(As filed with the Securities and Exchange Commission on February 23, 2004)
File No. 70-[_____]
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM U-1
APPLICATION OR DECLARATION
UNDER
THE PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
FIRSTENERGY CORP.
76 South Main Street
Akron, Ohio 44308
(Name of company filing this statement
and address of principal executive office)
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FIRSTENERGY CORP.
(Name of top registered holding company parent of applicant)
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Leila L. Vespoli, Senior Vice President Douglas E. Davidson, Esq.
and General Counsel Thelen Reid & Priest LLP
FirstEnergy Corp. 875 Third Avenue
76 South Main Street New York, New York 10022
Akron, Ohio 44308
(Names and addresses of agents for service)
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ITEM 1. DESCRIPTION OF PROPOSED TRANSACTION.
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1.1 Introduction. FirstEnergy Corp. ("FirstEnergy"), a registered
holding company under the Public Utility Holding Company Act of 1935, as amended
(the "Act"), hereby files this Application/Declaration pursuant to Sections
6(a)(2), 7, and 12(e) of the Act and Rules 62 - 65 thereunder (a) for approval
of certain amendments to its Amended Articles of Incorporation ("Articles") and
Amended Code of Regulations ("Regulations," and together with the Articles, the
"Governing Documents"), as described below, (b) for authority to solicit proxies
(the "Solicitation") from its common stockholders for use at its Annual Meeting
scheduled for May 18, 2004, and at any adjournment or adjournments thereof, in
connection with such amendments and for shareholder approval for certain
executive compensation plans (and related amendments thereto) providing for the
issuance of shares of FirstEnergy common stock heretofore approved by the
Commission under the Act, and (c) to terminate FirstEnergy's Rights Agreement as
heretofore approved by the Commission.
FirstEnergy directly or indirectly owns all of the outstanding common
stock of ten electric utility subsidiaries, Ohio Edison Company, The Cleveland
Electric Illuminating Company, The Toledo Edison Company, American Transmission
Systems, Incorporated, Jersey Central Power & Light Company, Pennsylvania
Electric Company, Metropolitan Edison Company, Pennsylvania Power Company, York
Haven Power Company, and The Waverly Electric Power & Light Company, which
together provide service to approximately 4.3 million retail and wholesale
electric customers in a 36,100 square-mile area in Ohio, New Jersey, New York
and Pennsylvania. As of February 23, 2004, FirstEnergy had issued and
outstanding 329,836,276 shares of common stock, par value $0.10 per share.
FirstEnergy's shares are listed for trading on the New York Stock Exchange
("NYSE").
1.2 Amendments to Governing Documents. FirstEnergy proposes to amend
its Governing Documents, and to solicit proxies in connection therewith, in
order to eliminate or modify certain so-called "anti-takeover" type provisions
that were originally intended, at least in part, to force persons seeking to
take control of the company to initiate arm's length discussions with the Board
of Directors.
(a) Declassification of Board of Directors. FirstEnergy's
Regulations (Exhibit A-2 hereto) currently provide that the Board of Directors
of the company is to be divided into three (3) classes with members of each
class serving three-year terms. The Board of Directors currently consists of
fifteen (15) members divided into three (3) classes. The Board of Directors has
unanimously adopted resolutions, subject to shareholder and regulatory
approvals, amending the Regulations to eliminate the classification of Board
members. The proposal, if approved by shareholders, would allow for the annual
election of directors beginning with the director slate to be voted upon at
FirstEnergy's 2005 Annual Meeting. Directors who have been previously elected
for three-year terms expiring beyond the 2005 Annual Meeting would serve out the
balance of their terms so that no director previously elected to a multi-year
term would have his or her term shortened. Consequently, under the proposed
amendments, the first class of directors to be elected to one-year terms would
be in 2005. Directors standing for election in 2006 and 2007 would likewise be
elected to one-year terms so that upon the conclusion of the Annual Meeting in
2007, the declassification of the Board would be complete and all directors
would be subject to annual election.
