnergy is seeking authorization. As noted
in Item 1.8.1 above, all external financings by the Utility Subsidiaries will be
exempt from approval by the Commission under Rule 52(a) except for Short-term
Debt of JCP&L, Penelec, Penn Power, Met-Ed, ATSI and NONGC.
4.2 Utility Money Pool.As noted in Item 1.11.1 above, borrowings under
the Utility Money Pool by each of the seven Primary Utility Subsidiaries have
been approved by the relevant state public utility commission and are therefore
exempt under Rule 52(a), subject to applicable borrowing limits. All such state
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(28) Standard & Poor's Rating Services
(29) Moody's Investors Service, Inc.
(30) Fitch, Inc.
38
approvals will be maintained during the Authorization Period to permit each
Primary Utility Subsidiary's continuing participation in the Utility Money Pool.
4.3 Tax Allocation Agreement. Under 66 Pa.C.S.A. ss. 2202, which
relates to contracts and other arrangements between public utilities and their
affiliates, approval of the PPUC is required in order for Penelec, Met-Ed and
Penn Power to become parties to the proposed Tax Allocation Agreement. A copy of
the joint application by Penelec, Met-Ed, and Penn Power with the PPUC for
approval of the Tax Allocation Agreement is filed herewith as Exhibit D-1 and
the secretarial letter noting approval by the PPUC is filed herewith as Exhibit
D-2.
ITEM 5. PROCEDURE
---------
The Commission has issued a notice of filing of this
Application/Declaration, as amended (Holding Co. Act Release No. 27683), and no
hearing has been requested. Accordingly, the Applicants request that an order
approving the transactions proposed herein be issued as soon as the Commission's
rules allow and in any event not later than June 30, 2003. The Applicants
further request that there be no 30-day waiting period between the issuance of
the Commission's order and the date on which it is to become effective. The
Applicants submit that a recommended decision by a hearing or other responsible
officer of the Commission is not needed with respect to the proposed
transactions and that the Division of Investment Management may assist with the
preparation of the Commission's decision and/or order in this matter unless the
Division of Investment Management opposes the matters covered hereby.
ITEM 6. EXHIBITS AND FINANCIAL STATEMENTS
---------------------------------
(a) EXHIBITS.
--------
A-1 Amended Articles of Incorporation of FirstEnergy. (Incorporated
by reference to Exhibit 4(a) Registration Statement on Form S-3
filed on March 17, 2003 in File No. 333-103865)
A-2 FirstEnergy Amended Code of Regulations. (Incorporated by
reference to Exhibit 3 to Annual Report on Form 10-K/A filed on
April 16, 2001 in File No. 333-21011)
B-1 Utility Money Pool Agreement. (Incorporated by reference to
Exhibit N-2 to the Form U-1 Application/Declaration in File No.
70-9793)
B-2 Non-Utility Money Pool Agreement. (Incorporated by reference to
Exhibit N-3 to the Form U-1 Application/Declaration in File No.
70-9793)
B-3 Form of Tax Allocation Agreement. (Previously filed)
B-4 Rights Agreement between FirstEnergy and The Bank of New York, as
rights agent. (Incorporated by reference to Exhibit 4.1 to
39
FirstEnergy's Current Report on Form 8-K, dated December 1, 1997,
in File No. 333-21011)
C-1 Registration Statement on Form S-3, filed March 17, 2003.
(Incorporated by reference to File No. 333-103865)
C-2 Registration Statement on Form S-3, as amended, filed February
11, 2003 (Stock Investment Plan). (Incorporated by reference to
File No. 333-102074)
C-3 Registration Statement on Form S-8, filed November 26, 2002
(Rights Agreement and Deferred Compensation Plans). (Incorporated
by reference to File No. 333-21011)
D-1 Joint Application of Penelec, Met-Ed and Penn Power to the PPUC
for approval of Tax Allocation Agreement. (Filed herewith)(31)
D-2 Secretarial letter noting approval by the PPUC of the Tax
Allocation Agreement. (Filed herewith)
E Organization Chart of FirstEnergy and Subsidiaries. (Form SE -
Paper format only) (Previously filed)
F-1 Opinion of Thelen Reid & Priest LLP. (Filed herewith)
F-2 Opinion of Gary D. Benz, Esq. (Filed herewith)
G Form of Federal Register Notice. (Previously filed)
H Capitalization Ratios of Primary Utility Subsidiaries at December
31, 2002. (Previously filed)
H-1 Capitalization Ratios of FirstEnergy and Primary Utility
Subsidiaries at March 31, 2003. (Filed herewith)
I Table showing components of Acquisition Debt and related interest
expense in 2002. (Filed herewith)(32)
----------
(31) This exhibit is substituted for an exhibit that was incorrectly filed as
part of Amendment No. 1 in this proceeding.
