NOTE 1 - DESCRIPTION OF PLAN
The following brief description of the Allegheny Energy Employee Stock Ownership and Savings Plan (the Plan) is intended to give a general summary of its principal provisions. Participants should refer to the Plan document for a more complete description of the Plan's provisions.
GENERAL:
The Plan is a defined contribution plan and is subject to the provisions of the Employee Retirement Income Security Act of 1974 (ERISA). The Plan has two segments: a savings segment and a stock ownership segment. The savings segment entitles participants to contribute up to 18% of their earnings with additional contributions as described below directly by Allegheny Energy Service Corporation (AESC). The AESC contributions are subsequently reimbursed to AESC by its affiliates for which it provides staffing services. The employee stock ownership segment of the Plan (ESOP) enabled employees to become beneficial owners of the common stock of Allegheny Energy, Inc. (the Company) through tax credits that ended with the plan year 1986. Members remain in this segment of the Plan and are credited with additional shares of common stock through dividend reinvestments.
On August 18, 2000, the Company's subsidiary, Monongahela Power Company, purchased Mountaineer Gas Company (Mountaineer Gas). If they elected to enroll, the non-union employees of Mountaineer Gas became participants in the Plan as of January 1, 2001 while the union employees remained in the Mountaineer Gas Company 401(k) Plan. Cash from the non-union employees' accounts totaling $1,236,095 was transferred from Branch Bank and Trust (BB&T) to T. Rowe Price Trust Company (T. Rowe Price) on April 1, 2001.
In December 1999, Monongahela Power Company, purchased West Virginia Power (WVP), a subsidiary of UtiliCorp United Inc.(UCU). Pursuant to the terms of the Plan, as amended, asset balances of the participants in the UCU Plan who continued in the employ of the Company following the acquisition of WVP were transferred from the UCU Plan to the Plan. Stock of $3,957,803, cash of $4,710,661 and loans of $246,350 were transferred from the UCU Plan to the Plan during March and April of 2000.
PARTICIPATION:
All full-time employees of the Company not represented by a collective bargaining unit are eligible to participate in the Plan. Part-time employees are eligible to participate if they are scheduled to work at least 1,000 hours in a year.
Employees represented by a collective bargaining unit that has entered into a written agreement with AESC that provides for participation in the Plan are also eligible to participate.
CONTRIBUTIONS:
The Plan allows each participating employee to contribute 2% to 12% of their pre-tax earnings through payroll deductions to an investment fund or funds of their choice. Under federal law, the maximum contribution from pre-tax earnings was $10,500 in 2001 and 2000. Participants may elect to make post-tax contributions of up to 6% of eligible earnings. AESC contributes 50% of the first 6% of pre-tax earnings contributed by a participant.
Participant pre-tax and post-tax contributions are paid directly to the Plan's trustee as soon as administratively possible, but no later than 15 business days after the month following the payroll period in which the participant's contributions were withheld. AESC's matching contribution is made to the trustee on a quarterly basis and can be made in cash, Company common stock, or both. In 2001 and 2000, all of AESC's contributions were made in Company common stock. After March 2001 and prior to September 1997, the Company common stock was valued at the average of the daily high and low prices for the 10 consecutive trading days immediately preceding the date of transfer to the trustee. From September 1997 through March 2001, the Company common stock was valued at the average of all shares of common stock purchased on the open market, excluding any related broker fees or commissions, which are paid by the Company.
ALLOCATION:
Company contributions to the employee stock ownership segment of the Plan ceased with the Plan year 1986. Investment earnings less expenses are allocated to members based on their cumulative share allocation.
The contributions to the savings segment of the Plan are allocated based on the investment elections made by each participant. Dividend and interest income, as well as capital gains distributions are allocated based upon the ratio of each participant's investment in any selected fund to the total investment of all participants in such fund.
VESTING:
Participants are immediately fully vested in all participant contributions and earnings attributable to such contributions. Participants hired on or after July 1, 1998 are vested in AESC's contribution after 12 months of service.
PARTICIPANT LOANS:
An employee who has participated in the savings segment for at least one year may borrow on his or her account balance subject to the provisions described in the Plan. The principal amount of an employee's loan may not exceed the lessor of 50% of the pre-tax contribution account balance or $50,000, reduced by the difference between the highest outstanding loan balance during the preceding 12-month period and the outstanding loan balance on the last day of the quarter prior to the date of the new loan application.