A shareholder proposal to declassify the Board of Directors has been
received by FirstEnergy and included in its proxy materials each year since
1998. Each year, the Board of Directors has considered carefully the advantages
and disadvantages of maintaining a classified board. While the Board of
Directors still believes that there are compelling reasons to maintain a
classified board, in furtherance of its goal of ensuring sound corporate
governance policies, after further consideration of the various arguments for
and against a classified board, and in light of the amount of shareholder
support for a similar proposal at the 2003 Annual Meeting, the Board of
Directors has decided to propose declassifying the Board.
Approval of the proposal requires the affirmative vote of the holders
of at least 80% of FirstEnergy's outstanding common stock.
The proposed amendments to the Regulations are set forth in Appendix C
to the Preliminary Proxy Statement (incorporated by reference as Exhibit B-1
hereto), with deletions indicated by strike-outs and additions indicated by
underlining.
(b) Elimination of Certain Supermajority Shareholder Voting
Requirements. In addition, FirstEnergy's shareholders will be asked to consider
and vote upon a proposal to amend Regulation 36 of the Regulations and to repeal
Article X of the Articles (Exhibit A-1 hereto), which relate to the voting
requirements for amending or repealing certain provisions in the Governing
Documents.
Currently, the affirmative vote of 80% of the shares entitled to vote,
voting as a single class (together, an "80% Supermajority") is required to make
certain amendments to the Governing Documents. FirstEnergy's Board of Directors
is proposing that these special 80% Supermajority voting requirements be changed
in the Governing Documents to reduce the voting requirements from 80% of the
shares entitled to vote to two-thirds, which is consistent with Ohio law.
Approval of this proposal requires the affirmative vote of 80% of the shares
entitled to vote.
Article X of the Articles establishes an 80% Supermajority requirement
to amend or repeal the following provisions: Article V--the fixing or changing
of the terms of unissued or treasury shares; Article VI--the absence of
cumulative voting rights in the election of directors; Article VII--the absence
of preemptive rights to acquire unissued shares; and, Article VIII--the ability
of the company to repurchase its shares. Similarly, Regulation 36 of the Code
also establishes an 80% Supermajority requirement to amend or repeal the
following provisions: Regulation 1--the time and place of shareholder meetings;
Regulation 3(a)--the calling of special shareholder meetings; Regulation 9--the
order of business at shareholder meetings; Regulation 11--the number, election
and term of directors; Regulation 12--the manner of filling vacancies on the
Board of Directors; Regulation 13--the removal of directors; Regulation 14--the
nomination of directors and elections; and, Regulation 31--the indemnification
of directors and officers. Both Article X and Regulation 36 require an 80%
Supermajority vote to be amended or repealed.
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In addition, the Board of Directors proposes to change the 80%
Supermajority voting requirement in Regulations 11 and 13. Currently, Regulation
11 of the Code enables a change in the number of Directors of the company, and
Regulation 13 provides that any Director or the entire Board of Directors may be
removed, in each case only by the affirmative vote of the holders of at least
80% of the voting power of the company, voting together as a single class. The
Board of Directors proposes to reduce this 80% Supermajority in both cases to
two-thirds.
While these protective measures are beneficial, the FirstEnergy Board
believes there are also compelling arguments for having a lower threshold for
shareholder amendments to the Governing Documents. For example, in recent years
some investors have expressed the view that a lower threshold for shareholder
amendments in the Governing Documents may improve the corporate governance
profile of FirstEnergy in that it allows increased flexibility in responding to
unforeseen challenges and increases shareholders' ability to effectively
participate in the company's governance.