(32) This exhibit is substituted for an exhibit that was incorrectly filed as
part of Amendment No. 1 in this proceeding.
40
J Illustration showing difference in allocation of consolidated
income taxes under Rule 45(c) and proposed Tax Allocation
Agreement. (Previously filed)
K-1 Pro forma capitalization ratios for FirstEnergy consolidated and
Cleveland Electric at year-end 2003 - 2005. (Filed confidentially
pursuant to Rule 104)
K-2 FirstEnergy cash flow projections for years 2003 - 2005. (Filed
confidentially pursuant to Rule 104)
(b) FINANCIAL STATEMENTS.
--------------------
FS-1 FirstEnergy Consolidated Balance Sheets as of December 31, 2002,
and Consolidated Statements of Income, Statement of Retained
Earnings, and Consolidated Statements of Cash Flows for the year
ended December 31, 2002. (Incorporated by reference to
FirstEnergy Form 10-K for the period ended December 31, 2002)
(File No. 333-21011)
FS-2 Ohio Edison Company Consolidated Balance Sheet as of December 31,
2002, and Consolidated Statements of Income, Statement of
Retained Earnings and Consolidated Condensed Statements of Cash
Flows for the year ended December 31, 2002. (Incorporated by
reference to Ohio Edison Company Form 10-K for the period ended
December 31, 2002) (File No. 1-2578)
FS-3 The Cleveland Electric Illuminating Company Consolidated Balance
Sheet as of December 31, 2002, and Consolidated Statements of
Income, Statement of Retained Earnings and Consolidated Condensed
Statements of Cash Flows for the year ended December 31, 2002.
(Incorporated by reference to The Cleveland Electric Illuminating
Company Form 10-K for the period ended December 31, 2002) (File
No. 1-2323)
FS-4 The Toledo Edison Company Consolidated Balance Sheet as of
December 31, 2002, and Consolidated Statements of Income,
Statement of Retained Earnings and Consolidated Condensed
Statements of Cash Flows for the year ended December 31, 2002.
(Incorporated by reference to The Toledo Edison Company Form 10-K
for the period ended December 31, 2002) (File No. 1-3583)
FS-5 Pennsylvania Power Company Consolidated Balance Sheet as of
December 31, 2002, and Consolidated Statements of Income,
Statement of Retained Earnings, and Consolidated Condensed
Statements of Cash Flows for the year ended December 31, 2002.
41
(Incorporated by reference to Pennsylvania Power Company Form
10-K for the period ended December 31, 2002) (File No. 1-3491)
FS-6 Metropolitan Edison Company Consolidated Balance Sheet as of
December 31, 2002, and Consolidated Statements of Income,
Statement of Retained Earnings and Consolidated Condensed
Statements of Cash Flows for the year ended December 31, 2002.
(Incorporated by reference to Metropolitan Edison Company Form
10-K for the period ended December 31, 2002) (File No. 1-446)
FS-7 Pennsylvania Electric Company Consolidated Balance Sheet as of
December 31, 2002, and Consolidated Statements of Income,
Statement of Retained Earnings and Consolidated Condensed
Statements of Cash Flows for the year ended December 31, 2002.
(Incorporated by reference to Pennsylvania Electric Company Form
10-K for the period ended December 31, 2002) (File No. 1-3522)
FS-8 Jersey Central Power & Light Company Consolidated Balance Sheet
as of December 31, 2002, and Consolidated Statements of Income,
Statement of Retained Earnings and Consolidated Condensed
Statements of Cash Flows for the year ended December 31, 2002.
