File No. 70-8411
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
POST-EFFECTIVE AMENDMENT NO. 9
TO
APPLICATION OR DECLARATION
ON
FORM U-1
UNDER
THE PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
ALLEGHENY POWER SERVICE CORPORATION
800 CABIN HILL DRIVE
GREENSBURG PA 15601
ALLEGHENY POWER SYSTEM, INC.
12 EAST 49TH STREET
NEW YORK, NY 10017
AYP CAPITAL, INC.
12 EAST 49TH STREET
NEW YORK, NY 10017
(Name of company or companies filing this statement and addresses of principal
executive offices)
Allegheny Power System, Inc.
(Name of top registered holding company parent of each applicant or declarant)
Nancy H. Gormley, Esq.
Vice President
Allegheny Power System, Inc.
Tower Forty-Nine
12 East 49th Street
New York, NY 10017
(Name and address of agent for service)
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TABLE OF CONTENTS
Page
Background. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
Overview. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
Part I. Energy-Related Activities . . . . . . . . . . . . . . . . . 2
1. Activities. . . . . . . . . . . . . . . . . . . . . . . . . .2
A. Energy Management Services and Demand-Side Management
Services . . . . . . . . . . . . . . . . . . . . . . . .3
2. Investment and Financing. . . . . . . . . . . . . . . . . . .5
A. Investment In, and Financing Of, AYP Capital . . . . . .5
B. Investment In, and Financing Of, Energy-Related
NEWCO. . . . . . . . . . . . . . . . . . . . . . . . . .6
C. Guarantees . . . . . . . . . . . . . . . . . . . . . . .6
Part II. Other Activities . . . . . . . . . . . . . . . . . . . . . 7
A. FUCOs, EWGs and Project NEWCOs . . . . . . . . . . . . 7
B. Factoring of Accounts Receivable . . . . . . . . . . . 12
C. Real Estate Activities . . . . . . . . . . . . . . . . 14
Part III. Transactions With Associates and Accounting . . . . . . . . 15
Part IV. Reporting . . . . . . . . . . . . . . . . . . . . . . . . . 16
<PAGE>
1. Applicants hereby delete in its entirety, Item 1. Description of
Proposed Transaction contained in Post-Effective Amendment No. 7 and further
amend Item 1. Description of Proposed Transaction by adding to the end
thereof the following:
BACKGROUND
By order dated July 14, 1994 (HCAR No. 26085), Allegheny Power
System, Inc. ("APS"), a registered holding company under the Public Utility
Holding Company Act of 1935 (the "Act"), was authorized to organize and
finance AYP Capital, Inc. ("AYP Capital") for the purpose of investing
directly or indirectly in (i) companies in the area of emerging technologies
related to APS's core utility business, and (ii) companies for the acquisition
and ownership of exempt wholesale generators ("EWGs") within the definition of
Section 32 of the Act.
By order dated February 3, 1995 (HCAR No. 26229) AYP Capital was
authorized to expand the scope of those previously approved activities to
include activities related to the development, acquisition, construction,
ownership and operation of EWGs. In addition, AYP Capital was authorized to
engage in preliminary development activities in respect of (i) qualifying
cogeneration facilities and small power production facilities ("SPPs") located
throughout the United States, in accordance with the Public Utility Regulatory
Policies Act of 1978 and regulations thereunder; (ii) nonqualifying
cogeneration facilities, nonqualifying SPPs and independent power production
facilities ("IPPs") located within the service territories of APS public
utility subsidiary companies (the "Operating Subsidiaries"); (iii) EWGs;
(iv) companies involved in new technologies related to the core business of
APS; and (v) foreign utility companies as defined in Section 33(a) of the Act
("FUCOs"). AYP Capital was also authorized to provide consulting services to
nonaffiliate companies. APS was authorized to increase its investment in AYP
Capital from $500,000 to $3 million.
OVERVIEW
Applicants propose that the authority requested in Part I herein for
energy-related activities be effective in each case through the earlier of
December 31, 1999 or the effective date of rules adopted by the Commission
exempting such transactions from the approval requirements of the Act. APS
and AYP Capital request authority to allow AYP Capital and one or more special
purpose subsidiaries to engage in the following energy-related activities:
To allow AYP Capital or a special purpose subsidiary ("EMS NEWCO")
to provide energy management services and demand-side management
services to non-associate companies, and to provide those services to
associate companies at cost in compliance with Rules 90 and 91. APS
requests authority to invest in AYP Capital, and AYP Capital further
requests authority to invest in an Energy-Related NEWCO, up to an
aggregate of $75 million outstanding at any one time for these
activities.
It is proposed that the authority requested in Part II herein for
other activities not specifically within proposed Rule 58 be effective in each
case through the earlier of December 31, 1999 or the effective date of rules
adopted by the Commission exempting such transactions from the approval
requirements of the Act. APS and AYP Capital request authority to allow AYP
Capital and one or more special purpose subsidiaries to engage in the
following additional activities:
(A) To allow AYP Capital to engage in activities directly or
indirectly related to the development, acquisition, ownership,
construction and operation of FUCOs and the acquisition of the
securities of one or more companies ("Project NEWCOs") engaged directly
or indirectly, and exclusively, in the business of owning and holding
the securities of FUCOs and/or EWGs. APS and AYP Capital request
authorization for up to $100 million in loans and guarantees and up to
$200 million in nonrecourse debt securities in connection with EWGs,
FUCOs and Project NEWCOs;
(B) To allow AYP Capital or a special purpose subsidiary
("Factoring NEWCO") to factor the accounts receivable of associate and
non-associate utility companies, municipalities and electric
cooperatives. APS requests authority to invest in AYP Capital, and AYP
Capital further requests authority to invest in a Factoring NEWCO, up to
an aggregate of $25 million outstanding at any one time for these
activities; and
(C) To allow AYP Capital or a special purpose subsidiary ("Real
Estate NEWCO") to engage, on an agency basis, in activities directly or
indirectly related to the real estate portfolio of APS and its associate
companies at cost in compliance with Rules 90 and 91. APS requests
authority to invest in AYP Capital, and AYP Capital further requests
authority to invest as a Real Estate NEWCO, up to an aggregate of $2
million outstanding at any one time for these activities.
