File No. 70-______
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
APPLICATION
on
FORM U-1
under the
PUBLIC UTILITY HOLDING COMPANY ACT OF 1935 ("Act")
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FIRSTENERGY CORP.
76 South Main Street
Akron, Ohio 44308
OHIO EDISON COMPANY
76 South Main Street
Akron, Ohio 44308
The Cleveland Electric Illuminating Company
76 South Main Street
Akron, Ohio 44308
The Toledo Edison Company
76 South Main Street
Akron, Ohio 44308
Pennsylvania Power Company
1 E. Washington Street
P.O. Box 891
New Castle, PA 16103
Metropolitan Edison Company
2800 Pottsville Pike
Reading, PA 19640-0001
Pennsylvania Electric Company
1001 Broad Street
Johnstown, PA 15907
Jersey Central Power & Light Company
Madison Avenue at Punch Bowl Road
Morristown, NJ 07060-9871
American Transmission Systems, Incorporated
76 South Main Street
Akron, Ohio 44308
(Names of companies filing this statement and
addresses of principal executive offices )
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FIRSTENERGY CORP.
76 South Main Street
Akron, Ohio 44308
(Name of top registered holding company,
parent of each applicant or declarant)
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Leila L. Vespoli Douglas E. Davidson, Esq.
Senior Vice President Thelen Reid & Priest LLP
and General Counsel 40 West 57th Street
FirstEnergy Corp. New York, New York 10019
76 South Main Street
Akron, Ohio 44308
(Names and addresses of agents for service)
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ITEM 1. DESCRIPTION OF PROPOSED TRANSACTION.
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A. FirstEnergy Corp., an Ohio corporation ("FirstEnergy"), a registered
holding company under the Act, holds, directly or indirectly, all of the
outstanding common stock of eight electric utility operating subsidiaries ---
Ohio Edison Company, The Cleveland Electric Illuminating Company, The Toledo
Edison Company, American Transmission Systems, Incorporated , Jersey Central
Power & Light Company, Metropolitan Edison Company, Pennsylvania Electric
Company, and Pennsylvania Power Company (collectively, the "Applicants"). The
Applicants' combined service areas encompass approximately 37,200 square miles
in Ohio, New Jersey and Pennsylvania. The areas they serve have a combined
population of approximately 11.0 million. By this Application, the Applicants
hereby request authorization pursuant to Section 9(c)(3) of the Act to invest,
directly or through subsidiaries, in one or more low-income housing projects
that qualify or will qualify for tax credits under Section 42 of the Internal
Revenue Code ("Code") and historic building or other qualified rehabilitation
projects that qualify or will qualify for tax credits under Section 47 of the
Code (collectively, "Tax Credit Projects").
B. By Order dated October 29, 2001 (HCAR No. 27459) (the "Merger
Order"), the Commission authorized, among other things, the merger between
FirstEnergy and GPU, Inc. ("GPU"), a Pennsylvania corporation. The merger became
effective on November 7, 2001, with FirstEnergy being the surviving entity. In
the Merger Order, the Commission also authorized, among other things,
FirstEnergy and its subsidiaries to retain investments then held by FirstEnergy
in low income housing properties that qualify for Low Income Housing Tax Credits
("LIHTC") under Section 42 of the Code. As of December 31, 2001, FirstEnergy and
its subsidiaries collectively held passive LIHTC investments totaling
approximately $102 million in various separate limited partnerships or limited
liability companies (LLCs) that own and manage low-income housing properties.
Neither FirstEnergy nor any of its subsidiaries has made any further such
investments since the merger. Neither FirstEnergy nor any of its subsidiaries
participates actively in the development, management, or operation of these
properties. In each case, responsibility for the day-to-day management of these
ventures resides in the general partner or managing member of the venture (in
the case of LLCs)1 or in an independent management company.
Attached hereto as Exhibit H is a list of LIHTC project investments
currently held by FirstEnergy and its subsidiaries, and the aggregate investment
in such projects as of December 31, 2001.
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1 State LLC statutes typically allow the members of an LLC to provide for the
management of the LLC by a managing member. See, e.g., Delaware Limited
Liability Company Act, ss.18-402. As indicated below, Applicants represent
that they will invest in LLCs only as a non-managing member, and that their
rights (including consent rights) under the relevant membership agreement
will be no greater than the rights typically accorded limited partners
under a limited partnership statute.
