(As filed with the Securities and Exchange Commission on December 2, 2005)
File No. 70-10322
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
The Cleveland Electric Illuminating Company
The Toledo Edison Company
Pennsylvania Power Company
FirstEnergy Nuclear Generation Corp.
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 applicants)
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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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The Application-Declaration filed in this proceeding on July 18, 2005, as
heretofore amended and restated in its entirety by Amendment No. 1, filed on
October 27, 2005, 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.
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FirstEnergy Corp., an Ohio corporation ("FirstEnergy"), is a
registered holding company under the Public Utility Holding Company Act of 1935,
as amended (the "Act")./1/ FirstEnergy directly owns all of the outstanding
common stock of Ohio Edison Company ("Ohio Edison"), The Cleveland Electric
Illuminating Company ("Cleveland Electric"), and The Toledo Edison Company
("Toledo Edison"), and indirectly through Ohio Edison owns all of the
outstanding common stock of Pennsylvania Power Company ("Penn Power")./2/ Ohio
Edison, Penn Power, Cleveland Electric and Toledo Edison are referred to herein
as the "Utility Subsidiaries."
When the transactions described below are completed, FirstEnergy will
become the parent holding company of FirstEnergy Nuclear Generation Corp. ("FE
Nuclear"), a newly organized Ohio corporation. FE Nuclear will be a non-exempt
electric generation company subsidiary of FirstEnergy.
FirstEnergy, the Utility Subsidiaries, and FE Nuclear are referred to
herein as the "Applicants."
1.2 Description of Utility Subsidiaries' Operations.
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Ohio Edison was organized under the laws of the State of Ohio in 1930
and owns property and does business as an electric public utility in that state.
Ohio Edison also has ownership interests in certain generating facilities
located in the Commonwealth of Pennsylvania. Ohio Edison engages in the
generation, distribution and sale of electric energy to communities in a 7,500
square mile area of central and northeastern Ohio having a population of
approximately 2.8 million.
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1 See FirstEnergy Corp., Holding Co. Act Release No. 27459 (Oct. 29, 2001),
as supplemented by Holding Co. Act Release No. 27463 (Nov. 8, 2001) (the
"Merger Order").
2 FirstEnergy's other public utility subsidiaries are Jersey Central Power &
Light Company, Pennsylvania Electric Company, Metropolitan Edison Company,
York Haven Power Company, The Waverly Electric Power & Light Company and
American Transmission Systems, Incorporated. These companies are not
applicants in this proceeding.
2
Ohio Edison owns all of Penn Power's outstanding common stock. Penn
Power was organized under the laws of the Commonwealth of Pennsylvania in 1930
and owns property and does business as an electric public utility in that state.
Penn Power engages in the generation, distribution and sale of electric energy
in a 1,500 square mile-area of western Pennsylvania having a population of
approximately 300,000. Penn Power is also authorized to do business and owns
property in the State of Ohio.
Cleveland Electric was organized under the laws of the State of Ohio
in 1892 and does business as an electric public utility in that state. Cleveland
Electric engages in the generation, distribution and sale of electric energy in
an area of approximately 1,700 square miles in northeastern Ohio having a
population of approximately 1.9 million. It also has ownership interests in
certain generating facilities located in Pennsylvania.
Toledo Edison was organized under the laws of the State of Ohio in
1901 and does business as an electric public utility in that state. Toledo
Edison engages in the generation, distribution and sale of electric energy in an
area of approximately 2,500 square miles in northwestern Ohio having a
population of approximately 800,000. It also has interests in certain generating
facilities located in Pennsylvania.
Filed herewith as Exhibit H is a table showing the components of
consolidated capitalization as of September 30, 2005, of FirstEnergy, Ohio
Edison, Penn Power, Cleveland Electric and Toledo Edison.
The Utility Subsidiaries are requesting authorization herein to
transfer ownership of their respective interests in certain nuclear generating
plants and related assets and liabilities to FE Nuclear. These asset transfers
are in furtherance of FirstEnergy's Ohio and Pennsylvania corporate separation
plans, which were described in FirstEnergy's Application/Declaration for
authorization to merge with GPU, Inc. ("GPU"). In addition, FirstEnergy and FE
Nuclear are requesting authorization to engage in financing and other related
transactions for the period commencing on the effective of the order issued in
this proceeding and ending on February 8, 2006 (the "Authorization Period").