PART I. Energy-Related Activities
1. Activities
APS and AYP Capital request authority for AYP Capital and one or
more special purpose subsidiaries to engage in the activities described below.
"Special purpose subsidiaries" as used herein (for example, EMS NEWCO,
Factoring NEWCO and Real Estate NEWCO) will be wholly-owned subsidiaries of
AYP Capital. AYP Capital proposes to organize these newly created
corporations and to invest in and provide funding for them up to the aggregate
limits sought herein through (1) acquisition of common stock, (2) loans and
the conversion of any such loans to capital contributions. The Applicants
believe that all of the activities described in this Part I fit within the
activities specifically enumerated in proposed Rule 58 under the Act as
permissible for an "energy-related company" within the meaning of
paragraph (b)(1) of proposed Rule 58.
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(A) Energy Management Services and
Demand-Side Management Services
APS and AYP Capital request authority to allow AYP Capital or an
EMS NEWCO to provide a wide range of energy conservation services, energy
management services and demand-side services to non-associate companies at
market prices and to associate companies at cost. AYP Capital also requests
authority for it or an EMS NEWCO to invest in energy management equipment
and/or provide customer financing for the purchase of energy conservation,
energy management and demand-side management services and the purchase of
equipment (including equipment purchased from third party vendors and
suppliers).
Energy conservation, energy management and demand-side management
services have a clear relationship to the core business of APS and present an
area for APS to provide additional services to its customers and potential
customers as well as other consumers of energy while utilizing APS' expertise
and technical resources. In fact, AYP Capital has filed a separate
Application-Declaration together with EUA Cogenex Corporation requesting
permission to jointly form a Delaware limited liability company for the
purpose of providing energy conservation services and for both companies to
guarantee third party loans obtained by the limited liability company.
AYP Capital expects to offer (directly or through an EMS NEWCO)
energy management services and demand-side management services to customers in
and around the service territory of the Operating Subsidiaries, but does not
intend to limit activities in this business to such area.
Energy management and demand-side management services will be
offered primarily to commercial and industrial customers. Targeted commercial
customer segments initially include: private colleges and universities,
private hospitals and nursing homes, food service and grocery chains, and
commercial offices with multiple sites. Industrial customers initially will
include: companies engaged in general manufacturing, iron and steel
production, coal production, strip and deep mining. These customer segments
have been selected for initial focus based upon the consistent expressions of
strong interest in energy management, demand-side management and energy
conservation by Operating Company customers in these segments.
Commercial customers have expressed interest in the following
areas of energy management and conservation: audits and analysis of energy
sources and uses; management of energy use; indoor and outdoor lighting;
quality of electric power; electric motor selection and use; air quality;
systems for heating, ventilation and air conditioning, including thermal
energy storage systems.
Industrial customers have expressed interest in the following
areas of energy management and conservation: audits and analysis of energy
sources and uses; indoor and outdoor lighting; electrotechnologies; electric
motor selection and use; air quality; systems for heating, ventilation and air
conditioning, including thermal energy storage systems; consultation with
<PAGE>
respect to environmental quality requirements; and facility management
services.
APS and AYP Capital request authority to allow AYP Capital or an
EMS NEWCO to provide the following types of energy management and demand-side
management services to non-associate companies and associate companies:
(a) Energy management services including: (1) the
identification of energy and other resource (water, labor, maintenance,
materials, etc.) cost reduction and/or efficiency opportunities; (2) the
design of facility and process modification and/or enhancement to
realize such opportunities; (3) the management of or the direct
construction or installation of energy conservation or energy efficiency
equipment; (4) the training of client personnel in the operation of
equipment; (5) the maintenance of energy systems; (6) the design and/or
management of and/or the direct construction or installation of new and
retrofit heating, ventilating and air conditioning, electrical and power
systems, motors, pumps, lighting, water and plumbing systems, and
related structures, to realize energy and other resource efficiency or
to otherwise meet a customer's energy needs; (7) performance contracts,
i.e., contracts under which the service provider is paid for its
services and/or the equipment it installs based on the energy savings or
other identified factors that result from such services and equipment;
(8) assistance in identifying and arranging financing for energy
conservation or efficiency programs or for the purchase of equipment to
meet a customer's energy needs; (9) system commissioning, i.e.,
observing the operation of the installed system to insure that it meets
the design specifications; (10) the reporting of system results; and
(11) other similar or related energy management activities.
(b) Demand-side management services including: (1) design of
energy conservation programs; (2) implementation of energy conservation
programs; (3) performance contracts for demand-side management work;
(4) monitoring and/or evaluating demand-side management programs,
including metering and site inspection; and (5) other similar or related
demand-side management activities.