3
C. Proposal to Invest in Additional Projects. Applicants, directly or
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through one or more subsidiaries, propose to invest an aggregate of up to $100
million from time to time through December 31, 2007 in existing or new LIHTC
projects located anywhere within the United States and historic building or
other qualified rehabilitated building projects ("Section 47 Projects") located
within the service territories of the Applicants (collectively, "Tax Credit
Projects") that qualify or are expected to qualify for the Federal and/or State
tax credits. As in the past, FirstEnergy will not take any active role in the
development, management or operation of any Tax Credit Project and will not
acquire any interest in any venture holding a Tax Credit Project if, as a result
thereof, such venture would become an "affiliate," as defined under Section
2(a)(11) of the Act, of FirstEnergy. Accordingly, Applicants will invest in such
ventures as a limited partner in one or more limited partnerships and/or as a
non-managing member in one or more LLCs, with rights that are substantially the
same as rights typically accorded limited partners under limited partnership
statutes.2
Applicants will continue to undertake appropriate due diligence
activities in connection with such investments and manage such investments in
order to protect the tax credits that each Tax Credit Project is entitled to and
to assure that the physical properties are properly maintained. These activities
will include reviewing and analyzing financial statements generated by the
general partners, managing member or third-party property manager against the
approved budget for the investments and conducting due diligence assessments to
determine that the properties remain in compliance with the provisions of all
applicable Federal and State regulations. Investment
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2 Under limited partnership statutes that have been adopted in most states,
limited partners may not participate in the control of the business of the
partnership without risking becoming liable to third parties for the
obligations of the partnership. See, e.g., Delaware Revised Uniform Limited
Partnership Act, as amended 2001 ("DRULPA"), ss.17-303(a). However, such
statutes typically provide that specified actions by a limited partner will
not constitute participation in the control of the business of the
partnership, such as consulting with the general partner, requesting
meetings of the partnership, or exercising the right to consent to limited
number of actions by the partnership that could affect the limited
partners' rights. See, e.g., DRULPA, ss.17-303(b). Consistent with consent
rights that may be exercised by limited partners under any applicable
limited partnership statute, Applicants anticipate that, as a limited
partner, they would typically have the right to approve all or some of the
following actions: the dissolution and winding up of the partnership; any
sale, exchange or mortgage of partnership assets; the admission of new
partners; the incurrence or renewal of any indebtedness of the partnership;
any change in the nature of the business of the partnership; any amendment
to the partnership agreement; a merger or consolidation; indemnification of
any partner; and any transaction involving an actual or potential conflict
of interest. Such approval rights are necessary and appropriate in order to
enable limited partners to protect their interests in the partnership.
Applicants represent that their rights (including consent rights) as
non-managing members in any manager-managed LLC will be no greater that
those of a limited partner in a limited partnership.
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management in this context may also include on-site inspections to determine
that the physical structures and grounds are maintained as quality affordable
housing.
In general, a separate limited partnership or manager-managed LLC would
be established for each new qualifying Tax Credit Project. This structure will
allow for financing each Tax Credit Project on a stand-alone basis under the
control of an unaffiliated third party, insulate each investment property from
any liabilities that may arise in connection with the development or management
of any other Tax Credit Project, and facilitate compliance with the requirements
of Sections 42 of the Code (as applicable to low income housing properties) and
Section 47 of the Code (as applicable to certified historic structures and other
qualified rehabilitated buildings).
Opportunities to invest in a specific Tax Credit Project, directly or
through investments in syndicated funds, are evaluated by FirstEnergy's
Investment Management Department in conjunction with the Tax Department on a
case-by-case basis. The financial analysis considers the future cash flows
related to the capital contribution made and the expected tax credits that will
be earned by the partnership or LLC over the term of the investment. Since each
investment is analyzed on a case-by-case basis, this economic analysis is
modified to account for differing assumptions.
As described above, this Application does not seek approval to invest
in any specific partnership or LLC, but rather seeks general approval for the
investment of up to an aggregate of $100 million in (a) LIHTC projects located
anywhere in the United States or its territories and (b) Section 47 Projects
located within the service territories of the Applicants during the period
through December 31, 2007. The requested amount of investment authority is
consistent with FirstEnergy's 5-year forecast as shown on Exhibit I, which the
Applicants will update on an annual basis through the filing of certificates
pursuant to Rule 24.