1.3 Transfer of Nuclear Generating Plants to FE Nuclear.
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The Utility Subsidiaries own, as tenants in common, interests in the
following nuclear generating plants:
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Plant Location MW Ownership %
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Beaver Valley 1 Shippingport, PA 821 Ohio Edison 35%
Penn Power 65%
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Beaver Valley 2 Shippingport, PA 831 Ohio Edison 20.22%
Penn Power 13.74%
Cleveland Electric 24.47%
Toledo Edison 1.65%
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3
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Davis-Besse Oak Harbor, OH 883 Cleveland Electric 51.38%
Toledo Edison 48.62%
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Perry North Perry Village, OH 1,260 OES Nuclear 17.42%
Penn Power 5.245%
Toledo Edison 19.91%
Cleveland Electric 44.85%
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The Utility Subsidiaries propose to sell or otherwise transfer their
respective ownership interests in the nuclear plants to FE Nuclear by means of
the following transactions, all of which will be carried out concurrently:/3/
Transfer of Nuclear Plants by Penn Power. Initially, pursuant to the
terms of a Subscription and Capital Contribution Agreement ("Penn Power
Contribution Agreement"), filed herewith as Exhibit B-1, Penn Power will acquire
100 shares of common stock of FE Nuclear in consideration for Penn Power's
contribution to FE Nuclear of its undivided interests in the two Beaver Valley
units and Beaver Valley common facilities and its undivided interest in Perry
Unit 1. In connection with such contribution, FE Nuclear will assume Penn
Power's obligations in respect of $63 million aggregate principal amount of
pollution control revenue bonds ("PCRBs") and certain other liabilities
associated with the transferred units. The parties to the Penn Power
Contribution Agreement have agreed that the value of the contributed assets will
be the net book value thereof as of the end of the fiscal quarter immediately
preceding the closing. Simultaneously, Penn Power will receive from FE Nuclear a
promissory note in the form of Exhibit B-5 hereto ("FE Nuclear Note") in respect
of the book value of certain related assets, including construction work in
progress, nuclear plant decommissioning funds, inventories and spare parts
(totaling, as of September 30, 2005, approximately $328 million), less the
agreed upon value of other liabilities assumed by FE Nuclear (approximately $162
million as of September 30, 2005). The FE Nuclear Note will bear interest at a
rate equal to Penn Power's weighted average cost of long-term debt, determined
as shown in Exhibit I hereto, will mature 20 years after its date of issuance,
and will be prepayable at any time, in whole or in part, by FE Nuclear.
Following the contribution to FE Nuclear, Penn Power will distribute
the stock of FE Nuclear as a dividend to its parent, Ohio Edison, such that FE
Nuclear will become, momentarily, a direct wholly-owned subsidiary of Ohio
Edison. If the transactions described in the previous paragraph had occurred on
September 30, 2005, Penn Power's cost basis for the stock of FE Nuclear would
have been equal to the net book value of the transferred interests in the Beaver
Valley and Perry units and associated assets (approximately $176 million), less
the PCRB obligations ($63 million) and the distribution of the stock of FE
Nuclear to Ohio Edison would have resulted in a charge to Penn Power's retained
earnings of $113 million.
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3 The Utility Subsidiaries do not propose to transfer to FE Nuclear their
remaining percentage ownership interests in Beaver Valley Unit 2
(approximately 40%) and the Perry unit (approximately 12.6%), which are
currently subject to sale and leaseback arrangements with third parties.
4
Transfer of Nuclear Plants by Ohio Edison. Pursuant to the terms of a
Capital Contribution Agreement ("Ohio Edison Contribution Agreement"), filed as
Exhibit B-2 hereto, Ohio Edison will contribute its undivided interests in the
two Beaver Valley units and Beaver Valley common facilities and the common stock
of OES Nuclear Incorporated ("OES Nuclear"), a wholly-owned subsidiary of Ohio
Edison, which holds an undivided interest in Perry Unit 1, together with
associated decommissioning funds and its interests in other assets, inventories,
fuel, spare parts, equipment, supplies and contract rights relating to the
transferred units, to FE Nuclear as an additional capital contribution to FE
Nuclear. In connection with such transfer, FE Nuclear will initially assume Ohio
Edison's obligations in respect of $115 million aggregate principal amount of
PCRB obligations and certain other liabilities associated with the transferred
units. An additional $297 million of Ohio Edison's PCRBs will be assumed and/or
refinanced by FE Nuclear after the distribution described in the next paragraph.
The parties to the Ohio Edison Contribution Agreement have agreed that the value
of the contributed assets will be the net book value thereof as of the end of
the fiscal quarter immediately preceding the closing.
Following the transfer of Ohio Edison's nuclear assets to FE Nuclear,
it is anticipated that OES Nuclear will be merged with and into FE Nuclear, and
Ohio Edison will distribute the stock of FE Nuclear as a dividend to its parent,
FirstEnergy, such that FE Nuclear will momentarily become a direct wholly-owned
subsidiary of FirstEnergy.
If the transactions described above had occurred on September 30,
2005, Ohio Edison's cost basis for the stock of FE Nuclear would have been equal
to the net book value of the transferred interests in the Beaver Valley and
Perry units and associated assets (approximately $514 million), less the initial
PCRB obligations to be assumed at closing ($115 million), less accumulated other
comprehensive income (approximately $7 million) and the agreed upon value of
other liabilities (principally an asset retirement obligation and accumulated
deferred income taxes) assumed by FE Nuclear (totaling approximately $160
million). Simply in order to account for the difference between Ohio Edison's
capital contribution to FE Nuclear and the additional Ohio Edison nuclear assets
which FE Nuclear is acquiring from Ohio Edison as part of the transaction, an
intercompany receivable (represented for accounting purposes by a long term FE
Nuclear Note) will be set up on the Ohio Edison balance sheet in the amount of
$232 million. FE Nuclear will repay that obligation, together with interest
determined as shown on Exhibit I, through the assumption and/or refinancing
after closing of the additional outstanding Ohio Edison PCRBs which, as noted
above, total $297 million, an amount greater than the intercompany receivable
that is created in the transaction.
