File No. 70-8411
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
POST-EFFECTIVE AMENDMENT NO. 7
TO
APPLICATION OR DECLARATION
ON
FORM U-1
UNDER
THE PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
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)
<PAGE>
TABLE OF CONTENTS
Background. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Overview. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Part I. Energy-Related Activities . . . . . . . . . . . . . . . . . . 4
1. Activities. . . . . . . . . . . . . . . . . . . . . . . . . . 4
A. Qualifying Cogeneration Facilities
and SPPs . . . . . . . . . . . . . . . . . . . . . . . . 5
B. Energy Management Services and Demand-Side Management
Services . . . . . . . . . . . . . . . . . . . . . . . . 5
C. Investment In New Technologies . . . . . . . . . . . . . 9
D. Brokering of Energy-Related Commodities and Power
Brokering, Power Marketing and Related Activities. . . .13
E. Commercialization Power Quality Devices. . . . . . . . .15
F. Telecommunications Services. . . . . . . . . . . . . . .16
G. Environmental Services . . . . . . . . . . . . . . . . .17
H. Chemical Laboratory Services . . . . . . . . . . . . . .18
2. Investment and Financing. . . . . . . . . . . . . . . . . . .19
A. Investment In, and Financing Of, AYP Capital . . . . . .20
B. Investment In, and Financing Of, Energy-Related
NEWCOs . . . . . . . . . . . . . . . . . . . . . . . . .21
C. Guarantees . . . . . . . . . . . . . . . . . . . . . . .22
Part II. Other Activities. . . . . . . . . . . . . . . . . . . . . . .23
A. FUCOs, EWGs and Project NEWCOs . . . . . . . . . . . . .24
B. Factoring or Securitization of Accounts Receivable . . .31
C. Real Estate Activities . . . . . . . . . . . . . . . . .34
Part III. Transactions With Associates and Accounting . . . . . . . . .36
Part IV. Reporting . . . . . . . . . . . . . . . . . . . . . . . . . .38
<PAGE>
1. Applicants hereby delete in its entirety, the amendment to Item 1.
Description of Proposed Transaction contained in Post-Effective Amendment
No. 5 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
<PAGE>
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:
(A) to allow AYP Capital to engage in activities directly or
indirectly related to the development, acquisition, ownership,
construction and operation of qualifying cogeneration facilities and
SPPs located throughout the United States;
(B) to allow AYP Capital or one or more special purpose
subsidiaries ("EMS NEWCOs") 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;
(C) to allow AYP Capital to invest in new technologies or enter
into one or more investment limited partnership agreements, including
such an agreement with Advent International Corporation ("Advent");
(D) to allow AYP Capital or one or more special purpose
subsidiaries ("Brokering NEWCOs") to engage in power brokering, power
2
<PAGE>
marketing and related activities, as well as brokering of energy-related
commodities and financial instruments to non-associate companies, and to
provide those services to associate companies at cost in compliance with
Rules 90 and 91;
(E) to allow AYP Capital or one or more special purpose
subsidiaries ("Technology NEWCOs") to engage in the marketing, sale and
installation of power quality devices to customers of associate
companies and non-associate utility companies;
(F) to allow AYP Capital or one or more special purpose
subsidiaries ("Telecommunications NEWCOs") to provide telecommunications
services to non-associate companies, and to provide those services to
associate companies at cost in compliance with Rules 90 and 91;
(G) to allow AYP Capital or one or more special purpose
subsidiaries ("Environmental NEWCOs") to provide environmental services
to non-associate companies; and
(H) to allow AYP Capital or one or more special purpose
subsidiaries ("Laboratory NEWCOs") to sell chemical laboratory services
to non-associate companies, and to provide those services to associate
companies at cost in compliance with Rules 90 and 91.
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
3
<PAGE>
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;
(B) to allow AYP Capital or one or more special purpose
subsidiaries ("Factoring NEWCOs") to factor the accounts receivable of
associate and non-associate utility and similar companies, or effect
securitizations of accounts receivable of such companies;
(C) to allow AYP Capital or one or more special purpose
subsidiaries ("Real Estate NEWCOs") to engage 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.