In addition, APS and AYP Capital request authority to allow AYP
Capital or an EMS NEWCO to make investments in energy efficiency and
conservation assets and/or other industrial or commercial equipment utilizing
or involved in the utilization of electric power (collectively, "energy
assets") and/or loans to energy services and demand-side management customers
or customers who purchase or may be expected to purchase electricity, directly
or indirectly, from an Operating Subsidiary to enable such customers to
finance the purchase of such energy assets. The energy assets so acquired may
be leased or sold to customers at prices to be negotiated based upon the fair
market value thereof. Such energy assets would also be used by AYP Capital or
an EMS NEWCO in providing energy conservation and efficiency services to
associate companies at cost. They may also be used to provide services to
non-associates, including industrial and retail customers of associate
companies, at prices based on the fair market value thereof. AYP Capital or
an EMS NEWCO may retain title to the facilities and equipment used to provide
<PAGE>
these services. Customer financing will enable AYP Capital's or the EMS
NEWCO's customers to purchase goods and services from third party vendors and
suppliers of their own choosing on terms and conditions negotiated directly by
them.
Customer financing may take the form of capitalized leases,
operating leases, tax exempt financings, promissory notes, or conditional
sales contracts. The term and duration of these arrangements will vary from
one year to thirty years. All financing will be priced at fair market value,
and will include the cost of the equipment, interest and the cost of capital,
and the credit worthiness of the particular customer and arrangement involved.
In February 1995, the Commission in EUA Cogenex Corporation
(Release No. 35-26232) recognized that the provision of energy management
services is closely related to the core business of electric utility
companies. Moreover, the Applicants believe that the proposed energy
management and demand-side management services fall within the provisions of
paragraph (i) of section (b)(1) of proposed Rule 58.
2. Investment and Financing
APS seeks authorization to increase its investment in AYP Capital,
and to permit AYP Capital to incur debt which may be guaranteed by APS, which
is set forth in more detail below in connection with energy-related
activities, in order to enable AYP Capital to (i) engage in the activities
described in Part I as well as the activities previously approved by the
Commission, and (ii) make investments in an EMS NEWCO ("Energy-Related NEWCO")
to engage in such activities.
(A) Investment in, and Financing of, AYP Capital
APS proposes to invest in AYP Capital up to an aggregate of
$75 million outstanding at any one time (calculated as provided herein)
through December 31, 1999 in connection with the activities previously
approved by the Commission and the energy-related activities described in Part
I through any combination of (1) purchases of AYP Capital's common stock, and
(2) loans to AYP Capital. In addition, AYP Capital proposes to obtain loans
from banks or other lenders or issue other recourse obligations which may or
may not be guaranteed by APS. Any such borrowings by AYP Capital from third
parties that are guaranteed by APS would be included in and subject to the
$75 million aggregate investment authority requested by APS. Seventy-five
million dollars represents less than 2% of APS' consolidated capitalization of
$4,525,893,826 at June 30, 1995.
APS and AYP Capital are also requesting authorization in Part II
of this Application for (i) up to $100 million in Section A (FUCOs and EWGs)
and authority to issue up to $200 million of nonrecourse debt securities, (ii)
up to $25 million in Section B (Factoring of Accounts Receivable), and (iii)
up to $2 million in Section C (Real Estate). However, Applicants state that
no more than an aggregate of $100 million will be outstanding at any one time
in connection with all of the activities in this Post-Effective Amendment
combined, including loans and guarantees, and not more than $200 million in
<PAGE>
nonrecourse debt securities will be outstanding. One hundred million dollars
represents less than 2.5% of APS' consolidated capitalization at June 30,
1995.
To the extent such investments involve loans to AYP Capital, such
loans will be made from time to time prior to December 31, 1999, with
maturities no later than December 31, 2004. Such loans if they are from APS
will bear a fixed interest rate equal to a rate not exceeding the prime rate
in effect on the date of the loan at a bank designated by APS. Loans to AYP
Capital under the authority requested herein may be funded by APS through its
short-term borrowing program, as previously authorized by order of the
Commission dated November 5, 1993 (File No. 70-7888, Release No. 35-25919).
Such loans may be evidenced by notes from AYP Capital payable to the order of
APS in the principal amount of such loan, or may be made pursuant to open
account advances. In the case of loans from lenders other than APS, the loans
will have a fixed interest rate not to exceed, on the date of the loan, 3%
over the prime rate at a U.S. money center bank to be designated by APS. Any
notes sold to a lender other than APS may be guaranteed by APS as to
principal, premium, if any, and interest. In connection with any such sale,
lender fees such as underwriting and commitment fees may be paid in an amount
not greater than 3% of the principal amount of any note. It is further
proposed that any notes issued to APS hereunder may, at the option of APS, be
converted to capital contributions to AYP Capital through APS's forgiveness of
the debt represented thereby.
(B) Investment in, and Financing of, an Energy-Related NEWCO
APS and AYP Capital also request authorization through
December 31, 1999 for AYP Capital to organize an Energy-Related NEWCO and to
invest in and provide funding to such Energy-Related NEWCO through
(1) purchases of capital stock and (2) loans and the conversion of any such
loans to capital contributions. APS and AYP Capital propose that any amount
permitted to be invested by APS in AYP Capital shall be permitted to be
reinvested by AYP Capital in an Energy-Related NEWCO. In addition, the
Applicants propose that the Energy-Related NEWCO be granted the authority to
obtain loans from banks or other lenders which may or may not be guaranteed by
APS or AYP Capital. Any such borrowings by the Energy-Related NEWCO from
third parties would be included in and subject to the $75 million investment
authority requested by APS for the energy-related activities in Part I. All
of the parameters with respect to loans to AYP Capital described above in
subsection (A) would also apply to loans to such Energy-Related NEWCO, except
that guarantees of loans may also be made by AYP Capital.