Sale of Nuclear Plants by Cleveland Electric and Toledo Edison.
Cleveland Electric and Toledo Edison have each entered into a Nuclear Purchase
and Sale Agreement with FE Nuclear ("Nuclear PSA"), filed herewith as Exhibits
B-3 and B-4, respectively, under which FE Nuclear has agreed to purchase
Cleveland Electric's and Toledo Edison's respective undivided ownership
interests in Beaver Valley Unit 2, Perry Unit 1 and Davis-Besse for a purchase
price equal to the net book value thereof, determined as of the end of the
fiscal quarter immediately preceding the closing, together with the respective
interests of Cleveland Electric and Toledo Edison in nuclear decommissioning
trust funds associated with those plants and their respective right, title and
interest in and to all contracts, fuel, spare parts, inventories, equipment,
supplies and other assets associated with each transferred unit, less the amount
of obligations of Cleveland Electric and Toledo Edison under PCRBs associated
with the transferred units ($367 million and $246 million, respectively, as of
5
September 30, 2005) that FE Nuclear has agreed to assume, and the agreed upon
value of certain other liabilities (principally asset retirement obligations and
accumulated deferred income taxes), totaling approximately $343 million and $209
million, respectively, associated with the transferred units.
At closing, FE Nuclear will pay the purchase price, determined as
described in the previous paragraph, by delivering to Cleveland Electric and
Toledo Edison FE Nuclear Notes, in the form of Exhibit B-5 hereto, secured by a
lien on the transferred assets. Each FE Nuclear Note will bear interest at a
rate per annum based on the average weighted cost of long-term debt of Cleveland
Electric and Toledo Edison, as the case may be, determined as shown in Exhibit I
hereto, will mature 20 years after the date of issuance, and will be prepayable
at any time, in whole or in part, at the option of FE Nuclear, without penalty.
If the transactions described above had been consummated as of
September 30, 2005, the principal amounts of the FE Nuclear Notes delivered to
Cleveland Electric and Toledo Edison would have been approximately $993 million
and $706 million, respectively.
The existing PCRB obligations of Cleveland Electric and Toledo Edison
will remain liabilities of those companies. As previously indicated (and as
further described in Item 1.5.1 below), FE Nuclear has agreed to assume the
existing PCRB obligations by entering into agreements with issuing authorities
for the issuance of new PCRBs, the proceeds of which would be used by FE Nuclear
to repay principal of the FE Nuclear Notes issued at closing to Cleveland
Electric and Toledo Edison. Cleveland Electric and Toledo Edison, in turn, will
use the proceeds so received from repayments of FE Nuclear Notes to retire a
like principal amount of the existing PCRB obligations.
Repurchases of Common Stock of Cleveland Electric, Toledo Edison and
Penn Power. In connection with the transfer of the nuclear plants to FE Nuclear,
FirstEnergy intends to make a cash capital contribution to FE Nuclear of up to
$750 million. FE Nuclear will use the proceeds of this investment at or
subsequent to closing to prepay a like amount of the FE Nuclear Notes delivered
at closing to Penn Power, Cleveland Electric and Toledo Edison. In turn, Penn
Power, Cleveland Electric and Toledo Edison will apply the proceeds of such
prepayment of the FE Nuclear Notes, first, to repay outstanding borrowings under
the FirstEnergy System Utility Money Pool ("Money Pool")/4/ and, second, to the
extent that there are any remaining prepayment proceeds, to repurchase shares of
common stock of Cleveland Electric and Toledo Edison that are held by
FirstEnergy and shares of common stock of Penn Power that are held by Ohio
Edison. The purpose of these transactions is to adjust (i.e., reduce) the equity
and debt capitalization of Cleveland Electric, Toledo Edison and Penn Power to
mirror their smaller asset base after the transfer of their undivided interests
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4 The Commission has previously authorized FirstEnergy and the Utility
Subsidiaries to participate in the Utility Money Pool. See FirstEnergy
Corp., et al., Holding Co. Act Release No. 27694 (June 30, 2003) (the "2003
Financing Order"). At September 30, 2005, outstanding borrowings under the
Utility Money Pool by Cleveland Electric, Toledo Edison and Penn Power
totaled $466.4 million, $378.1 million, and $22.2 million, respectively.