Similar amendments seeking to remove the 80% Supermajority voting
requirement from the Code and the Articles have been proposed by FirstEnergy's
shareholders in the past and have received support at Annual Meetings. Given the
amount of shareholder support for this proposal and following careful
assessment, the Board of Directors has decided to propose the elimination of the
80% Supermajority voting requirement. While the Board of Directors believes that
the 80% Supermajority provision can be an important tool for protecting
shareholders, it also believes that there are compelling arguments, at this
point, to changing FirstEnergy's 80% Supermajority voting requirement. The Board
of Directors is dedicated to ensuring that FirstEnergy's corporate governance
policies provide overall benefits to its shareholders and believes that it is in
the best interest of FirstEnergy and its shareholders to change the 80%
Supermajority voting requirement.
The proposed amendments to the Articles and Regulations are set forth
in Appendix D to the Preliminary Proxy Statement (Exhibit B-1 hereto), with
deletions indicated by strike-outs and additions indicated by underlining.
(c) Certain Compensation Plan Amendments. In addition to voting
on the changes to the Governing Documents described above, FirstEnergy's
shareholders will also be asked to approve FirstEnergy's existing Executive
Deferred Compensation Plan ("Executive Plan"), which was established by the
Board of Directors in 1985, and Deferred Compensation Plan for Outside Directors
("Director Deferred Plan"), which was established by the Board of Directors in
1997. The plans have not heretofore been approved by FirstEnergy's shareholders
as such approval had not been required. These plans allow eligible employees and
outside directors, as the case may be, to defer a portion of their compensation
and retainers by choosing to have such amounts treated as though invested in
common stock of FirstEnergy. Both plans also contain a matching feature under
which an additional 20% of the amount deferred is credited to an employee's or
director's account and invested in common stock equivalents.
The Executive Plan and Director Deferred Plan are being submitted for
shareholder approval at the Annual Meeting in order to comply with new listing
requirements of the NYSE adopted in 2003. The new listing requirements apply to
equity compensation plans that contain a matching or bonus formula that credits
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additional shares of stock to an employee's or director's account based on the
amount of his or her deferrals. Under the NYSE listing standards, equity
compensation plans with such features must now be approved by shareholders.
These features are also required to contain either a fixed term of no more than
ten years or a maximum share reserve. The Board of Directors is proposing to add
the ten-year term and maximum share reserve to each plan.
The Commission has previously authorized FirstEnergy to issue up to 30
million shares of common stock or common stock based awards under the Executive
Plan and Director Deferred Plan and other plans maintained for the benefit of
shareholders, officers, employees and non-employee directors, as they may be
amended or renewed from time to time./1/ The proposed changes, which are
required in order to comply with NYSE listing rules, will not increase the
number of shares of common stock or common stock equivalents that FirstEnergy is
already authorized to issue.
1.3 Termination of Shareholder Rights Plan. In November 1997, the
Board of Directors of FirstEnergy authorized assignment of one share purchase
right (a "Right") for each outstanding share of FirstEnergy common stock. The
Rights are issued pursuant to a Rights Agreement dated as of November 18, 1997
between FirstEnergy and The Bank of New York, as rights agent (incorporated by
reference as Exhibit B-2 hereto). 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. The Rights, which currently are to expire on November 18,
2007, are not exercisable until a triggering event involving either an
acquisition of 15% or more of the outstanding common stock of the company by any
person or group of associated persons (an "Acquiring Person") or the
commencement or announcement of an intention make a tender offer by any
Acquiring Person of at least 25% of the outstanding common stock of the company.
In the event of a merger with or other specified transactions (as described in
the Rights Agreement) between FirstEnergy and an Acquiring Person, the holder of
each Right would be entitled to receive, upon exercise of the Right, a number of
shares of common stock of FirstEnergy, or of the Acquiring Person, as the case
may be, having a value double the amount of the Purchase Price./2/
FirstEnergy's Board of Directors has elected, subject to receipt
Commission authorization, to terminate the Rights Agreement through the
acceleration of the expiration date of the Rights issued thereunder. As is the
case with previous shareholder proposals to declassify the Board of Directors
and to eliminate 80% Supermajority voting requirements, the Board of Directors
has considered carefully the advantages and disadvantages of the Rights
Agreement. While the Board of Directors still believes that there are compelling
reasons to maintain the Rights Agreement, in furtherance of its goal of ensuring
sound corporate governance policies, after further consideration of the various
arguments for and against rights plans in general, and in light of the amount of
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/1/ See FirstEnergy Corp., et al., Holding Co. Act Release No. 27694 (June
30, 2003). The authorization period under this order extends through
December 31, 2005.