D. Description of LIHTC Program. The LIHTC program has provided the
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Applicants a major incentive to invest in low-income housing projects by
generating a stream of tax credits that reduce Applicants' federal and state
income tax liability. Generally, the owner of a qualified LIHTC property must
agree to rent the units to persons with sufficiently low incomes as defined in
Section 42 of the Code for at least fifteen years. In this way, the LIHTC
program has resulted in the creation of a substantial amount of affordable
housing. Applicants believe that there is a continuing need for affordable
housing throughout the United States, and thus seeks authorization to make
additional investments in LIHTC properties. Each state has an annual allocation
of federal tax credits under Section 42 of the Code in the amount of $1.25 per
capita. Tax credits are allocated annually in a competitive process, so there is
no way to predict which housing projects will be awarded credits in any given
year.
Under the LIHTC program, equal annual tax credits are available over a
ten-year period payable over eleven years, with the first and last years
prorated. Under Section 42(h)(6)(A) of the Code, no credit is allowed for any
taxable year unless an agreement between the housing project owner and the
applicable state housing credit agency is in effect as of the end of such
taxable year. Furthermore, pursuant to Sections 42(h)(6)(B)(i), 42(h)(6)(D) and
42(h)(6)(E)(ii) of the Code, such an agreement must prohibit any increase in
gross rent for a period ending on the later of (a) the date specified by such
agency in the agreement or (b) 15 years after the date when the building
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is placed in service. Thus, even though the flow of tax credits for an LIHTC
property stops after ten years, the property remains subject to rent and income
restrictions for at least fifteen years.
Based on the requirements of Section 42 of the Code, the limitations
imposed by state housing credit agencies on LIHTC properties and market
conditions, Applicants would expect to hold their respective investment
interests in each Tax Credit Project for a period of 15 to 17 years to protect
their investment in the property.
E. Description of Historic Structures and Rehabilitated Buildings Tax
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Credit Program (Section 47 Projects). Likewise, Applicants would earn tax
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credits under Section 47 of the Code through investments in "certified historic
structures" (defined as structures that are either listed in the National
Register or located in a registered historic district and certified by the
Secretary of the Interior as being of historic significance), as well as other
types of "qualified rehabilitated buildings" (which could include apartment and
office buildings, factories, warehouses, etc.) that were first placed in service
before 1936. This program was designed to rehabilitate and extend the usefulness
of historic structures in order to preserve a sense of history and retain our
architectural heritage and character (in the case of "certified historic
structures") and to materially extend the useful life and/or significantly
upgrade the usefulness of other types of buildings (in the case of "qualified
rehabilitated buildings"). The tax credit is based on the qualified
rehabilitation expenditures, as defined under the Code and regulations. It is
equal to 20% in the case of "certified historic structures" and 10% in the case
of other rehabilitated buildings. These credits are subject to possible
recapture if the rehabilitated property is transferred before five years after
it is placed in service. In addition to the federal tax credits, FirstEnergy may
also qualify for tax credits that are available under state law with respect to
investments in historic building rehabilitation projects.
ITEM 2. FEES, COMMISSIONS AND EXPENSES.
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The estimated fees, commissions and expenses incurred or to be incurred
in connection with this Application are $15,000. Transactional costs incurred in
connection with making any particular investment authorized herein will vary
depending upon, among other things, the size and complexity of any particular
transaction. In general, these costs would be incurred primarily in connection
with performing due diligence and investigation and negotiating the
transactional documents to which Applicants would become a party.
ITEM 3. APPLICABLE STATUTORY PROVISIONS.
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A. By this Application, Applicants are seeking authorization pursuant
to Section 9(c)(3) of the Act to invest, directly or through one or more
subsidiaries, in additional Tax Credit Projects through the acquisition of
interests in limited partnerships and manager-managed LLCs from time to time
through December 31, 2007. These investments will be substantially identical to
those in which Applicants already hold an interest. Applicants are not seeking
authorization to change their current roles as passive investor in such
projects. Applicants' activities would be limited to managing its investments in
Tax Credit Projects, review and analysis of the financial statements generated
by third-party property management firms, and the conduct of due diligence in
order to ensure that Tax Credit Projects remain eligible for the tax credits.
6
As stated above, under the Merger Order, the Commission authorized
FirstEnergy and its subsidiaries to retain the existing investments in LIHTC
properties. Other newly registered holding companies have also been authorized
to retain preexisting passive investments in LIHTC properties, as well as
historic structures and other rehabilitated buildings that qualify for tax
credit projects. See e.g., WPL Holdings, Inc., Holding Co. Act Release No. 26856
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(Apr. 14, 1998); Exelon Corporation, Holding Co. Act Release No. 27256 (Oct. 19,
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2000); and CP&L Energy, Inc., Holding Co. Act Release No. 27284 (Nov. 27, 2000).