6
in the nuclear plants to FE Nuclear. On a pro forma basis, taking into account
the transfer of the nuclear plants to FE Nuclear and the related intercompany
financing transactions, common equity as a percentage of total capitalization of
Cleveland Electric, Toledo Edison, and Penn Power as of September 30, 2005 will
equal 47%, 61% and 72%, respectively./5/ On a pro forma basis, assuming
completion of the transactions described above, the $750 million capital
contribution by FirstEnergy, and FE Nuclear's repayment of the FE Nuclear Notes,
common equity as a percentage of FE Nuclear's total capitalization as of
September 30, 2005 would equal approximately 35%.
1.4 External Debt Financing by FE Nuclear.
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As indicated, upon completion of the transactions described in Item
1.3 above, FE Nuclear will become a direct public-utility subsidiary of
FirstEnergy. It is contemplated that FE Nuclear's requirements for additional
common equity (including the $750 million equity infusion by FirstEnergy at
closing) will be satisfied by capital contributions by FirstEnergy pursuant to
Rule 45(b)(4).
FE Nuclear herein requests authorization to issue and sell to
unaffiliated lenders, from time to time during the Authorization Period,
long-term debt securities having maturities of up to 50 years ("Long-term Debt")
and short-term debt securities having maturities of less than one year
("Short-term Debt") in an aggregate amount at any time outstanding not to exceed
$1.5 billion (the "FE Nuclear Debt Limit"). The following general terms will be
applicable where appropriate to Long-term Debt and Short-term Debt of FE
Nuclear:
Effective Cost of Money. The effective cost of capital (i.e., the
aggregate of all payments, including interest, dividend distributions and other
periodic payments) in respect of Long-term Debt and Short-term Debt of FE
Nuclear will not exceed competitive market rates available at the time of
issuance for securities having the same or reasonably similar terms and
conditions issued by similar companies of reasonably comparable credit quality;
provided that, in no event will the effective cost of capital (i) on Long-term
Debt exceed at the time of issuance 500 basis points over the yield to maturity
of comparable-term U.S. Treasury securities if the interest rate on such
Long-term Debt securities is a fixed rate or, if the rate on such Long-term Debt
securities is a floating rate, 500 basis points over the London Interbank
Offered Rate ("LIBOR") for maturities of less than one year; and (ii) on
Short-term Debt exceed at the time of issuance, (A) in the case of commercial
paper or any other short-term borrowing that is not tied to a reference rate,
300 basis points over LIBOR, and (B) in the case of any short-term borrowing
that is tied to a reference rate, either (1) 300 basis points over LIBOR, (2) 50
basis points over the prime rate, as announced from time to time by CitiBank, or
any successor thereto, or (3) 100 basis points over the Federal Funds Rate,
whichever reference rate is applicable.
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5 See pro forma balance sheets of Penn Power, Cleveland Electric and Toledo
Edison, filed herewith as Exhibits FS-12, FS-13 and FS-14, respectively.
Since the aggregate of Money Pool borrowings by Penn Power, Cleveland
Electric and Toledo Edison exceeds $750 million at September 30, 2005, the
pro formas do not reflect any stock repurchases.
7
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.
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 FE Nuclear, financing of
working capital requirements of FE Nuclear, the acquisition, retirement or
redemption of securities (including PCRB obligations) previously issued by or on
behalf FE Nuclear, and other lawful purposes. 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.
Common Equity Ratio. FE Nuclear and each of the Utility Subsidiaries
commits that it will maintain common equity as a percentage of consolidated
capitalization (common stock equity, long-term debt and short-term debt,
including current maturities of long-term debt) at 30% or higher.
Ratings Event. With respect to the securities issuance authority
proposed in this Application/Declaration: (a) within four business days after
the occurrence of a Ratings Event,/6/ Applicants will notify the Commission of
its occurrence (by means of a letter, via fax, email or overnight mail to the
Office of Public Utility Regulation), and (b) within 30 days after the
occurrence of a Ratings Event, Applicants will submit a post-effective amendment
to this Application/Declaration explaining the material facts and circumstances
relating to that Ratings Event (including the basis on which, taking into
account the interests of investors, consumers and the public as well as other
applicable criteria under the Act, it remains appropriate for FE Nuclear to
issue the securities for which authorization has been requested in this
Application/Declaration, so long as FE Nuclear continues to comply with the
other applicable terms and conditions specified in the Commission's order
authorizing the transactions requested in this Application/Declaration).
Furthermore, except in accordance with a further order of the Commission, no
securities authorized as a result of this Application/Declaration will be issued
following the 60th day after a Ratings Event (other than Short-term Debt) if the
downgraded rating(s) has or have not been upgraded to investment grade.
Applicants request that the Commission reserve jurisdiction, through the
remainder of the Authorization Period, over the issuance of any securities
(other than Short-term Debt) that FE Nuclear is prohibited from issuing as a
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6 A "Ratings Event" will be deemed to have occurred if, during the
Authorization Period, (i) any security issued by FirstEnergy or FE Nuclear
upon original issuance, if rated, is rated below investment grade, or (ii)
any outstanding security of FirstEnergy or FE Nuclear that is rated is
downgraded below investment grade. For purposes of this provision, a
security will be deemed "investment grade" if it is rated investment grade
by at least one nationally recognized statistical rating organization, as
that term is used in paragraphs (c)(2)(vi)(E), (F) and (H) of rule 15c3-1
of the Securities Exchange Act of 1934, as amended).