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.
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.
4
<PAGE>
(A) Qualifying Cogeneration Facilities and SPPs
APS believes that it is well positioned to identify, evaluate,
select and operate qualifying cogeneration facilities and SPPs, 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 development,
acquisition of and ownership of interests in, construction and/or operation of
qualifying cogeneration facilities and SPPs located throughout the United
States. The activities in this area come within the provisions of
paragraph (viii) of section (b)(1) of proposed Rule 58.
(B) Energy Management Services and
Demand-Side Management Services
APS and AYP Capital request authority to allow AYP Capital or EMS
NEWCOs to provide a wide range of energy conservation services, energy
management services and demand-side services to associate companies and non-
associate companies. AYP Capital also requests authority for it or EMS NEWCOs
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
5
<PAGE>
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 EMS NEWCOs)
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
6
<PAGE>
motor selection and use; air quality; systems for heating, ventilation and air
conditioning, including thermal energy storage systems; consultation with
respect to environmental quality requirements; and facility management
services.
APS and AYP Capital request authority to allow AYP Capital or EMS
NEWCOs 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.,
7
<PAGE>
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.
Any energy management and demand-side management services provided
by AYP Capital or EMS NEWCOs to associate companies will be furnished at
prices not to exceed market prices pursuant to an exception from the
requirements of Section 13(b) and Rules 90 and 91 thereunder.
In addition, APS and AYP Capital request authority to allow AYP
Capital or EMS NEWCOs 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
EMS NEWCOs in providing energy conservation and efficiency services to
associate companies at prices not to exceed market prices, or in providing
services to non-associates, including industrial and retail customers of
8
<PAGE>
associate companies, at prices based on the fair market value thereof. AYP
Capital or EMS NEWCOs may retain title to the facilities and equipment used to
provide these services. Customer financing will enable AYP Capital's or an
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. Loans to customers for this purpose will be evidenced by
the customers' promissory notes.
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.
(C) Investment in New Technologies
Significant opportunities exist for investment by AYP Capital in
companies that are developing new technologies related to APS' core business
operations. Such new technologies would have the capability of improving or
augmenting the Operating Subsidiaries' operations currently or in the future,
and AYP Capital has received general authority to make investments in such
companies and to engage in preliminary development activities in connection
therewith. AYP Capital believes that in addition to its direct investments of
this sort, it may be advantageous from time to time to identify experienced
investment participants in the venture capital business and to form investment
limited partnerships to achieve AYP Capital's business objectives in this
area. AYP Capital requests authority to make such investments directly or to
enter into arrangements with investment partners. Investing with an
9
<PAGE>
experienced investment partner would assist AYP Capital in accessing
opportunities for direct investments, strategic partnering agreements, joint
ventures, licensing agreements, and/or acquisitions. In fact, the Commission
in February 1995 approved AYP Capital's participation as a limited partner in
Envirotech Investment Fund I Limited Partnership, a Delaware limited
partnership which will make investments in certain technology sectors related
to improving the generation, transmission and distribution of electricity.
See Release No. 35-26225.
The areas in which AYP Capital's investments will be primarily
focused include:
Energy conversion, storage and delivery technology;
Conservation, load management, and demand-side management
technologies, systems and services;
Environmental and waste treatment technologies and services
related to electricity generation, transmission and
distribution (i.e., technologies for scrubbing of stack
emissions or disposal of fly ash wastes), or environmental
technologies which use electric power as a key component in
their waste treatment process;
Advanced computer hardware and software for use in the
generation, transmission and distribution (or planning
therefor) of electricity (including artificial
intelligence/neural net systems and components);
Power-related electronic systems, control systems and
components;
Electronic automation systems and components, including
instrumentation, sensors, robotics and inspection
techniques; and
such other projects, technology, products and the like which
may from time to time arise which meet the general
objectives as stated above.
