File No. 70-98__
(Acquisition of the Common Stock of Leasing Technologies)
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM U-1
APPLICATION/DECLARATION
UNDER
THE PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
_________________________________
Allegheny Ventures, Inc. Allegheny Energy, Inc.
10435 Downsville Pike 10435 Downsville Pike
Hagerstown, Maryland 21740 Hagerstown, Maryland
21740
Allegheny Energy Service Corporation
10435 Downsville Pike
Hagerstown, Maryland 21740
__________________________________
Allegheny Energy, Inc.
10435 Downsville Pike
Hagerstown, Maryland 21740
The Commission is requested to send copies of all notices, orders
and communications in connection with this Application /
Declaration to:
Thomas K. Henderson, Esq.
Vice President and General Counsel
Allegheny Energy, Inc.
10435 Downsville Pike
Hagerstown, MD 21740
Anthony Wilson, Esq.
Senior Attorney
Allegheny Energy Service Corporation
10435 Downsville Pike
Hagerstown, MD 21740
<PAGE>
TABLE OF CONTENTS Page
Item 1. Description of the Proposed Transaction . . 3
A. Introduction. . . . . . . . . . . . . . 3
B. Description of the Parties . . . . . . . . 5
C. Overview of the Transaction . . . . . . . . 6
D. Post Transaction Operation and Management. . . 8
Item 2. Fees, Commissions and Expenses . . . . . . . . 8
Item 3. Applicable Statutory Provisions . . . . . . . 8
Item 4. Regulatory Approvals . . . . . . . . .. . . . 14
Item 5. Procedure . . . . . . . . . . . . . .. . . . 14
Item 6. Exhibits and Financial Statements . .. . . . 14
A. Exhibits . . . . . . . . . . . . . .. . . . 14
B. Financial Statements . . . . . . . . . . 14
Item 7. Information as to Environmental Effects . . 15
<PAGE>
Item No. 1. Description of the Proposed Transaction
A. Introduction
Allegheny Energy, Inc. ("Allegheny"), a registered holding
company, Allegheny Energy Service Corporation ("AESC"), a wholly
owned service subsidiary of Allegheny, and Allegheny Ventures,
Inc. ("Allegheny Ventures"), a wholly owned non-utility subsidiary
of Allegheny (collectively, "Applicants"), hereby file this
application-declaration with the Securities and Exchange
Commission ("Commission") under Sections 6(a), 7, 9(a), 10, 11,
12(b) and 13(b) of the Public Utility Holding Company Act of 1935,
as amended ("Act"), and Rules 45, 46, 53, 54, 90 and 91 under the
Act.
Subject to Commission approval, Allegheny Ventures has
entered into a Stock Purchase Agreement ("Stock Purchase
Agreement") to acquire 100% of the issued and outstanding common
stock of Leasing Technologies International, Inc. ("Leasing
Technologies").<F1> The purchase price ("Purchase Price") for all of
the issued and outstanding common stock of Leasing Technologies
shall be in an aggregate amount not to exceed the equivalent value
of Allegheny common stock equal to not less than approximately
$26,000,000 and not greater than $42,085,482.00, subject to
certain elections and adjustments as set forth in the Stock
Purchase Agreement, plus a de minimus amount of cash payable for
any fractional shares. The Transaction will be accounted for as a
purchase. Specifically, by this application-declaration, subject
to the terms and conditions described herein, Applicants seek
authority for:
* Allegheny Ventures to acquire 100% of the issued and
outstanding common stock of Leasing Technologies from the owners
of that common stock ("Sellers");
* Allegheny to issue shares of Allegheny common stock, in a
number to be determined pursuant to the Stock Purchase Agreement,
to the Sellers or their agents;
* Allegheny Ventures to assume up to $85 million in existing
debt held by Leasing Technologies;
* Allegheny Ventures or Allegheny to make capital and operating
contributions to Leasing Technologies in the form of loans,
guarantees, advances, or equity contributions up to an aggregate
amount not to exceed $100 million through December 31, 2004;
* Leasing Technologies to provide financing and leasing
services to Allegheny Ventures' industrial and commercial
customers for energy related equipment and telecommunications
equipment - including providing ancillary products and services in
a de minimus amount - without regard to the customer's location;
<F1> See Exhibit A-1, Stock Purchase Agreement.
<PAGE>
* Leasing Technologies to enter into a service agreement with
AESC.<F2>
* Leasing Technologies to exceed the 50% limitation in
financing and leasing activities to associated companies; and,
Leasing Technologies to maintain a 90/10 debt to equity ratio for
Leasing Technologies and have it deemed to be 70/30 for purposes
of Allegheny's consolidated debt/equity requirements
(collectively, the "Transaction").