8
result of the occurrence of a Ratings Event if no revised rating reflecting an
investment grade rating has been issued.
1.5 Description of Specific Types of External Debt Securities
of FE Nuclear.
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All debt securities issued by FE Nuclear 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 1.4 above.
1.5.1. Long-term Debt. 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 FE Nuclear may
determine at the time of issuance. Any Long-term Debt (a) may be secured or
unsecured, (b) may be senior or subordinated, (c) will have maturities ranging
from one to 50 years, (d) 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, (e) may be entitled to mandatory or optional sinking
fund provisions, (f) may provide for reset of the coupon pursuant to a
remarketing arrangement, (g) 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, (h) may be called from existing investors by a third party, and
(i) may be entitled to the benefit of affirmative or negative financial or other
covenants.
Long-term Debt may also be in the form of agreements between FE
Nuclear and one or more industrial development authorities ("IDAs") pursuant to
which an IDA agrees to issue PCRBs for the purpose of financing or refinancing
pollution control revenue facilities relating to FE Nuclear's nuclear power
plants./7/ Under the terms of any such agreement, payments to the issuing IDA
would be designed to match payments of principal of and interest on the PCRBs to
which such agreement relates.
As security for FE Nuclear's obligations under any agreement relating
to any series of PCRBs, FE Nuclear requests authority to (1) issue its
promissory note or notes to evidence the loan to FE Nuclear of the proceeds of
the PCRBs by the issuing IDA, (2) acquire and deliver a letter of credit ("LOC")
guaranteeing payment of the PCRBs and enter into reimbursement agreements with
respect to any such LOC, (3) acquire insurance policies guaranteeing payment of
the PCRBs, and/or (4) pledge its first mortgage bonds as collateral for its
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7 As described in Item 1.3 above, in connection with the transfer of the
nuclear plants to FE Nuclear, FE Nuclear will assume approximately $1.1
billion of PCRB obligations of the Utility Subsidiaries. FE Nuclear
proposes to enter into agreements with the issuing IDAs to refinance these
outstanding PCRBs.
9
obligations to the issuing IDA, any trustee, LOC bank or PCRB insurer./8/ To
avoid double counting, it is proposed that the amount of any note or notes
issued by FE Nuclear to evidence the loan to FE Nuclear of the proceeds of any
PCRBs or first mortgage bonds issued by FE Nuclear as collateral security for
PCRB obligations not count against the FE Nuclear Debt Limit.
The maturity date and interest rate and the redemption, sinking fund,
tender or repurchase features, if any, with respect to Long-term Debt of a
particular series (including any PCRBs), as well as any associated placement,
underwriting or selling agent fees, commissions and discounts, if any, will be
established by negotiation or competitive bidding.
1.5.2. Short-term Debt. Short-term Debt of FE Nuclear may be in
the form of commercial paper, promissory notes and/or other forms of unsecured
short-term indebtedness. FE Nuclear may 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 FE
Nuclear Debt Limit. Credit lines may be set up for use by FE Nuclear for general
corporate purposes in addition to credit lines to support commercial paper as
described in this subsection. FE Nuclear will borrow and repay under such lines
of credit, from time to time, as it is deemed appropriate or necessary. FE
Nuclear 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.
Commercial paper would be sold 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 FE Nuclear 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 Intrasystem Financing Transactions.
----------------------------------
FE Nuclear further requests authorization to make direct long-term and
short-term borrowings from FirstEnergy ("Direct Borrowings"). All such Direct
Borrowings would be evidenced by FE Nuclear's promissory notes and would be
prepayable at any time without premium or penalty at FE Nuclear's option. The
aggregate principal amount of Direct Borrowings by FE Nuclear at any time
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8 FirstEnergy may also guarantee PCRB obligations of FE Nuclear pursuant to
the authority previously granted under the 2003 Financing Order or any
subsequent order issued by the Commission that authorizes FirstEnergy to
guarantee obligations of its subsidiaries.
10
outstanding will be counted against and will in no event exceed the FE Nuclear
Debt Limit. The interest rate and maturity of any Direct Borrowings will be
designed to parallel the terms (i.e, effective cost of funds and maturity) of
similar debt securities issued by FirstEnergy, as authorized by the Commission
in a separate proceeding./9/
In addition, FE Nuclear requests authorization to become a participant
in and to make borrowings under the FirstEnergy System Non-Utility Money Pool
Agreement ("Non-Utility Money Pool") subject to terms and conditions previously
approved by the Commission./10/ FE Nuclear requests authorization to borrow up
to $1 billion at any time outstanding under the Non-Utility Money Pool.
Borrowings by FE Nuclear under the Non-Utility Money Pool would also be counted
against the proposed FE Nuclear Debt Limit.