For example, AYP Capital intends to enter into an investment
limited partnership agreement (the "Advent Agreement") with Advent
10
<PAGE>
International Corporation ("Advent"), a form of which is attached hereto as
Exhibit B-1, by which AYP Capital and Advent would form a limited partnership
(the "Partnership") under the laws of the State of Delaware. AYP Capital
would be the sole investor and limited partner and Advent would be the general
partner. The investment goals of the Partnership will be consistent with the
general objectives and goals outlined above. As the general partner, Advent
shall have such liability for the repayment, satisfaction and discharge of the
debts, liabilities and obligations of the Partnership as is provided by
applicable law for a general partner of a limited partnership (See Section
1.04(a) of the Advent Agreement). AYP Capital, as the limited partner, shall
be liable to the Partnership for the repayment, satisfaction and discharge of
its debts, liabilities and obligations only to the extent of (i) the unpaid
portion of its capital commitments, and (ii) applicable Delaware law. (See
Section 1.04(b) of the Advent Agreement).
Advent will have fiduciary responsibility for investments and will
receive a yearly management fee of 3.5% of the total committed capital, as
well as a 20% share of net gains and income on investments. (See Section 2.03
of the Advent Agreement). The Advent Agreement provides that the Partnership
shall continue for a period of ten years from the date of AYP Capital's
initial capital contribution. The Partnership may be extended for such period
of time not longer than four years as the general partner and the limited
partner may agree. However, the Partnership may be dissolved at any time
after its first full fiscal year. (See Section 6.01 of the Advent Agreement).
The investment objective of the Partnership will be to invest principally in
securities of businesses engaged in activities in those product and market
areas that AYP Capital has determined meet its business objectives in the area
11
<PAGE>
of new and emerging energy technologies related to APS' core business and
which are described in Appendix B to the Advent Agreement.
Investment opportunities for the Partnership will be identified
primarily by Advent through the Partnership and in some instances by AYP
Capital. Advent and AYP Capital will develop an investment charter for the
Partnership to meet AYP Capital's business development objectives. Advent
personnel will provide investment advice, identify potential investments which
meet AYP Capital's business development objectives and present such
opportunities to AYP Capital for review. AYP Capital will then determine
whether the proposed investment meets its financial and other objectives.
Both Advent and AYP Capital will undertake appropriate due diligence
activities before an investment commitment will be made. Advent will make a
preliminary recommendation on the structure of each investment and prepare an
investment proposal for AYP Capital's review. AYP Capital will retain final
approval over any investment made by the Partnership. AYP Capital believes
that investing through the form of limited partnerships allows it to
participate in the new competitive arena in a conservative and studied manner
with minimum risk to investors and consumers by utilizing the advice of
experts in the field of venture capital to identify and evaluate new energy
and energy-related environmental and other technologies and investment
opportunities.
Because of the need for quick response in the area of venture
capital, AYP Capital does not intend to seek prior Commission approval before
the limited partnership invests in a company identified by Advent. In each
case, however, AYP Capital will first determine that the investment
opportunity meets its financial and other objectives, as outlined above.
12
<PAGE>
AYP Capital intends that its participation in future investments
and in limited partnerships would be generally consistent -- in terms of the
nature of the investments to be pursued, the partners AYP would seek out, the
structure of the partnership and the terms and conditions on which such
investments would be made. Except as described herein, no associate company
or affiliate of the Applicants or any affiliate of any such associate company
will have any material interest, directly or indirectly, in the proposed
transactions to be entered into by such investment partnerships.
The investments to be made by AYP Capital in new technologies and
those to be made by AYP Capital through any investment limited partnerships
will be to pursue businesses that fall within the activities specifically
enumerated in paragraph (b)(1) of proposed Rule 58 as permissible for an
"energy-related company".