/2/ In its order approving FirstEnergy's acquisition of GPU, Inc., the
Commission also authorized FirstEnergy to implement the Rights Agreement in
accordance with its terms. See FirstEnergy Corp., et al., Holding Co. Act
Release No. 27459 (Oct. 29, 2001) (the "Merger Order").
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shareholder support for a similar proposal at the 2003 Annual Meeting, the Board
of Directors has decided to take action to terminate the Rights Agreement.
Accordingly, the Board has taken action to accelerate the expiration
date of the outstanding Rights to March 31, 2004 or such later date as the
Commission issues an order in this docket as herein requested. No shareholder
approval is required for this proposal.
1.4 Request for Expedited Action on the Proposed Solicitation.
FirstEnergy intends to seek shareholder approval to amend its Governing
Documents at its Annual Meeting to be held on May 18, 2004. In order to maintain
its schedule for timely receipt of proxies for the Annual Meeting, FirstEnergy
intends to file the definitive proxy materials with the Commission under Section
14 of the Securities Exchange Act of 1934, as amended, on April 2, 2004 and
commence the Solicitation immediately thereafter. Accordingly, FirstEnergy is
requesting that the Commission's notice of filing of the Application/Declaration
include an order authorizing commencement of the Solicitation
ITEM 2. FEES, COMMISSIONS AND EXPENSES.
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FirstEnergy estimates that the total amount of all fees, commissions
and expenses to be incurred in connection with the proposed transactions will
not exceed $35,000. FirstEnergy has engaged the services of Innisfree M&A
Incorporated to assist in the Solicitation and has agreed to pay Innisfree M&A
Incorporated a fee for its services not expected to exceed $12,500, plus
reimbursement of its expenses. Solicitation will also be made in person or by
telephone, mail or other electronic means, and may be made by officers and
employees of FirstEnergy.
ITEM 3. APPLICABLE STATUTORY PROVISIONS.
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3.1 General. Sections 6(a) and 7 of the Act are applicable to the
proposed amendments to the Governing Documents and termination of the
Rights Agreement and Section 12(e) and Rules 62 - 65 are applicable to the
Solicitation./3/
3.2 Analysis under 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 "exempt wholesale
generator" ("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 "foreign utility companies" ("FUCOs") in determining whether to
approve other transactions if Rule 53(a), (b) and (c) are satisfied.
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/3/ FirstEnergy does not believe that the solicitation of shareholder
approval for the Executive Plan or the Director Deferred Plan is
subject to Sections 12(e) and Rules 62 - 65 since the plans are already
in existence and the proposed changes to the plans (to add the 10-year
fixed term and maximum share reserve provisions to comply with NYSE
listing rules) do not appear to require approval under Sections 6(a)
and 7 of the Act.
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FirstEnergy currently meets all of the conditions of Rule 53(a),
except for clause (1). Under the Merger Order, as modified by order dated June
30, 2003 (Holding Co. Act Release No. 27694) (the "June 2003 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 $1.6 billion as of September 30, 2003, would be $800
million. The Merger Order, as modified by the June 2003 Order, also specifies
that this $5 billion amount may include amounts invested in EWGs and FUCOs by
FirstEnergy and GPU, Inc. ("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 June 2003
Order, the Commission reserved jurisdiction over Other Investments that exceed
such $1.5 billion amount.
As of September 30, 2003, and on the same basis as set forth in the
Merger Order, FirstEnergy's "aggregate investment" in EWGs and FUCOs was
approximately $1.06 billion,/4/ an amount significantly below the $5 billion
amount authorized in the Merger Order, as modified by the June 2003 Order.