Alternately, in the event this Commission deems this
Transaction not to satisfy the Commission's standards as discussed
in Item 3, Applicants request Commission approval of this
Transaction on the basis that it is a de minimus investment taking
into account the fact that the Transaction when viewed in the
context of its relative size and impact on Allegheny as a whole
will have a de minimus impact both in terms of monetary investment
and risk exposure. Specifically, when Leasing Technologies' total
assets of $97 million, gross revenues of $19.8 million, and net
income of $2.0 million for the twelve month period ended September
30, 2000 are compared with Allegheny's total assets of $7 billion,
gross revenues of $3.5 billion, and net income of $188 million
for same twelve month period the de minimus nature and effect of
this Transaction becomes apparent. Leasing Technologies' assets,
gross revenues, and net income represent less than one percent of
that of the Allegheny system. Moreover, the aggregate investment
of $100 million represents an asset investment of less than one
and one half percent of the value of the existing assets - a de
minimus investment for the Allegheny system.
Applicants seek to minimize operational disruptions to
Leasing Technologies during the time period when this application-
declaration is pending before the Commission. Financing and
leasing is a highly liquid business that requires a company to
have a great deal of flexibility in utilizing its capital.<F3> Due
to the relatively short-term nature of a financing and leasing
company's assets, success in the industry requires the continuous
underwriting of new business. Leasing Technologies would be
greatly restricted in its ability to utilize its capital during
the period between signing of an acquisition agreement and closing
of the transaction. Accordingly, Applicants request an order not
later than April 30, 2001.
B. Description of the Parties
1. The Applicants
Allegheny is a diversified energy company, headquartered in
Hagerstown, Maryland. The Allegheny system consists of three
regulated electric public utility companies, one public utility
natural gas company, an electric generating company, and a non-
utility non-regulated subsidiary. The electric utilities are West
Penn Power Company ("West Penn"), Monongahela Power Company
<F2> See Exhibit A-2, Form Service Agreement.
<F3> Financing and leasing is the term applied to providing secured
equipment financing. This financing type developed in the late
1970's as a means for these companies to acquire needed operating
equipment without exhausting the expensive development capital
raised from their venture capital backers. Equipment financed
usually includes essentials such as computers, laboratory
equipment, test equipment, furniture, manufacturing and production
equipment, and other office automation equipment.
<PAGE>
("Monongahela Power") (Monongahela Power also has a regulated
natural gas utility division as a result of its purchase of West
Virginia Power), and The Potomac Edison Company ("Potomac
Edison"). In addition to having a gas division Monongahela Power
has a wholly owned subsidiary, the Mountaineer Gas Company, which
is a regulated public utility natural gas company, (all
collectively d/b/a "Allegheny Power"). Allegheny Power delivers
electric energy to about three million people or 1.6 million
customers in parts of Maryland, Ohio, Pennsylvania, Virginia, and
West Virginia and natural gas to about 230,000 customers in West
Virginia. Allegheny Energy Supply Company, L.L.C. ("AE Supply")
is the electric generating company for the Allegheny system. AE
Supply owns, operates and markets competitive retail and wholesale
electric generation.<F4> AE Supply also manages and operates electric
generation owned by the regulated utilities d/b/a Allegheny Power
that has not yet been deregulated. Allegheny Ventures, Inc., a
non-utility non-regulated subsidiary of Allegheny, actively
invests in and develops energy-related projects through its wholly
owned subsidiary Allegheny Energy Solutions. Additionally,
Allegheny Ventures invests in and develops telecommunications
projects through Allegheny Communications Connect, Inc., an exempt
telecommunications company under the Act.
For the twelve months ended September 30, 2000, Allegheny's
gross revenues and net income were approximately $3.524 billion
and $188 million, respectively.
2. Leasing Technologies
Leasing Technologies is a privately held leasing and
financing company formed in 1983. It is headquartered in Wilton,
Connecticut, with offices in Philadelphia, Boston, Atlanta, San
Francisco, and Los Angeles.<F5> Leasing Technologies provides
financial services to entities primarily involved in technology or
information services companies specializing in providing financing
to entities engaged in telecommunications, biotechnology,
healthcare, software, internet, and other technologies. Leasing
Technologies offers a variety of equipment financing and leasing
services focusing primarily on short-term fair market value leases
ranging from 18 to 48 months. Leasing Technologies also has a
division that focuses primarily on young venture capital-backed
companies in the technology, information services, software,
telecommunications and life science markets. Since its inception
Leasing Technologies has written equipment leases and loans
totaling over $250 million. Leasing Technologies presently serves
over two hundred (200) customers in a variety of industries
throughout the United States.