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 are
not expected to exceed $35,000.
ITEM 3. APPLICABLE STATUTORY PROVISIONS
-------------------------------
3.1 General.
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Sections 9(a) and 10 of the Act are applicable to Penn Power's
acquisition of the common stock of FE Nuclear, and Sections 9(a), 10, and 12(b)
of the Act and Rule 45 thereunder are applicable to the proposed acquisition by
the Utility Subsidiaries of the FE Nuclear Notes. Sections 12(d) and 12(f) of
the Act and Rules 43 and 44 thereunder are applicable to the transfer by the
Utility Subsidiaries of their respective interests in the nuclear plants to FE
Nuclear, and Section 12(b) of the Act and Rule 45 thereunder are applicable to
FE Nuclear's assumption of PCRB obligations and other liabilities of the Utility
Subsidiaries related to the transferred nuclear plants. Sections 9(a), 10 and
12(c) of the Act are applicable to the proposed acquisition by Cleveland
Electric and Toledo Edison of shares of their common stock held by FirstEnergy
and to the proposed acquisition by Penn Power of shares of its common stock held
by Ohio Edison. Section 12(c) of the Act and Rule 46 thereunder are applicable
to the transfer, by in-kind dividend, of the common stock of FE Nuclear by Penn
Power to Ohio Edison and of the common stock of FE Nuclear by Ohio Edison to
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9 Under the 2003 Financing Order, FirstEnergy is authorized to issue
long-term and short-term debt securities, subject to various restrictions
and limitations, from time to time through December 31, 2005. FirstEnergy
has filed a post-effective amendment in File No. 70-10122 to request an
extension to the authorization period under the 2003 Financing Order
through February 8, 2006.
10 Under the 2003 Financing Order, FirstEnergy is currently authorized to
maintain and make loans to its non-utility subsidiaries through the
Non-Utility Money Pool. Although FE Nuclear will be an "electric utility
company" for purposes of the Act, it will not be a state-regulated utility
and therefore will be considered to be on the non-regulated side of
FirstEnergy's business.
11
FirstEnergy. However, the dividend distribution will be charged to retained
earnings and not to capital or unearned surplus and, therefore, should not
require separate authorization by the Commission. Sections 6(a) and 7 of the Act
are applicable to FE Nuclear's issuance of Long-term Debt and Short-term Debt.
Sections 6(a), 7, 9, 10, and 12(b) of the Act are or may be applicable to
agreements FE Nuclear enters into with respect to PCRBs and to the intrasystem
financing transactions described herein.
3.2 Rules 53 and 54.
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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 any "exempt wholesale generator" ("EWG"), or to guarantee the
securities of any 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 "foreign utility
companies" ("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). Under the Merger Order and 2003 Financing Order, the
Commission, among other things, authorized FirstEnergy to invest in EWGs and
FUCOs so long as 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," also as defined
in Rule 53(a)(1), of $2.1 billion as of September 30, 2005, would be $1.05
billion. The Merger Order and 2003 Financing Order also specify 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 December 31, 2005, 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"). Under
the Merger Order and 2003 Financing Order, the Commission reserved jurisdiction
over Other Investments that exceed such $1.5 billion amount.
As of September 30, 2005, pro forma to take into account the recent
transfer of certain fossil and hydroelectric generating plants of the Utility
Subsidiaries to FirstEnergy Generation Corp., FirstEnergy's aggregate investment
in EWGs and FUCOs was approximately $2.5 billion,/11/ an amount significantly
below the $5 billion amount authorized in the Merger Order and 2003 Financing
Order. Additionally, as of September 30, 2005, FirstEnergy's consolidated
----------
11 This $2.5 billion amount represents Current Investments and GenCo
Investments.
12
retained earnings were $2.1 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 September 30, 2005, FirstEnergy's consolidated capitalization
consisted of 44.9% common equity, 0.9% cumulative preferred stock, 52.9%
long-term debt and 1.3% 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 impact on FirstEnergy's consolidated 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")./12/
The domestic public utility subsidiaries of FirstEnergy are
financially sound companies as indicated by their investment grade ratings from
the nationally recognized rating agencies for their senior secured debt. The
following chart includes a breakdown of the senior, secured credit ratings for
those utility subsidiaries that currently have ratings for senior, secured debt:
----------
12 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. The remaining 20.1%
interest in Avon was sold on January 16, 2004. Through 2002, FirstEnergy
was unsuccessful in divesting GPU's former Argentina operations and made
the decision to abandon its interest in Emdersa in early 2003. On April 18,
2003, FirstEnergy divested its ownership in Emdersa through the abandonment
of its shares in Emdersa's parent company. FirstEnergy included in
discontinued operations Emdersa's net income of $7 million and a $67
million charge for the abandonment in the second quarter of 2003. An
after-tax loss of $87 million (including $109 million in currency
transaction losses arising principally from U.S. dollar denominated debt)
was included in discontinued operations in 2002. In December 2003, Emdersa
Guaracachi S. A. ("EGSA"), GPU Power's Bolivia subsidiary, was sold to
Bolivia Integrated Energy Limited. FirstEnergy included in discontinued
operations a $33 million loss on the sale of EGSA in the fourth quarter of
2003 and an operating loss for the year of $2 million. On January 30, 2004,
FirstEnergy sold its 28.67% interest in Termobarranquilla S. A., Empresa de
Servicios Publicos ("TEBSA") for $12 million. An impairment loss of $26
million related to TEBSA was recorded in December 2003 in Other Operating
Expenses on the consolidated statement of income and no gain or loss was
recognized upon the sale in 2004.