Additionally, as of September 30, 2003, "consolidated retained earnings" were
$1.6 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, 2003, FirstEnergy's consolidated capitalization
consisted of 38.7% common equity, 1.7% cumulative preferred stock, 1.3%
subsidiary - obligated mandatorily redeemable preferred securities, 57.1%
long-term debt and 1.2% 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")./5/
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/4/ This $1.1 billion amount represents Current Investments only. As of
September 30, 2003, FirstEnergy had no GenCo Investments.
/5/ 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
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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's operating public-utility subsidiaries remain 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 public-utility subsidiaries of FirstEnergy that have ratings:
Subsidiary Standard & Poors/6/ Moody's/7/ Fitch/8/
Ohio Edison BBB Baa1 BBB+
Cleveland Electric BBB- Baa2 BBB-
Toledo Edison BBB- Baa2 BBB-
Penn Power BBB- Baa1 BBB+
JCP&L BBB Baa1 BBB+
Met-Ed BBB Baa1 BBB+
Penelec BBB Baa1 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.
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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 to reduce the carrying value of its
remaining 20.1% interest. On January 16, 2004, FirstEnergy announced that
it had completed the sale of its remaining 20.1% interest in Avon.
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. In April 2003, FirstEnergy abandoned its ownership interest
in Emdersa. As a result of this divestiture, FirstEnergy recognized a
one-time, non-cash charge of $67.4 million in the second quarter of 2003.
In addition, FirstEnergy reflected the results of this business (after-tax
loss of $87.5 million) as discontinued operations in the restated
Consolidated Statement of Income for the year ended December 31, 2002.
FirstEnergy also recognized a currency translation adjustment in other
comprehensive income of $91.5 million in 2002. On February 2, 2004,
FirstEnergy announced that it had completed the sale of all of its
remaining operating FUCO assets.
/6/ Standard & Poor's Rating Services
/7/ Moody's Investors Service, Inc.
/8/ Fitch, Inc.
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ITEM 4. REGULATORY APPROVALS.
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No state commission and no federal commission, other that this
Commission, has jurisdiction over the proposed transactions.
ITEM 5. PROCEDURE.
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The Commission is requested to publish a notice under Rule 23 with
respect to the filing of this Application/Declaration as soon as practicable
after the Proxy Statement has been declared effective under the Securities
Exchange Act of 1934, as amended, and that such notice include an order
authorizing commencement of the Solicitation. FirstEnergy further requests 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.
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(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 Notice of Annual Meeting and Proxy
Statement of FirstEnergy.
(Incorporated by reference to
Schedule 14A/Preliminary Proxy
Statement filed by FirstEnergy on
February 23, 2004 in File No.
333-21011)
B-2 Rights Agreement dated as of
November 18, 1997 between
FirstEnergy Corp. and The Bank of
New York, as rights agent .
(Incorporated by reference to
Exhibit 4.1 to Current Report on
Form 8-K, filed by FirstEnergy on
December 1, 1997, in File No.
333-21011)
C Not Applicable.
D Not Applicable.
E Not Applicable.
F-1 Opinion of Thelen Reid & Priest LLP (to
be filed by amendment).
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F-2 Opinion of Gary D. Benz, Esq. (to be file by
amendment)
G Form of Federal Register Notice.
(b) Financial Statements:
(Omitted as not relevant to the proposed transactions.)
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 the Solicitation 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 the Solicitation which is the subject hereof.
SIGNATURE
Pursuant to the requirements of the Public Utility Holding Company Act
of 1935, the undersigned company has duly caused this statement to be signed on
its behalf by the undersigned thereunto duly authorized.
FIRSTENERGY CORP.
By: /s/ Harvey L. Wagner
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Name: Harvey L. Wagner
Title: Vice President and Controller
Date: February 23, 2004