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In Exelon Corp., the Commission stated that such interests are retainable if
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they are "passive," are made for the purpose of obtaining the tax credits, and
are "self-liquidating," i.e., the assets wind down as the tax credits expire.
----
The Commission has also authorized, on a programmatic basis similar to that
proposed in this Application, new investments of this type by registered holding
companies, subject, generally, to the limitation that no affiliation is created
between a holding company and any venture owning or operating a Tax Credit
Project. See, e.g., Georgia Power Company, Holding Co. Act Release No. 26220
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(Jan. 24, 1995); and Alliant Energy Corporation, et al., Holding Co. Act Release
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No. 27060 (Aug. 13, 1999) and Holding Co. Act Release No. 27418 (June 11, 2001)
(eliminating service territory restriction contained in prior order).
B. Rule 54 Analysis. The proposed transactions are also subject to the
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requirements of Rule 54. Rule 54 provides that in determining whether to approve
an application by a registered holding company which does not relate to any
exempt wholesale generator ("EWG") or "foreign utility company" ("FUCO"), the
Commission shall not consider the effect of the capitalization or earnings of
any subsidiary which is an EWG or a FUCO upon the registered holding company if
paragraphs (a), (b) and (c) of Rule 53 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 amount is above the level which would be permitted by
clause (1) of Rule 53(a) if such amount were to be currently calculated. 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 Commission has reserved jurisdiction over investments that
exceed such amount.
As of December 31, 2001, and on the same basis as set forth in the
Merger Order, FirstEnergy's aggregate investment in EWGs and FUCOs was
approximately $2.04 billion, an amount significantly below the $5 billion amount
authorized in the Merger Order.
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
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FUCOs. Additionally, the proposed transactions will not have any material
impact on FirstEnergy's capitalization. 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.
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. Finally, Rule 53(c) by
its terms is inapplicable since the proposed transaction does not involve the
issue or sale of a security to finance the acquisition of an EWG or FUCO.
ITEM 4. REGULATORY APPROVAL.
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No state commission and no federal commission, other than this
Commission, will have jurisdiction over the transactions proposed herein.
ITEM 5. PROCEDURE.
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Applicants request that the Commission issue an order with respect to
this Application at the earliest practicable date, but in no event no later than
August 31, 2002. It is further requested that: (i) there not be a recommended
decision by an Administrative Law Judge or other responsible officer of the
Commission, (ii) the Office of Public Utility Regulation be permitted to assist
in the preparation of the Commission's decision and (iii) there be no waiting
period between the issuance of the Commission's order and the date on which it
is to become effective.
ITEM 6. EXHIBITS AND FINANCIAL STATEMENTS.
---------------------------------
(a) Exhibits.
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A - None.
B - None.
C - None.
D - None.
E - None.
F-1 - Opinion of Thelen Reid & Priest LLP - to be
filed by amendment.
8
F-2 - Opinion of Gary D. Benz, Esq. - to be filed
by amendment.
H - List of FirstEnergy's current LIHTC
Investments.
I - Tax Credit Pro Forma.
(b) Financial Statements.
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A-1 - FirstEnergy Consolidated Balance actual
and pro forma, as at December 31, 2001, and
consolidated Statements of Income, actual
and pro forma, and Statement of Retained
Earnings, for the twelve months ended
December 31, 2001; pro forma journal
entries. (Incorporated by reference to
FirstEnergy Form 10-K for the period ended
December 31, 2001) (File No. 333-21011)
A-2 - Ohio Edison Company Consolidated Balance
Sheet as of December 31, 2001, and
Consolidated Statements of Income and
Consolidated Condensed Statement of Cash
Flows for the year ended December 31, 2001
(Incorporated by reference to Ohio Edison
Company Form 10-K for the period ended
December 31, 2001) (File No.
1-2578)
A-3 - The Cleveland Electric Illuminating
Company Consolidated Balance Sheet as of
December 31, 2001, and Consolidated
Statements of Income and Consolidated
Condensed Statement of Cash Flows for the
year ended December 31, 2001 (Incorporated
by reference to The Cleveland Electric
Illuminating Company Form 10-K for the
period ended December 31, 2001) (File No.