(Incorporated by reference to Jersey Central Power & Light
Company Form 10-K for the period ended December 31, 2002) (File
No. (File No. 1-3141)
FS-9 FirstEnergy Consolidated Balance Sheets as of March 31, 2003, and
Consolidated Statements of Income, Statement of Retained
Earnings, and Consolidated Statements of Cash Flows for the three
months ended March 31, 2003. (Incorporated by reference to
FirstEnergy Form 10-Q for the period ended March 31, 2003) (File
No. 333-21011)
FS-10 Ohio Edison Company Consolidated Balance Sheet as of March 31,
2003, and Consolidated Statements of Income, Statement of
Retained Earnings and Consolidated Condensed Statements of Cash
Flows for the three months ended March 31, 2003. (Incorporated by
reference to Ohio Edison Company Form 10-Q for the period ended
March 31, 2003) (File No. 1-2578)
FS-11 The Cleveland Electric Illuminating Company Consolidated Balance
Sheet as of March 31, 2003, and Consolidated Statements of
Income, Statement of Retained Earnings and Consolidated Condensed
Statements of Cash Flows for the three months ended March 31,
2003. (Incorporated by reference to The Cleveland Electric
Illuminating Company Form 10-Q for the period ended March 31,
2003) (File No. 1-2323)
FS-12 The Toledo Edison Company Consolidated Balance Sheet as of March
31, 2003, and Consolidated Statements of Income, Statement of
42
Retained Earnings and Consolidated Condensed Statements of Cash
Flows for the three months ended March 31, 2003. (Incorporated by
reference to The Toledo Edison Company Form 10-Q for the period
ended March 31, 2003) (File No. 1-3583)
FS-13 Pennsylvania Power Company Consolidated Balance Sheet as of
March 31, 2003, and Consolidated Statements of Income, Statement
of Retained Earnings, and Consolidated Condensed Statements of
Cash Flows for the three months ended March 31, 2003.
(Incorporated by reference to Pennsylvania Power Company Form
10-Q for the period ended March 31, 2003) (File No. 1-3491)
FS-14 Metropolitan Edison Company Consolidated Balance Sheet as of
March 31, 2003, and Consolidated Statements of Income, Statement
of Retained Earnings and Consolidated Condensed Statements of
Cash Flows for the three months ended March 31, 2003.
(Incorporated by reference to Metropolitan Edison Company Form
10-Q for the period ended March 31, 2003) (File No. 1-446)
FS-15 Pennsylvania Electric Company Consolidated Balance Sheet as of
March 31, 2003, and Consolidated Statements of Income, Statement
of Retained Earnings and Consolidated Condensed Statements of
Cash Flows for the three months ended March 31, 2003.
(Incorporated by reference to Pennsylvania Electric Company Form
10-Q for the period ended March 31, 2003) (File No. 1-3522)
FS-16 Jersey Central Power & Light Company Consolidated Balance Sheet
as of March 31, 2003, and Consolidated Statements of Income,
Statement of Retained Earnings and Consolidated Condensed
Statements of Cash Flows for the three months ended March 31,
2003. (Incorporated by reference to Jersey Central Power & Light
Company Form 10-Q for the period ended March 31, 2003) (File No.
(File No. 1-3141)
There have been no material changes, not in the ordinary course of
business, to the aforementioned balance sheets from March 31, 2003, to the date
of this amended and restated Application/Declaration.
ITEM 7. INFORMATION AS TO ENVIRONMENTAL EFFECTS
---------------------------------------
The proposed transactions do not involve "major federal actions
significantly affecting the quality of the human environment" as set forth in
Section 102(2)(C) of the National Environmental Policy Act, 42 U.S.C. Sec. 4321
et seq. Consummation of the proposed transactions will not result in changes in
the operations of the Applicants that would have any impact on the environment.
No federal agency is preparing an environmental impact statement with respect to
this matter.
43
SIGNATURES
Pursuant to the requirements of the 1935 Act, the undersigned companies
have duly caused this Application/Declaration to be signed on their behalves by
the undersigned thereunto duly authorized.
FirstEnergy Corp.
Ohio Edison Company and its Subsidiaries
The Cleveland Electric Illuminating Company
The Toledo Edison Company
Pennsylvania Power Company
American Transmission Systems, Incorporated
Northeast Ohio Natural Gas Corp.
FE Acquisition Corp.
FirstEnergy Properties, Inc.
FirstEnergy Facilities Services Group, LLC
FE Holdings, LLC
FELHC, Inc.
FirstEnergy Securities Transfer Company
FirstEnergy Nuclear Operating Company
FirstEnergy Solutions Corp.
FirstEnergy Generation Corp.
FirstEnergy Ventures Corp.
Marbel Energy Corporation
Centerior Indemnity Trust
Centerior Service Company
FirstEnergy Service Company
Jersey Central Power & Light Company
Pennsylvania Electric Company
Metropolitan Edison Company
York Haven Power Company
Waverly Electric Power & Light Company
GPU Capital, Inc.
GPU Electric, Inc.
GPU Diversified Holdings, LLC
GPU Enertech Holdings, Inc.
GPU Power, Inc.
GPU Telcom Services, Inc.
GPU Nuclear, Inc.
MYR Group, Inc.
By: /s/ Harvey L. Wagner
----------------
Name: Harvey L. Wagner
Title: Vice President and Controller
Date: June 30, 2003
44