(D) Brokering of Energy-Related Commodities and Power
Brokering, Power Marketing and Related Activities
Applicants believe that APS' expertise and experience in managing
the resources necessary to conduct its utility business present it with an
opportunity to profitably assist others in managing and executing their
resource strategies. (See, e.g., Release Nos. 35-24329, 35-25848 and 35-25816
wherein the Commission authorized registered holding companies to engage in a
variety of gas and electricity brokering and marketing activities.)
Accordingly, APS and AYP Capital request authority for AYP Capital or
Brokering NEWCOs to engage in brokering of energy-related commodities
including, but not limited to, oil, gas, coal, SO2 allowances and NOx credits,
and financial instruments related thereto to non-associate companies and
associate companies. Brokering services to associate companies will be
13
<PAGE>
provided at cost in compliance with Rules 90 and 91 except that a reasonable
commission fee comparable to that paid to others may be charged.
Applicants further believe that they are well positioned to assist
others as a broker in meeting their wholesale electric power needs when such
needs cannot, for whatever reason, be fulfilled by one of the Operating
Subsidiaries. Accordingly, APS and AYP Capital request authority for AYP
Capital or Brokering NEWCOs to engage in power brokering services with respect
to electric generation and transmission resources, whereby, for negotiated
fees, a Brokering NEWCO would match a willing buyer and seller of wholesale
power or otherwise assist buyers of wholesale power in meeting their power
needs or sellers of wholesale power in selling their power.
In addition, the Applicants believe that in some cases it may be
desirable, for economic or other reasons, for AYP Capital or Brokering Newcos
to effect such transactions in electric generation and transmission resources
on a principal basis. Accordingly, the Applicants request authority for APS
Capital and Brokering Newcos to carry out such power marketing activities,
whereby a Brokering NEWCO would directly purchase and take ownership of
electric generation and transmission resources and resell those resources at
profitable prices to willing buyers of wholesale power. The Applicants also
request authority for APS Capital and Brokering Newcos to carry out such
activities ancillary to the foregoing -- such as maintaining an electronic
bulletin board or other information service relating to electric generation
and transmission resources -- as may from time to time appear to afford
attractive opportunities to AYP Capital.
14
<PAGE>
The Applicants believe that the proposed brokering and marketing
activities come within the provisions of paragraph (v) of section (b)(1) of
proposed Rule 58.
(E) Commercialization of Power Quality Devices
The quality of incoming power is vital to the proper operation and
reliability of sensitive electronic equipment. Customers increasingly rely on
electronic equipment in business and home use and desire protection for
erratic operation and failure due to power quality. Power quality solutions
are available from several manufacturers who offer state-of-the-art products
to protect against power spikes and transients from customer equipment, and
the local utility, lightning, voltage sags or surges, and short or long power
interruptions. Power quality devices range in size from small single purpose
power conditioning units which simply plug between an AC wall outlet and the
electronic equipment to large uninterruptible power supplies designed for
large power applications such as a mainframe computer.
APS and AYP Capital see power quality service as a logical
extension of the traditional delivery of reliable power at the customer meter
and would propose to offer power quality services to customers of associate
and non-associate utility companies for small to medium size power
applications up to about 25 kVA. APS and AYP Capital would anticipate
entering into supply arrangements with vendors of power quality devices.
AYP Capital and Technology NEWCOs would then assess the power requirements of
customers, market and sell cost-effective power quality solutions and, where
economically attractive to do so, install the power quality devices. These
devices are anticipated to be uninterruptible power systems, power
purification systems, power line conditioners and line isolator devices.
15
<PAGE>
APS and AYP Capital request authority to allow AYP Capital and
Technology NEWCOs to engage in the marketing and sale of power quality devices
to, and the installation of power quality devices at the premises of,
customers of associate companies and non-associate utility companies.
The Applicants believe that these activities fall within the
provisions of paragraph (ii) of section (b)(1) of proposed Rule 58.