(C) Guarantees
APS and AYP Capital also propose, from time to time, to guarantee
or to act as surety on bonds, indebtedness and performance and other
obligations issued or undertaken by AYP Capital or an Energy-Related NEWCO in
connection with their businesses. It is anticipated that, in the ordinary
course of business, AYP Capital and the Energy-Related NEWCO may be required
to furnish various types of bonds including bid bonds, performance bonds, and
material and payment bonds, and provide commercial sureties for obligations
under certain of such bonds. The proposed indemnification by APS or AYP
Capital of such sureties will facilitate obtaining the necessary bonds when
needed and at more favorable rates than if such obligations were not
guaranteed and will enhance the competitiveness of AYP Capital and the
Energy-Related NEWCO in the marketplace.
APS and AYP Capital seek the authority to provide such guarantees
of and similar provisions and arrangements concerning AYP Capital's and an
Energy-Related NEWCO's indebtedness to third parties, performance and
undertaking of other obligations through December 31, 1999; provided, that any
guarantees or indemnifications outstanding at December 31, 1999 shall continue
until expiration or termination in accordance with their terms. To the extent
that the amount of any underlying obligation being guaranteed by APS or AYP
Capital is not included in and subject to the $75 million investment authority
requested pursuant to subsections (A) and (B) above, any such guarantees,
indemnifications and sureties will be included in and subject to such $75
million investment authority. For purposes of computing the above
limitations, neither agreements to provide guarantees or indemnifications of
sureties of AYP Capital or the Energy-Related NEWCO which have not actually
been issued, nor the respective shares of any such obligations or
indemnification of sureties held by any joint venture partner of AYP Capital
or any Energy-Related NEWCO, will be counted. It is further proposed that,
because the need for such guarantees and indemnifications cover a range of
contracts too broad to describe all of their natures at this time, APS, AYP
Capital and the Energy-Related NEWCO have the flexibility to negotiate
specific guarantees and similar provisions and arrangements with third
parties, and indemnifications of sureties, as the need to do so arises,
without further Commission authorization.
PART II. OTHER ACTIVITIES
APS and AYP Capital also request authority for AYP Capital and one
or more special purpose subsidiaries to engage in the following additional
activities which are not specifically enumerated in section (b)(1) of proposed
Rule 58.
(A) FUCOs, EWGs and Project NEWCOs
Based on its experience and skills in electricity generation,
transmission and distribution and related fields, APS believes that it is well
positioned to identify, evaluate, select and operate FUCOs which present
attractive investment opportunities, and AYP Capital has been granted
authority to engage in preliminary development activities in respect thereof.
APS and AYP Capital now seek authorization to expand the scope of such
previously approved activities to allow AYP Capital to engage in activities
directly or indirectly related to the acquisition of and ownership of
interests in, construction and/or operation of FUCOs, including any necessary
authority for AYP Capital to make such investments in FUCOs through any type
of investment vehicles, including limited partnerships or other types of joint
entities such as limited liability companies, the sole objective of which is
to make investments in one or more FUCOs.
<PAGE>
AYP Capital has previously received authority to acquire interests
in EWGs, and is in this application requesting authority to invest in FUCOs.
APS and AYP Capital seek authorization to permit them to effect such
investments in EWGs and FUCOs, (collectively "Exempt Subsidiaries") through
special purpose subsidiaries to be organized from time to time for such
purposes. (See, e.g., Release No. 35-26096 wherein The Southern Company was
authorized to acquire the securities of one or more companies engaged in the
business of owning and holding the securities of FUCOs and EWGs.)
APS and AYP Capital request authorization to acquire in one or
more transactions, the securities of one or more companies ("Project NEWCOs")
engaged directly or indirectly, and exclusively, in the business of owning and
holding the securities of Exempt Subsidiaries. The Applicants propose that
the authorization requested herein remain effective until the earlier of: (i)
December 31, 1999; and (ii) the effective date of any rule of general
applicability adopted by the Commission that would exempt the acquisition of
any securities of any Project NEWCOs from the requirements of Section 9(a) and
10 of the Act.
A Project NEWCO may be organized at the time of, and in order to
facilitate, the making of bids or proposals to acquire an interest in any
Exempt Subsidiary, or after the award of a bid proposal, in order to
facilitate closing on the purchase or financing of any such Exempt Subsidiary.
A Project NEWCO also may be organized subsequent to the consummation of an
acquisition of an interest in an Exempt Subsidiary for a number of different
reasons, including to effect an adjustment in the respective ownership
interests in any Exempt Subsidiary held by APS or AYP Capital and unaffiliated
co-investors; facilitate a partial sale of an interest in any such Exempt
Subsidiary; comply with applicable laws of foreign jurisdictions limiting or
otherwise relating to the ownership of domestic companies by foreign
nationals; or limit exposure to U.S. and foreign taxes as part of tax
planning.
APS and AYP Capital request authority to make direct or indirect
investments in Project NEWCOs. Any such direct or indirect investment in any
Project NEWCO would be consummated only if, at the time thereof, and giving
effect thereto, APS' "aggregate investment," determined in accordance with
Rule 53(a)(1)(i), in all FUCOs, EWGs and Project NEWCOs would not exceed 50%
of APS' "consolidated retained earnings," as defined in Rule 53(a)(1)(ii).
Under this limitation, APS' present investment limitation in FUCOs, EWGs and
Project NEWCOs is approximately $485 million. In addition, any such
investment in any particular Project NEWCO would be limited to an amount no
greater than the amount reasonably required in connection with making the
underlying investment in any Exempt Subsidiary (or Exempt Subsidiaries) with
respect to which such Project NEWCO was organized or formed, taking into
account development expenditures, working capital needs and cash reserves
required to be maintained in accordance with financing documents.
The Applicants propose that a Project NEWCO may also acquire and
hold direct or indirect interests in both FUCOs and EWGs. The ability to
combine ownership of both FUCOs and EWGs under a single company will enable
APS, where appropriate and consistent with other objectives, to minimize the
<PAGE>
number of separate intermediate subsidiaries needed in connection with its
investments in EWGs and FUCOs.