For the twelve months ending September 30, 2000, Leasing
Technologies had revenues of approximately $19.8 million and net
income of $2.0 million.
<F4> See Allegheny Energy, Inc., Holding Co. Act Release No.35-27101,
Order Authorizing Formation of Subsidiary Company; Transfer of
Assets to Generation Company; Issuance and Acquisition of
Securities; Capital Contributions; and Service Agreements
(November 12, 1999). See also Allegheny Energy, Inc., Holding Co.
Act Release No.35-27205, Order Authorizing Formation of Subsidiary
Companies; Transfer of Assets and Liabilities to Generation
Company; Issuance of Notes; Payment of Dividends; Intersystem
Service Agreements; Reservation of Jurisdiction (July 31, 2000).
<F5> Leasing Technologies has two wholly owned subsidiaries: LTI
Portfolio Management Corp., and LTI Lease Corp. Additionally,
Atlantic Computer Funding Corporation, Inc., a New York
corporation, is an affiliate of Leasing Technologies due to the
fact that George A. Parker, Executive Vice President of Leasing
Technologies, owns 100% of Atlantic's stock. In turn Atlantic
owns 100% of LTI Funding. Both Atlantic Computer and LTI Funding
are inactive.
<PAGE>
C. Overview of the Transaction
1. The Acquisition
Subject to Commission approval, Allegheny Ventures has
entered into a Stock Purchase Agreement to acquire 100% of the
outstanding common stock of Leasing Technologies from the Sellers.
The Purchase Price for all of the issued and outstanding common
stock of Leasing Technologies is the equivalent of number of
shares of Allegheny common stock in a value not less than
approximately $26,000,000 and not to exceed approximately
$42,200,000 after adjustment for Leasing Technologies reaching
certain mutually established earnings targets over a three year
period. The Purchase Price is subject to certain elections and
adjustments as set forth in the Stock Purchase Agreement, plus a
de minimus amount of cash payable for any fractional shares.
Additionally, Allegheny Ventures has agreed to assume up to $85
million of Leasing Technologies' outstanding liabilities.<F6>
Collectively, Leasing Technologies' senior management and
employees own approximately 56.31% of the outstanding common stock
of Leasing Technologies. The 43.69% held by the non-management /
non-employee shareholders is payable in Allegheny common stock at
the closing of the Transaction. Management and employee
shareholders will be paid out of the escrow account over a period
of three years. At the end of each of the three (3) calendar
years following the closing of the Transaction the management and
employee shareholders will receive a baseline amount or the
baseline plus additional amounts pursuant to the Stock Purchase
Agreement.<F7> All consideration will be payable in Allegheny common
stock.<F8>
By this Transaction, Applicants propose to focus and expand
the scope and breadth of services to include the leasing and
financing of energy related, telecommunications, information
technology, and distributed generation equipment, along with
ancillary products and services. Allegheny and Allegheny Ventures
are committed to growing the unregulated portion of the
businesses. The ability to provide a comprehensive financial
solution for the Allegheny system's telecommunications,
distributed generation and core utility customers is a crucial
component of this strategy. Leasing Technologies will be the
financial platform to provide comprehensive financial solutions.
Applicants are fully committed to supporting Leasing Technologies
to achieve the planned business objectives.
<F6> See Exhibit A-1, Stock Purchase Agreement.
<F7> The additional amounts are subject to Leasing Technologies
achieving the mutually agreed upon plan, which plan, in the spirit
of the Transaction includes mutually agreed upon earnings before
interest and taxes ("EBIT") targets. The management and employee
shareholders can receive an amount (the "Overage") equivalent to
their respective pro-rata share of $16,398,500 worth of Allegheny
Energy common stock as determined by multiplying the percentage of
actual EBIT earned as compared to the target EBIT times the amount
of Allegheny Energy common stock allocated to the particular year
over the three (3) calendar years following the consummation of
the Transaction. At the end of three (3) calendar years following
the consummation of the Transaction, Allegheny Ventures will have
purchased the management and employee shareholders holdings for
total consideration equal to the baseline valuation plus Overages
of approximately $10,922,500 worth of Allegheny common stock to
the Outside Investors at the consummation of the Transaction.
<F8> Any fractional shares resulting from application of the above
calculations will be payable in cash.