(F) Telecommunications Services
APS and AYP Capital request authority to allow AYP Capital and
Telecommunications NEWCOs to develop and invest in telecommunications systems
directly and through joint enterprises, and to provide telecommunications
services directly and through joint enterprises to non-associate companies and
associate companies. APS currently owns and operates a microwave radio
network, various fiber optic and mobile radio systems, leases communication
circuits and uses cellular communications for the benefit of its Operating
Subsidiaries. Although APS and AYP Capital have not yet determined the
precise scope of the telecommunications activities in which they would like to
engage, because of the rapidly evolving nature of the telecommunications
industry and the increasing competitive pressures being placed on the electric
utility industry, APS and AYP Capital wish to be positioned to take advantage
of opportunities as they develop. These opportunities may include new
investments either directly or as a partner or in a joint venture with others
in personal communication services, digital microwave and fiber optic
networks, network management and control, pre-installation and on-site
integration services, diagnostic and monitoring facilities and expansion of
existing APS telecommunication facilities, as well as building and/or
maintaining microcells for personal communications services. The personal
16
<PAGE>
communications services (PCS) is a telecommunications system that provides
wireless connection to network-based services. It is a user interface which
will include cellular, paging, voice mail, fax and cordless telephones, which
could be handheld or mobile.
As technology develops, telecommunications systems are
increasingly becoming an essential component of the efficient, economic and
competitive provision of electric power and related services. APS and AYP
Capital believe that it may be advantageous for the holding company system to
develop telecommunications systems or services because they may allow APS to
further exploit and leverage the resources of its transmission and
distribution system. These resources include real property suitable for
microcell locations, facilities for switching centers and network management
operations and local market knowledge and influence. APS and AYP Capital
expect that any such telecommunications system or services would be more cost-
effective if services could be provided to non-associate companies as well as
to associate companies. Telecommunications services to associate companies
will be provided at cost in compliance with Rules 90 and 91.
Any telecommunications services will come within the provisions of
paragraph (xii) of section (b)(1) of proposed Rule 58.
(G) Environmental Services
The Applicants believe that APS' expertise and experience in
managing the Operating Subsidiaries' environmental compliance and regulatory
issues present them with an opportunity to profitably assist actual or
potential customers in connection with similar matters. These activities are
energy-related because of the potential for these services to be requested by
energy customers.
17
<PAGE>
In order to keep them satisfied, APS and AYP Capital may need to be
able to provide environmental services to them. AYP Capital previously
has been granted authority to enter into contracts to provide consulting
services to non-associate companies pursuant to which AYP Capital can consult
on environmental issues. APS and AYP Capital now seek authorization to allow
AYP Capital or Environmental NEWCOs to provide services to non-associate
companies to assist them in managing their environmental compliance
requirements. Such environmental services would include (i) environmental
consulting and audits; (ii) planning and designing of equipment or facilities,
or modifications thereto, to meet environmental requirements; (iii) planning
and designing of environmental controls or compliance systems, or
modifications thereto; (iv) management of or the direct construction or
installation of such equipment, facilities, systems and modifications; and (v)
other similar or related environmental management activities. The Applicants
expect that environmental services will initially be provided to customers who
purchase or may be expected to purchase, directly or indirectly, electricity
from an Operating Subsidiary, but would expect to expand to customers of non-
associate companies after the business has become established.
The Applicants believe that the proposed environmental services
come within the provisions of paragraph (vii) section (b)(1) of proposed
Rule 58.
(H) Chemical Laboratory Services
APS currently owns and operates a chemical analysis laboratory for
its core utility business. The laboratory capabilities currently include:
(1) water testing of process, effluent, surface and groundwater for
heavy metals, anions, and inorganic contaminants,
(2) PCBs in oil and soil and dissolved gases in oil,
18
<PAGE>
(3) coal for moisture, ash, sulphur, BTU, volatile matter and
grindability,
(4) lime for total and magnesium oxides,
(5) oils and solvents for toxic metals and flash points, and
(6) lubricating oils for wear testing and contaminant particle counts.
The Applicants believe that APS' existing chemical laboratory
resources present an opportunity to profitably perform the aforementioned
services and expand services to include full chemical analysis capability.