APS seeks authorization to invest in AYP Capital up to an
aggregate of $100 million outstanding at any one time (calculated as provided
in section 2 of Part I) through December 31, 1999 in the same manner and on
the same terms as described in section 2 of Part I (including guarantees by
APS of AYP Capital obligations) in connection with the activities described in
this section. Applicants state that no more than an aggregate of $100 million
will be outstanding at any one time in connection with all of the activities
this Post-Effective Amendment combined, including loans and guarantees, nor
more than $200 million in nonrecourse debt securities will be outstanding. In
addition, APS and AYP Capital also request authorization through December 31,
1999 for AYP Capital to organize, from time to time, Project NEWCOs and to
invest in and provide funding to such Project NEWCOs in the same manner and on
the same terms as the Applicants request authority for AYP Capital to invest
in an Energy-Related NEWCO as described in section 2 of Part I, except that
for these purposes APS and AYP Capital also request authorization to invest in
and provide funding to Project NEWCOs through purchases of partnership
interests and trust certificates in addition to capital stock, or the
equivalent of any of the foregoing under the laws of foreign subsidiaries, if
applicable. APS and AYP Capital also propose, from time to time, to provide
guarantees with respect to AYP Capital and Project NEWCOs in the same manner
and on the same terms as the Applicants propose to provide with respect to AYP
Capital in connection with energy-related activities and the Energy-Related
NEWCO in section 2 of Part I.
In addition to the foregoing, APS and AYP Capital also request
approval for any Project NEWCOs to issue equity securities and debt securities
to persons other than APS or AYP Capital (and with respect to which there is
no recourse to AYP Capital),[1] including banks, insurance companies and other
financial institutions, exclusively for the purpose of financing (including
any refinancing of) investments in Exempt Subsidiaries. Such securities may
be issued in one or more transactions from time to time through the earlier to
occur of (i) December 31, 1999, and (ii) the effective date of any rule of
general applicability adopted by the Commission exempting such transactions
from the application requirements under the Act. It is proposed that the
aggregate principal amount of nonrecourse debt securities issued by Project
NEWCOs to persons other than APS and AYP Capital will not exceed $200 million
at any one time outstanding (or the equivalent in currencies other than U.S.
dollars). Non-U.S. dollar-denominated debt would be incurred only to finance
non-U.S. dollar investments or would be fully hedged into U.S. dollars. In
any case in which APS or AYP Capital directly or indirectly own less than all
of the equity interests in a Project NEWCO, only that portion of the
[1]Any indebtedness of a Project NEWCO as to which there is recourse
to either APS or AYP Capital would be included in the $100 million
investment authority requested by APS and would be subject to the
same terms and conditions as indebtedness of APS and AYP Capital
described in this section.
<PAGE>
nonrecourse indebtedness of such Project NEWCO equal to APS' equity ownership
percentage shall be included for purposes of the foregoing limitation.
Equity securities issued by any Project NEWCOs to any party other
than APS or AYP Capital may include shares of capital stock, partnership
interests, trust certificates or the equivalent of any of the foregoing under
applicable foreign law. Nonrecourse debt securities issued to parties other
than APS or AYP Capital may include secured and unsecured promissory notes,
subordinated notes, bonds or other evidences of indebtedness. Securities
issued by Project NEWCOs may be denominated in either U.S. dollars or foreign
currencies.
The amount and type of such securities, and the terms thereof,
including interest rate, maturity, prepayment or redemption privileges, and
the terms of any collateral security granted with respect thereto, would be
negotiated on a case-by-case basis, taking into account differences from
project to project in optimum debt-equity ratios, projections of earnings and
cash flow, depreciation lives, and other similar financial and performance
characteristics of each project. Accordingly, APS and AYP Capital request the
authority to negotiate the terms and conditions of such securities without
further approval by the Commission.
Notwithstanding the foregoing, no equity security having a stated
par value would be issued or sold by a Project NEWCO for a consideration that
is less than such par value. No note, bond or other evidence of indebtedness
issued or sold by any Project NEWCOs will mature later than 30 years from the
date of issuance thereof or will bear interest at a rate which exceeds the
following: (i) if such note, bond or other indebtedness is U.S. dollar
denominated, at a fixed rate not to exceed, on the date of issuance, 6.5% over
the yield to maturity on an actively traded, non-callable, U.S. Treasury note
having a maturity equal to the average life of such note, bond or other
indebtedness (the "Applicable Treasury Rate"),[2] or at a floating rate not to
exceed, on the date of issuance, 6.5% over the then applicable prime rate at a
U.S. money center bank to be designated by APS (the "Applicable Prime Rate");
and (ii) if such note, bond or other indebtedness is denominated in the
currency of a country other than the United States, at a fixed or floating
rate which, when adjusted (i.e., reduced) for the prevailing rate of inflation
in such country, as reported in official indices published by such country,
would be equivalent to a rate on a U.S. dollar denominated borrowing of
identical average life that does not exceed, on the date of issuance, 10% over
the Applicable Treasury Rate (interpolated if necessary) or Applicable Prime
Rate, as the case may be.
[2]If there is not actively traded Treasury note with a maturity equal
to the average life of such note, bond or other evidence of
indebtedness, then the Applicable Treasury Rate would be
determined by interpolating linearly with reference to the yields
to maturity on actvely traded, non-callable, Treasury notes
having maturities near (i.e., both shorter and longer than) such
average life.