1-2323)
A-4 - The Toledo Edison Company Consolidated
Balance Sheet as of December 31, 2001, and
Consolidated Statements of Income and
Consolidated Condensed Statement of Cash
Flows for the year ended December 31, 2001
(Incorporated by reference to The Toledo
Edison Company Form 10-K for the period
ended December 31, 2001) (File No. 1-3583)
A-5 - Pennsylvania Power Company Consolidated
Balance Sheet as of December 31, 2001, and
Consolidated Statements of Income and
Consolidated Condensed Statement of Cash
Flows for the year ended December 31, 2001
(Incorporated by reference to Pennsylvania
Power Company Form 10-K for the period ended
December 31, 2001) (File No. 1-3491)
A-6 - Metropolitan Edison Company Consolidated
Balance Sheet as of December 31, 2001, and
Consolidated Statements of Income and
Consolidated Condensed Statement of Cash
Flows for the year ended December 31, 2001
(Incorporated by reference to Metropolitan
Edison Company Form 10-K for the period
ended December 31, 2001) (File No. 1-446)
A-7 - Pennsylvania Electric Company Consolidated
Balance Sheet as of December 31, 2001, and
Consolidated Statements of Income and
9
Consolidated Condensed Statement of Cash
Flows for the year ended December 31, 2001
(Incorporated by reference to Pennsylvania
Electric Company Form 10-K for the period
ended December 31, 2001) (File No. 1-3522)
A-8 - Jersey Central Power & Light Company
Consolidated Balance Sheet as of December
31, 2001, and Consolidated Statements of
Income and Consolidated Condensed Statement
of Cash Flows for the year ended December
31, 2001 (Incorporated by reference to
Jersey Central Power & Light Company Form
10-K for the period ended December 31, 2001)
(File No. 1-3141)
ITEM 7. INFORMATION AS TO ENVIRONMENTAL EFFECTS.
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(a) As such, the issuance of an order by your Commission with respect to this
Application is not a major Federal action significantly affecting the quality of
the human environment.
(b) No Federal agency has prepared or is preparing an environmental impact
statement with respect to this Application.
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SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE PUBLIC UTILITY HOLDING COMPANY ACT
OF 1935, THE UNDERSIGNED COMPANIES HAVE DULY CAUSED THIS STATEMENT TO BE SIGNED
ON THEIR BEHALF BY THE UNDERSIGNED THEREUNTO DULY AUTHORIZED.
FIRSTENERGY CORP.
By: _________________________
Harvey L. Wagner
Vice President, Controller
and Chief Accounting Officer
OHIO EDISON COMPANY
The Cleveland Electric
Illuminating Company
The Toledo Edison Company
Pennsylvania Power Company
American Transmission
Systems, Incorporated
Metropolitan Edison Company
Pennsylvania Electric Company
Jersey Central Power & Light
Company
By: _______________________
Harvey L. Wagner
Vice President, Controller
and Chief Accounting Officer
Date: August 12, 2002
11
Exhibit H
List of FirstEnergy's current LIHTC Investments
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Apollo Tax Credit Fund - III Limited Partnership ............................ $ 4,500,000
Apollo Tax Credit Fund - IX Limited Partnership ............................. 29,873,702
Boston Capital Corporate Tax Credit Fund IV ................................. 2,063,483
Boston Capital Corporate Tax Credit Fund X .................................. 5,341,538
Boston Capital Corporate Tax Credit Fund XIV ................................ 11,574,200
Boston Capital Corporate Tax Credit Fund XVII, a Limited Partnership ........ 6,782,570
Boston Financial Institutional Tax Credit Fund III, a Limited Partnership ... 4,650,000
Boston Financial Institutional Tax Credit Fund V, a Limited Partnership ..... 2,500,000
Boston Financial Institutional Tax Credit Fund XVI, a Limited Partnership ... 4,863,500
Marion Senior Housing Ltd. Partnership ...................................... 2,176,588
McDonald Corporate Tax Credit Fund LP ....................................... 2,500,000
McDonald Corporate Tax Credit Fund - 1995 LP ................................ 5,000,000
McDonald Corporate Tax Credit Fund - 1996 LP ................................ 10,000,000
McDonald Ohio Tax Credit Fund - 1998 LP ..................................... 5,000,000
Ohio Equity Fund for Housing LP II .......................................... 998,535
USA Institutional Tax Credit Fund VII LP .................................... 3,850,000
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$101,674,116
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Exhibit I
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Five Year Forecast LIHTC Investments
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($ millions)
Other Taxable Total
Year Tax Credits Gains (Losses) Tax Benefits
---- ----------- -------------- ------------
2002 ...... $ 8.8 $ 9.9 $12.8
2003 ...... 9.6 9.3 13.3
2004 ...... 9.2 8.4 12.6
2005 ...... 8.7 7.4 11.7
2006 ...... 8.4 6.7 11.1
----- ----- -----
$44.7 $41.7 $61.5
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