PAYMENT OF BENEFITS:
Shares allocated to a participant's account under the employee stock ownership segment of the Plan will be distributed to the participant or the participant's designated beneficiary in a lump-sum payment upon termination of employment, retirement, or death or upon the election to receive the distribution of a deferred account.
A participant's account in the savings segment of the Plan will be distributed to the participant or the participant's designated beneficiary in a lump-sum payment either upon election to receive distribution of a deferred account or, unless deferral has been elected, upon termination of employment, retirement, or death. The participant may elect to make a withdrawal of post-tax contributions and earnings at any time. A withdrawal of the participant's pre-tax contribution can be made, provided that (1) the participant first withdraws all amounts in the post-tax account, (2) the withdrawal is based on an immediate financial need created by hardship, and (3) the Employee Benefits Committee grants its approval.
A participant under age 70 1/2 who terminates employment (excluding death) and whose total account balance is $5,000 or more may elect to defer receipt of his distribution to any time after attaining age 55. A participant who defers retirement and attains age 70 1/2 will receive a distribution from the Plan no later than April 1 of the calendar year following the calendar year in which he or she attains age 70 1/2.
ADMINISTRATION:
The Plan is administered by the Employee Benefits Committee, which is appointed by the Company's Finance Committee. Plan assets are held in trust under an arrangement with T. Rowe Price and the recordkeeping with respect to individual participant accounts is maintained by T. Rowe Price Retirement Plan Services, Inc., (both wholly-owned subsidiaries of T. Rowe Price Associates, Inc.) based on information furnished by AESC and the participants. The assets of the non-union Mountaineer Gas employees were held by BB&T until they were transferred to the Plan on April 1, 2001. The assets of the participants in the UCU Plan who continued in the employ of the Company following the acquisition of WVP were held by American Century until they were transferred to the Plan during March and April of 2000.
The expenses of the stock ownership segment of the Plan are paid by the Plan but cannot exceed the lesser of (1) the sum of 10% of the first $100,000 of income from dividends on Company shares during the year and 5% of such dividends in excess of $100,000 or (2) $100,000. Any excess expenses are paid by AESC. The expenses of the savings segment of the Plan are paid by AESC.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
BASIS OF ACCOUNTING:
The financial statements of the Plan are presented on the accrual basis of accounting.
INVESTMENT VALUATION AND INCOME RECOGNITION:
The investments are stated at fair market value based on each fund's quoted market price at the close of the Plan year. Participant loans are valued at cost, which approximates fair market value. Cash represents amounts in a settlement account for subsequent purchases or for sales not settled at December 29, 2000. Security transactions are accounted for on the trade date basis; dividend income is recorded on the ex-dividend date and interest income is recorded as earned. Distributions to participants are based on their individual interests and are reflected at current values.
USE OF ESTIMATES:
The preparation of the financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements. Actual amounts could differ from those estimates.
PARTY-IN-INTEREST:
The Plan invests in certain funds managed by the Trustee and the stock of the Company. The income of the Plan is derived from these funds and the stock of the Company; therefore, these transactions qualify as party-in-interest transactions that are allowable under ERISA.
NEW ACCOUNTING PRONOUNCEMENTS:
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS No. 133), as amended by SFAS NO. 137 and SFAS No. 138. SFAS No. 133 requires that an entity recognize all derivatives and measure those instruments at fair value.
Pursuant to SFAS No. 137, the Plan was required to adopt SFAS No. 133, effective January 1, 2001. Management initially was unable to determine the impact of SFAS No. 133 on the Plan financial statements as a result of the inconsistency in accounting literature between SFAS No. 133, requiring derivatives to be measured at a fair value and the American Institute of Certified Public Accountants (AICPA) Audit and Accounting Guide on "Audits of Employee Benefit Plans" and Statement of Position 94-4, "Reporting of Investment Contracts Held by Health and Welfare Benefit Plans and Defined-Contribution Pension Plans," (SOP 94-4) requiring benefit responsive investment contracts (including synthetic Guaranteed Insurance Contracts) to be measured at contract value.
In October 2001, the Derivatives Implementation Group (DIG) of the FASB tentatively released Implementation Issue C-19, which provides that fully benefit responsive investment contracts accounted for under the provisions of SOP 94-4 are not subject to SFAS No. 133. DIG Implementation Issue C-19 is expected to be finalized during 2002. The Plan holds no material derivative financial instruments at December 29, 2001 or 2000.
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