<PAGE>
In connection with the issuance of any nonrecourse debt securities
by any Project NEWCO, it is anticipated that such Project NEWCO may grant
security in its assets. Such security interest may take the form of a pledge
of the shares or other equity securities of an Exempt Subsidiary that it owns,
including a security interest in any distributions from any such Exempt
Subsidiary, or a collateral assignment of its rights under and interests in
other property, including rights under contracts.
AYP Capital also requests authority for any Project NEWCO to agree
to pay placement or commitment fees, and other similar fees, to placement
agents or others in connection with any sale of its non-recourse debt
securities or equity securities.
In connection with investments in Exempt Subsidiaries, it is
typical that a portion of the capital requirements of any such Exempt
Subsidiary would be obtained through nonrecourse financing involving
borrowings from banks and other financial institutions. In some cases,
however, it may be necessary or desirable to structure an investment in an
Exempt Subsidiary such that the obligations created are not those of the
Exempt Subsidiary, but instead those of its parent companies. For example, in
a consortium of nonaffiliated companies bidding to purchase the securities or
assets of an EWG or FUCO, each of the consortium members would be obligated to
fund its respective share of the proposed purchase price. If external sources
of funds are needed for this purpose, a participant in the consortium may
choose to engage in nonrecourse financing through one or more single-purpose
subsidiaries -- such as the Project NEWCOs -- that would then utilize the
proceeds of the financing to acquire an ownership interest in the Exempt
Subsidiary.[3]
APS and AYP Capital believe that external financing by any Project
NEWCO involves the same issues that are involved when the financing is carried
out by an Exempt Subsidiary in terms of the potential adverse impacts upon the
financial integrity of a registered holding company system. Accordingly,
where the proceeds of any such financing (including any refinancing) are
utilized to make an investment in any Exempt Subsidiary, and there is no
recourse directly or indirectly to APS with respect to the securities issued
or sold, there is no basis for any adverse findings under Section 6, 7 and 12
of the 1935 Act, provided that, at the time of the issuance thereof, APS is in
compliance with Rule 53.
All services rendered by AYP Capital or Project NEWCOs to non-
affiliates will be based upon the fair market value thereof. AYP Capital and
Project NEWCOs also propose to provide such services and sell goods at fair
[3]Typically, the shares of capital stock or other equity interests
in the Exempt Subsidiary would be pledged to secure the securities
issued by the Project NEWCO.
<PAGE>
market prices to any associate EWG, FUCO or QF[4] and to Project NEWCOs which
are any of the foregoing, and request an exemption pursuant to Section 13(b)
from the requirements of Rules 90 and 91 as applicable to such transactions in
which any one or more of the following circumstances are met:
1. Such associate entity is a FUCO, or is an EWG which derives
no part of its income, directly or indirectly, from the generation,
transmission, or distribution of electric energy for sale within the United
States;
2. Such associate entity is an EWG which sells electricity at
market-based rates which have been approved by the Federal Energy Regulatory
Commission ("FERC") or the appropriate state public utility commission,
provided that the purchaser of such electricity is not an associate company of
AYP Capital within the APS System;
3. Such associate entity is a QF that sells electricity
exclusively (i) at rates negotiated at arms'-length to one or more industrial
or commercial customers purchasing such electricity for their own use and not
for resale, and/or (ii) to an electric utility company, other than any
associate company of AYP Capital within the APS System, at the purchaser's
"avoided cost" as determined in accordance with the regulations under PURPA;
or
4. Such associate entity is an EWG or QF that sells electricity
at rates based upon its cost of service, as approved by FERC or any state
public utility commission having jurisdiction, provided that the purchaser of
such electricity is not an associate company of AYP Capital within the APS
System.
(B) Factoring of Accounts Receivable
APS and AYP Capital request authority to allow AYP Capital or the
Factoring NEWCO to purchase accounts receivable (i) of the Operating
Subsidiaries, and (ii) of non-associate companies whose primary revenues are
derived from the sale of electricity, including municipalities and electric
cooperatives. (See File No. 70-7218, Release No. 35-26190 wherein CSW Credit,
Inc., a non-utility subsidiary of Central and South West Corporation, a
registered holding company, was authorized to expand its factoring business to
the factoring of accounts receivable of non-associate electric utility
companies.)
APS and AYP Capital believe that the factoring of accounts
receivable of the Operating Subsidiaries will reduce the capitalization
requirements of the Operating Subsidiaries, thus lowering the revenue required
from ratepayers, and will benefit APS shareholders through the earnings
generated by the factoring operation. APS and AYP Capital also believe that,
[4]QF is a qualifying facility as defined under the Public Utility
Regulatory Policies Act of 1978, as amended ("PURPA").
<PAGE>
for the same reasons factoring would benefit the Operating Subsidiaries, it
will be able to find opportunities profitably to factor accounts receivable of
non-associate companies. APS and AYP Capital are familiar with the patterns
of billing and collection in the electric utility industry and understand and
can manage the business risks involved in factoring accounts receivable of
non-associate electric utilities, including municipalities and electric
cooperatives. Accordingly, after an introductory period of conducting
factoring activities solely with the Operating Subsidiaries, it is expected
that factoring services will be expanded to non-associate electric utilities,
including municipalities and electric cooperatives subject to the parameters
described below.
AYP Capital and the Factoring NEWCO will limit the acquisition of
receivables from non-associate companies so that the trailing twelve-month
average amount of non-associate company receivables held as of the end of any
calendar month (i.e., the average of the month-end amounts for such month and
the preceding 11 months) will be less than the trailing twelve-month average
amount of receivables acquired from APS associate companies and held as of the
end of such calendar month.