13
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Subsidiary Standard & Poors/13/ Moody's/14/ Fitch/15/
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Cleveland Electric BBB Baa2 BBB-
Toledo Edison BBB Baa2 BBB-
Penn Power BBB+ Baa1 BBB+
Jersey Central Power BBB+ Baa1 BBB+
Metropolitan Edison Co. BBB+ Baa1 BBB+
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Ohio Edison and Pennsylvania Electric Company no longer have ratings
for the senior secured debt category. However, Ohio Edison's senior unsecured
debt is rated BBB- by S&P, Baa2 by Moodys and BBB by Fitch; and Pennsylvania
Electric Company's senior unsecured debt is rated BBB by S&P, Baa2 by Moodys and
BBB by Fitch.
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
--------------------
The transfer of the Utility Subsidiaries' interests in the nuclear
power plants to FE Nuclear has been approved by the Federal Energy Regulatory
Commission ("FERC") and the Nuclear Regulatory Commission ("NRC"). (See Exhibits
D-4 and D-6(a) and D-6(b).) In addition, Penn Power has obtained approval from
the Pennsylvania Public Utility Commission ("PPUC") for the proposed
transactions under Pennsylvania's affiliated interest statute. (See Exhibit
D-2.) No other state or federal commission or agency, other than this
Commission, has jurisdiction over the transactions for which authorization is
sought in this amended Application/Declaration.
----------
13 Standard & Poor's Rating Services
14 Moody's Investors Service, Inc.
15 Fitch, Inc.
14
ITEM 5. PROCEDURE
---------
The Commission has issued a notice of filing of this
Application/Declaration (Holding Co. Act Release No. 28051) and no hearing has
been requested. It is requested that the Commission issue an order approving the
transactions proposed herein as soon as practicable. 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 Articles of Incorporation of FirstEnergy Nuclear Generation
Corp. (previously filed).
B-1 Nuclear Subscription and Capital Contribution Agreement by and
between Pennsylvania Power Company and FirstEnergy Nuclear
Generation Corp. (previously filed).
B-2 Nuclear Capital Contribution Agreement by and between Ohio
Edison Company and FirstEnergy Nuclear Generation Corp.
(previously filed).
B-3 Nuclear Purchase and Sale Agreement by and between The
Cleveland Electric Illuminating Company, as Seller, and
FirstEnergy Nuclear Generation Corp., as Purchaser (previously
filed).
B-4 Nuclear Purchase and Sale Agreement by and between The Toledo
Edison Company, as Seller, and FirstEnergy Nuclear Generation
Corp., as Purchaser (previously filed).
B-5 Form of FE Nuclear Note (previously filed).
C Not applicable.
D-1 Application of Penn Power to Pennsylvania Public Utility
Commission for Approval of Affiliated Interest Agreements
(previously filed).
D-2 Order of the Pennsylvania Public Utility Commission Approving
Affiliated Interest Agreements (previously filed).
D-3 Application filed with the Federal Energy Regulatory
Commission (previously filed).
D-4 Order of the Federal Energy Regulatory Commission (previously
filed).
15
D-5(a) Application filed with the Nuclear Regulatory Commission by
Ohio Utility Applicants (previously filed).
D-5(b) Application filed with the Nuclear Regulatory Commission by
Penn Power (previously filed).
D-6 Order of the Nuclear Regulatory Commission Approving Transfer
of Licenses and Conforming Amendments (filed herewith).
E Not applicable.
F-1 Opinion of Thelen Reid & Priest, LLP (filed herewith).
F-2 Opinion of Gary Benz, Esq. (filed herewith).
G Form of Federal Register Notice (previously filed).
H Consolidated Capitalization Ratios of FirstEnergy, Ohio
Edison, Penn Power, Cleveland Electric and Toledo Edison as of
September 30, 2005, actual and pro forma (revised exhibit
filed herewith).
I Average Weighted Cost of Long-term Debt of Utility
Subsidiaries as of September 30, 2005 (previously filed).
(B) FINANCIAL STATEMENTS.
--------------------
FS-1 FirstEnergy Corp. Consolidated Balance Sheets as of December
31, 2004, and Consolidated Statements of Income, Statement of
Retained Earnings, and Consolidated Statements of Cash Flows
for the year ended December 31, 2004. (Incorporated by
reference to FirstEnergy Form 10-K for the period ended
December 31, 2004) (File No. 333-21011).