APS and AYP Capital request authority to allow AYP Capital and Laboratory
NEWCOs to sell the foregoing chemical laboratory services, and similar
services that APS may develop in connection with its core utility business, to
non-associate companies and associate companies. (See File No. 70-8123,
Release Nos. 35-26188 and 35-25776 wherein a wholly-owned electric utility
subsidiary of Central and South West Corporation was authorized to provide
laboratory services to non-affiliates.) Chemical laboratory services to
associate companies will be provided at cost in compliance with Rules 90 and
91.
The Applicants believe that the proposed chemical laboratory
services come within the provisions of paragraph (vii) 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 EMS NEWCOs, Brokering NEWCOs,
Technology NEWCOs, Telecommunications NEWCOs, Environmental NEWCOs and
19
<PAGE>
Laboratory NEWCOs (collectively, "Energy-Related NEWCOs") 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,
(2) cash capital contributions to AYP Capital, and (3) 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 up to $100 million in Section A (FUCOs and EWGs), up
to $25 million in Section B (Factoring or Securitization of Accounts
Receivable), and up to $10 million in Section C (Real Estate), for an aggregate
of $135 million in Part II. However, Applicants state that no more than an
aggregate of up to $100 million will be outstanding at any one time in
connection with all of the activities in Part I and Part II combined,
including loans and guarantees. One hundred million dollars represents less
than 2.5% of APS' consolidated capitalization at June 30, 1995.
20
<PAGE>
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, Energy-Related NEWCOs
APS and AYP Capital also request authorization through
December 31, 1999 for AYP Capital to organize, from time to time, Energy-
Related NEWCOs and to invest in and provide funding to such Energy-Related
NEWCOs through (1) purchases of capital stock, (2) capital contributions, and
(3) loans and the conversion of any such loans to capital contributions. APS
21
<PAGE>
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 Energy-Related
NEWCOs. In addition, the Applicants propose that Energy-Related NEWCOs 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
Energy-Related NEWCOs 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
Energy-Related NEWCOs, 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 Energy-Related NEWCOs in
connection with their businesses. It is anticipated that, in the ordinary
course of business, AYP Capital and Energy-Related NEWCOs 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
Energy-Related NEWCOs 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
22
<PAGE>
Energy-Related NEWCOs' 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 Energy-Related NEWCOs 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
Energy-Related NEWCOs 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.
23
<PAGE>
(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 development, 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 funds, the sole objective of which is to make investments in
one or more FUCOs.
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
24
<PAGE>
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
25
<PAGE>
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
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 A of Part II of this Application. 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 Part I and Part II combined,
including loans and guarantees. 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 Energy-Related NEWCOs as described in
section 2 of Part I, except that for these purposes APS and AYP Capital also
26
<PAGE>
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 Energy-Related NEWCOs 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
(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.
27
<PAGE>
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
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. APS and AYP Capital also request
authority for Project NEWCOs to redeem any securities issued under this
section in accordance with the terms thereof.
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
28
<PAGE>
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.
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
(2)If there is no 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 actively traded, non-callable, Treasury notes
having maturities near (i.e., both shorter and longer than) such
average life.
29
<PAGE>
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
(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.
30
<PAGE>
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.
(B) Factoring or Securitization of Accounts Receivable
APS and AYP Capital request authority to allow AYP Capital or
Factoring NEWCOs to purchase accounts receivable (i) of the Operating
Subsidiaries, (ii) of non-associate companies whose primary revenues are
derived from the sale of electricity, and (iii) of other non-associate
companies, including utility companies, that generate receivables from large
numbers of customers. (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 companies.)
APS and AYP Capital believe that the factoring or the
securitization 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, 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
31
<PAGE>
electric utility industry and understand and can manage the business risks
involved in factoring accounts receivable of non-associate electric utilities.
APS and AYP Capital believe the same knowledge and skills can usefully be
applied to factoring receivables of other businesses that generate receivables
from large numbers of customers. 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 and other non-associate companies subject to the parameters
described below.