AYP Capital or the Factoring NEWCO will purchase accounts
receivable from the associate company or non-associate company on the day that
such accounts receivable become due and payable. Purchases from Operating
Subsidiaries are intended to be made at discounts which are competitive to
those of other entities providing comparable factoring services. The
methodology to be used in determining an appropriate discount will incorporate
an analysis of the credit quality of the portfolio of assets being acquired
and the costs and expenses, including interest costs, incurred in operating
the Factoring NEWCO. In order to calculate the discount, historical
information on the portfolio of accounts receivable will be analyzed to
determine (i) expected losses on the pool of assets to be purchased and (ii)
the average life of the receivables portfolio. The discount may be different
for each of the Operating Subsidiaries and will be determined as described
below.
The discount is a factor which is adjusted for the average life of
the receivables portfolio. The factor is the sum of (a) a percentage which
reflects the expected losses that will result from nonpayment due to credit
reasons, (b) a percentage equal to the cost of financing the pool of
receivables, (c) a percentage equal to the servicing fees to be paid to the
respective Operating Subsidiary to service the portfolio, (d) a percentage
equal to any costs and expenses associated with operating the Factoring NEWCO,
and (e) a return on the equity invested in the Factoring NEWCO.
Accounts receivable will be assigned to AYP Capital or the
Factoring NEWCO on a nonrecourse basis, except to the extent that such
receivable is invalid, and AYP Capital or the Factoring NEWCO will bear the
risk of the uncollectability of the account. An invalid receivable is one
which is fraudulent, or one which is noncollectible for reasons other than an
inability or unwillingness on the part of a customer to pay an amount which is
legally owned. Each company from which accounts receivable are purchased is
<PAGE>
expected to be appointed to act as collection agent in respect of such account
receivables.
The factoring activities of AYP Capital and the Factoring NEWCO
will be conducted so that the risks associated with factoring operations for
non-associate companies will be borne by the APS shareholders and not the
Operating Subsidiaries or their ratepayers. Separate audited accounting
records will be maintained for the factoring activities in respect of each
non-associate customer.
In addition, APS and AYP Capital also request authorization
through December 31, 1999 for AYP Capital to organize a Factoring NEWCO and to
invest in and provide funding to such Factoring NEWCO in the same manner and
on the same terms as the Applicants request authority by AYP Capital to invest
in an Energy-Related NEWCO as described in section 2 of Part I. APS and AYP
Capital also propose, from time to time, to provide guarantees with respect to
AYP Capital and the Factoring NEWCO in the same manner and on the same terms
as the Applicants propose to provide with respect to AYP Capital in connection
with energy-related activities and the Energy-Related NEWCO.
(C) Real Estate Activities
From time to time various associate companies of AYP Capital
determine that real estate which they own and which is not in rate base is not
being used or could be used more profitably. In order to derive further value
from such real estate that associate companies of AYP Capital may own from
time to time, and to centralize real estate related activities for the holding
company system, APS and AYP Capital request authority to allow AYP Capital and
the Real Estate NEWCO to engage, as agent for the system companies, in the
following real estate related activities with reference to properties which
are not in rate base: (i) managing the system's real estate portfolio,
including identification of currently useful and non-useful properties;
(ii) marketing excess or unwanted system real estate, including advertising
and contacting potential buyers; and (iii) marketing, brokering or otherwise
facilitating the exploitation of resources contained in or on system real
estate. No real estate will be purchased by AYP Capital in connection with
its activities. Rather AYP Capital will provide real estate services such as
identifying currently useful and non-useful properties to associate companies
on an agency basis at cost in compliance with Rules 90 and 91. The net
proceeds realized from any sale or development will go to the company which
owns the subject asset. The system companies which currently own real estate
that is not in regulated rate base are Monongahela Power Company, The Potomac
Edison Company, West Penn Power Company, AP Coal Company and West Virginia
Power & Transmission Company. Managing the real estate portfolio by AYP
Capital or a Real Estate NEWCO, as agent for the system companies, may involve
identifying non-productive real estate assets, identifying and evaluating
alternative uses for such assets, arranging for the "best use" of those assets
(i.e. sale, timbering, oil/gas drilling, and mining), or monitoring the
ongoing financial performance of the system's real estate portfolio that is
not in rate base.
<PAGE>
The resources contained in or on system real estate which is not
in rate base include timber, oil, gas and coal. AYP Capital may, as agent for
the system companies, explore options and arrange for the logging of timber,
drilling for oil and gas and/or mining for coal on those properties.
In addition, APS and AYP Capital also request authorization
through December 31, 1999 for AYP Capital to organize a Real Estate NEWCO to
perform the above-described services for associate companies of AYP Capital.
APS and AYP Capital further request authority to invest in and provide funding
to such Real Estate NEWCO in the same manner and on the same terms as the
Applicants request authority by AYP Capital to invest in the Energy-Related
NEWCO as described in section 2 of Part I. APS and AYP Capital also propose,
from time to time, to provide guarantees with respect to AYP Capital and the
Real Estate NEWCO in the same manner and on the same terms as the Applicants
propose to provide with respect to AYP Capital in connection with energy-
related activities and an Energy-Related NEWCO.
PART III. TRANSACTIONS WITH ASSOCIATES AND ACCOUNTING
AYP Capital currently has no employees. A wide range of services
are provided on an as-needed basis to AYP Capital by personnel employed by
Allegheny Power Service Corporation ("APSC"), a wholly-owned subsidiary of
APS, pursuant to a Service Agreement effective August 8, 1994. The Service
Agreement provides that AYP Capital will reimburse APSC for the cost of
services provided, computed in accordance with Rules 90 and 91 of the Act and
applicable rules and regulations.
At the present time, APSC budgets for personnel to meet the
requirements of the utility as well as the non-utility businesses which it
supports. Consequently, the staffing for APSC fluctuates. However, it is the
intention of AYP Capital that its business requirements will not diminish the
responsibility of APSC personnel to serve the Operating Companies in a timely
fashion so that the Operating Companies may serve their customers.