FS-2 Ohio Edison Company Consolidated Balance Sheet as of December
31, 2004, and Consolidated Statements of Income, Statement of
Retained Earnings and Consolidated Condensed Statements of
Cash Flows for the year ended December 31, 2004. (Incorporated
by reference to Ohio Edison Company Form 10-K for the period
ended December 31, 2004) (File No. 1-2578).
FS-3 The Cleveland Electric Illuminating Company Consolidated
Balance Sheet as of December 31, 2004, and Consolidated
Statements of Income, Statement of Retained Earnings and
Consolidated Condensed Statements of Cash Flows for the year
ended December 31, 2004. (Incorporated by reference to The
Cleveland Electric Illuminating Company Form 10-K for the
period ended December 31, 2004) (File No. 1-2323).
FS-4 The Toledo Edison Company Consolidated Balance Sheet as of
December 31, 2004, and Consolidated Statements of Income,
Statement of Retained Earnings and Consolidated Condensed
16
Statements of Cash Flows for the year ended December 31, 2004.
(Incorporated by reference to The Toledo Edison Company Form
10-K for the period ended December 31, 2004) (File No.
1-3583).
FS-5 Pennsylvania Power Company Consolidated Balance Sheet as of
December 31, 2004, and Consolidated Statements of Income,
Statement of Retained Earnings, and Consolidated Condensed
Statements of Cash Flows for the year ended December 31, 2004.
(Incorporated by reference to Pennsylvania Power Company Form
10-K for the period ended December 31, 2004) (File No.
1-3491).
FS-6 FirstEnergy Corp. Consolidated Balance Sheets as of September
30, 2005, and Consolidated Statements of Income, Statement of
Retained Earnings, and Consolidated Statements of Cash Flows
for the nine months ended September 30, 2005. (Incorporated by
reference to FirstEnergy Form 10-Q for the period ended
September 30, 2005) (File No. 333-21011).
FS-7 Ohio Edison Company Consolidated Balance Sheet as of September
30, 2005, and Consolidated Statements of Income, Statement of
Retained Earnings and Consolidated Condensed Statements of
Cash Flows for the nine months ended September 30, 2005.
(Incorporated by reference to Ohio Edison Company Form 10-Q
for the period ended September 30, 2005) (File No. 1-2578).
FS-8 The Cleveland Electric Illuminating Company Consolidated
Balance Sheet as of September 30, 2005, and Consolidated
Statements of Income, Statement of Retained Earnings and
Consolidated Condensed Statements of Cash Flows for the nine
months ended September 30, 2005. (Incorporated by reference to
The Cleveland Electric Illuminating Company Form 10-Q for the
period ended September 30, 2005) (File No. 1-2323).
FS-9 The Toledo Edison Company Consolidated Balance Sheet as of
September 30, 2005, and Consolidated Statements of Income,
Statement of Retained Earnings and Consolidated Condensed
Statements of Cash Flows for the nine months ended September
30, 2005. (Incorporated by reference to The Toledo Edison
Company Form 10-Q for the period ended September 30, 2005)
(File No. 1-3583).
FS-10 Pennsylvania Power Company Consolidated Balance Sheet as of
September 30, 2005, and Consolidated Statements of Income,
Statement of Retained Earnings, and Consolidated Condensed
Statements of Cash Flows for the nine months ended September
30, 2005. (Incorporated by reference to Pennsylvania Power
Company Form 10-Q for the period ended September 30, 2005)
(File No. 1-3491).
17
FS-11 Pro forma Balance Sheet of Ohio Edison Company, together with
journal entries (revised exhibit filed herewith).
FS-12 Pro forma Balance Sheet of Pennsylvania Power Company,
together with journal entries (revised exhibit filed
herewith).
FS-13 Pro forma Balance Sheet of Cleveland Electric Illuminating
Company, together with journal entries (revised exhibit filed
herewith).
FS-14 Pro forma Balance Sheet of Toledo Edison Company, together
with journal entries (revised exhibit filed herewith).
FS-15 Pro forma Balance Sheet of FirstEnergy Corp. (stand-alone),
together with journal entries (revised exhibit filed
herewith).
FS-16 Pro forma Balance Sheet of FirstEnergy Nuclear Generation
Corp. (revised exhibit filed herewith).
There have been no material changes, not in the ordinary course of
business, to the aforementioned balance sheets from September 30, 2005, to the
date of this 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.
18
SIGNATURES
Pursuant to the requirements of the 1935 Act, the undersigned
companies have duly caused this amended Application/Declaration to be signed on
their behalves by the undersigned thereunto duly authorized.
FirstEnergy Corp.
Ohio Edison Company
The Cleveland Electric Illuminating Company
The Toledo Edison Company
Pennsylvania Power Company
FirstEnergy Nuclear Generation Corp.
By: /s/ Harvey L. Wagner
----------------
Name: Harvey L. Wagner
Title: Vice President, Controller and
Chief Accounting Officer
Date: December 2, 2005
19