AYP Capital and all Factoring NEWCOs 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 will be made at discounts which are competitive to those of other
entities providing comparable factoring services. 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.
Each company from which accounts receivable are purchased is expected to be
appointed to act as collection agent in respect of such account receivables.
32
<PAGE>
The factoring activities of AYP Capital and Factoring NEWCOs 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.
The Applicants believe that at times it may be economically
advantageous to AYP Capital for it to structure the foregoing transactions as
securitizations of accounts receivables -- i.e., the offering in the capital
markets of securities backed by the accounts receivable -- rather than as
factoring transactions. Applicants propose to establish a special purpose
subsidiary of AYP Capital to facilitate the securitization activities. This
subsidiary will organize one or more Master Trusts. AYP Capital's subsidiary
will transfer the acquired accounts receivable to a Master Trust in exchange
for certificates of beneficial interest in the Trust. The Trust will finance
its acquisition of the accounts receivable by issuing certificates that are
backed by the Trust assets. The certificates are then sold by the subsidiary
to investors. It is anticipated that the certificates will have a three to
five year term and will carry an investment grade rating. The manner by which
the certificates will ultimately be offered and to whom will be determined at
the time of the financing on the basis of where AYP Capital will get the best
market execution. The Applicants therefore request authority to provide, on a
fee basis, structuring and related advice regarding the securitization of
accounts receivable generated by companies of the sort described above. In
addition, Applicants request authority to securitize any accounts receivable
that they may purchase. Any offerings of the securities thus created would be
33
<PAGE>
made only by one or more broker-dealers registered under the Securities
Exchange Act of 1934.
APS seeks authorization to invest in AYP Capital up to an
aggregate of $25 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 B of Part II of this Application. 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 Part I and Part II combined,
including loans and guarantees.
In addition, APS and AYP Capital also request authorization
through December 31, 1999 for AYP Capital to organize, from time to time,
Factoring NEWCOs and to invest in and provide funding to such Factoring NEWCOs
in the same manner and on the same terms as the Applicants request authority
by AYP Capital to invest in Energy-Related NEWCOs 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 Factoring 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 Energy-Related
NEWCOs.
(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
34
<PAGE>
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
Real Estate NEWCOs to engage 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;
(iii) developing system real estate; and (iv) 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.
APS seeks authorization to invest in AYP Capital up to an
aggregate of $10 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 C of Part II of this Application. 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 Part I and Part II combined,
including loans and guarantees.
In addition, APS and AYP Capital also request authorization
through December 31, 1999 for AYP Capital to organize, from time to time, Real
35
<PAGE>
Estate NEWCOs 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 NEWCOs in the same manner and on the
same terms as the Applicants request authority by AYP Capital to invest in
Energy-Related NEWCOs 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 Real Estate 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 Energy-Related NEWCOs.
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 NEWCO may or may not
have paid employees. If not, personnel employed by APSC will provide a wide
36
<PAGE>
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.
APSC employees maintain records (by work order) showing time spent
in rendering services, nature of services, and identity of companies or groups
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.
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.
37
<PAGE>
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.
IV. REPORTING
APS will provide, not later than 120 days after the end of each
calendar year, a certificate of notification pursuant to Rule 24 under the Act
notifying the Commission of each investment made by APS, directly or
indirectly, in AYP Capital and any NEWCO in the previous year, indicating the
amount and type of such investment.
38
<PAGE>
In connection with its factoring activities, AYP Capital and each
Factoring NEWCO will file certificates pursuant to Rule 24, within 120 days
after the end of each calendar year, concerning: (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 each
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; and
(4) calculation by month of AYP Capital's consolidated earnings coverage.
39
<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: NANCY H. GORMLEY
Nancy H. Gormley
Vice President
AYP CAPITAL, INC.
By: NANCY H. GORMLEY
Nancy H. Gormley
Counsel
Dated: July 31, 1995
40