Initially, AYP Capital anticipates that each wholly-owned
subsidiary of AYP Capital ("NEWCO") may or may not have paid employees. If
not, personnel employed by APSC will provide a wide range of services on an
as-needed basis to such NEWCO pursuant to a service agreement to be entered
into between the NEWCO and APSC. Under this service agreement, the NEWCO will
reimburse APSC for the cost of services provided, computed in compliance with
Rules 90 and 91 of the Act, as well as applicable rules and regulations. All
time spent by APSC employees working for such NEWCO will be billed to and paid
by such NEWCO on a monthly basis.
Subject to Commission approval, AYP Capital or NEWCOs may at some
future date enter into similar agreements for the performance of services with
other APS companies. At no time will AYP Capital or NEWCOs use in excess of
2% of the total employees of all other Allegheny system domestic public
utility companies.
APSC employees maintain records (by work order) showing time spent
in rendering services, nature of services, and identity of companies or groups
<PAGE>
of companies served. APSC has established AYP Capital project and
administrative work orders for APSC employees working on behalf of AYP
Capital. All charges for time and associated incremental out-of-pocket
expenses incurred by APSC employees working on behalf of AYP Capital will be
billed to and paid by AYP Capital on a monthly basis. If AYP Capital utilizes
Operating Company personnel, the Operating Company personnel will maintain
records (by work order) showing the time spent in rendering services and the
nature of the services. All charges for time and associated incremental out-
of-pocket expenses incurred by Operating Company personnel working on behalf
of AYP Capital will be billed to and paid by AYP Capital on a monthly basis.
Internal system controls, such as monthly reviews of accounts, assure that
charges will be paid by AYP Capital monthly.
AYP Capital will maintain separate financial records and detailed
supporting records by project. These records will include, but are not
limited to, service company billings, project investment, outside consulting
fees, administrative expenses, and APS capital contributions. APSC personnel,
pursuant to the service agreement with AYP Capital, are responsible for record
keeping and reporting which are in compliance with generally accepted
accounting principles.
Each NEWCO will also maintain separate financial records and
detailed supporting records by project. These records will be available to
any proper federal regulatory agency or state regulatory agency for review.
The accounting staff of APSC, pursuant to the service agreement with each
NEWCO, will be responsible for record keeping and reporting which are in
compliance with generally accepted accounting principles.
Within 45 days after AYP Capital determines that the purpose for
owning any NEWCO no longer exists, it shall liquidate or dissolve any such
NEWCO unless, within that time, AYP Capital determines that any such NEWCO may
be used in conjunction with another proposal or plan as described herein in a
different Exempt Subsidiary. To the extent needed, APS and AYP Capital
request authority to liquidate or dissolve any NEWCO under such circumstances.
Revenues from customers of AYP Capital and NEWCOs which are not
associated with APS will be calculated to reimburse all applicable costs,
including overhead, plus produce a profit for AYP Capital or such NEWCO, as
the case may be. All of AYP Capital's and the NEWCOs' costs will be
identified and booked promptly. AYP Capital will continue to use portions of
systems also employed by APSC to account for those costs and segregate them by
project. AYP Capital will retain such of its earnings as may remain after
reimbursement to APSC of these costs and after the payment or funding of other
costs and liabilities of AYP Capital and its subsidiaries. Some portion or
all of the retained earnings of AYP Capital may be paid as dividends to APS.
PART IV. REPORTING
AYP Capital will provide, not later than 60 days following the end
of each calendar quarter and 120 days after the end of each calendar year, a
certificate of notification pursuant to Rule 24. Such certificates shall
include the following:
<PAGE>
(1) An unaudited balance sheet and income statement for AYP
Capital and one for each NEWCO, when established;
(2) A narrative description of AYP Capital's activities during
the quarter just ended and a total of expenses organized by segment (i.e.
Energy Management Services, FUCOs and EWGs, Factoring of Accounts Receivable,
and others), and within each segment, a narrative description of services
rendered by project, and new developments and updates by project type;
(3) Amounts and forms of: (i) guarantees of, and similar
provisions and arrangements concerning, performance and undertaking of other
obligations by AYP Capital, or any subsidiary of AYP Capital, which APS has
granted and are currently effective; and (ii) indemnifications of and with
respect to persons acting as sureties on bonds or other obligations on behalf
of AYP Capital, or any subsidiary of AYP Capital, which APS has granted and
are currently effective;
(4) A description of services provided to associate companies
which identifies the recipient company, the service and the charge to the
associate. The method for computing the charge, with regard to FUCOs and
EWGs, if different than at cost, will be set out; and
(5) In connection with its factoring activities, (1) a balance
sheet as of the end of the year, statement of income for the twelve months
then ended and notes to the financial statements; (2) a listing of AYP
Capital's and the Factoring NEWCO's principal amount of borrowings outstanding
at the end of each year, which will contain the terms of each obligation, name
of lending institution and effective cost of borrowing; (3) outstanding
accounts receivable as of the end of each month, separated by associate and
non-associate companies with each non-associate company listed separately and
a detailed calculation of the annual discount for associate companies; (4)
methodology used in computing the discount to associate companies; and
(5) calculation by month of AYP Capital's consolidated earnings coverage.
<PAGE>
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.
ALLEGHENY POWER SYSTEM, INC.
By: KLAUS BERGMAN
Klaus Bergman
Chief Executive Officer
AYP CAPITAL, INC.
By: KLAUS BERGMAN
Klaus Bergman
President and
Chief Executive Officer
Dated: October 26, 1995
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