<PAGE>
2. Service Agreement
Applicants seek authority for Leasing Technologies to enter
into a service agreement with AESC. AESC will provide a wide
range of services to Leasing Technologies pursuant to a service
agreement. Under the proposed service agreement, Leasing
Technologies will reimburse AESC for the cost of services provided
AESC will account for, allocate, and charge its costs of these
services on a full cost reimbursement basis under a work order
system consistent with Commission requirements. Time for AESC
employees will be billed to and paid on a monthly basis, based
upon time records. Leasing Technologies will maintain separate
financial records and detailed supporting records. All services
will be provided at cost in compliance with Rules 90 and 91.
3. Financing
Applicants seek authority to: assume $85 million of Leasing
Technologies' existing indebtedness; and, through December 31,
2004, directly or indirectly make equity or subordinated debt
investments in Leasing Technologies up to an aggregate of $100
million to support ongoing operations. The $100 million
investment would be made from time to time during the
authorization period through open account advances, guarantees,
lines of credit, and / or loans. Loans in this Transaction from
Allegheny to Allegheny Ventures will have a market interest rate
per annum not in excess of Mellon Bank's prime commercial lending
rate as announced from time to time plus 3% and will have a final
maturity not to exceed 30 years. Additionally, authorization is
requested for Leasing Technologies to issue short-term or long-
term debt, through the authorization period in an aggregate amount
not to exceed the portion of the $100 million then outstanding
multiplied by the authorized debt to equity ratio approved for
Leasing Technologies. Leasing Technologies' short-term and long-
term debt issuance will be at market rates and on a non-recourse
basis to Allegheny and its other subsidiaries.
4. Capitalization Ratios
Allegheny requests that the Commission deem the actual
debt/equity ratio of Leasing Technologies for purposes of
Allegheny's consolidated debt equity requirements to be 70/30 as
long as Leasing Technologies maintains at least the 10 equity
ratio customary for financing companies. Many financing companies
maintain a debt/equity ratio of approximately 90/10, as that is a
customary leverage ratio and necessary to compete in that
industry. This avoids penalizing Allegheny for leverage that is
completely customary in the finance/leasing industry. In
addition, requiring Leasing Technologies to maintain a 70/30 ratio
would significantly disadvantage it against other competitors and
would not permit Leasing Technologies to most efficiently use its
resources.
The Transaction, when completed, will not materially impact
the debt / equity ratios of Allegheny. Moreover, Allegheny, and
all the subsidiaries thereof, will not undertake to issue any debt
or engage in any transaction if such action would result in
Allegheny's consolidated system debt / equity ratios falling below
the Commission's debt / equity requirement of 30% common equity,
including Leasing Technologies at an imputed 70/30 debt to equity
ratio. Additionally, within sixty (60) days after the end of each
financial quarter, Allegheny will provide the Commission with
<PAGE>
reports containing actual and pro forma capitalization ratio
calculations in the same format that was provided in the
confidential exhibit to this application for Allegheny on a
consolidated basis.
D. Post Transaction Management and Operations
Applicants intend to integrate leasing and financing efforts
with broader efforts to establish energy and telecommunications
businesses both within and outside their traditional utility
service territory. Accordingly, Applicants request that the
Commission not impose any geographic limits on the proportion of
its leasing business that comes from customers located within its
traditional utility service territory nor on the amount of
business with associate companies.
Applicants propose to utilize Leasing Technologies to support
existing and planned Allegheny business activities and
initiatives. This includes financing and/or leasing networking
and telecommunications and internet service and equipment,
distributed generation equipment and installation, ancillary
products and services, etc. Additionally, the Transaction would
position Allegheny to finance what traditionally had been core
utility services in a deregulating marketplace. Those services
include financing equipment replacement or upgrades. Finally,
Leasing Technologies will provide Allegheny with a vehicle to
diversify into new technologies as well as create new revenue
streams for the future.
The leasing and financing of energy related,
telecommunications, information technology, and distributed
generation equipment, along with ancillary products and services,
is similar to activities previously approved by this Commission in
a series of earlier orders.<F9> In those orders the Commission
authorized a registered system to engage in a significant number
of financing activities, including: (i) providing short and long
term loans, for a period of time not to exceed the lesser of ten
years of the expected useful life of the equipment, for the
purchase of standard gas appliances and certain gas utilizing
equipment, such as gas heat pumps and gas turbines;<F10> and (ii)
financing, through guarantees, capital leases, operating leases or
promissory notes with terms of one to five years, the purchase of
electric bicycles, tricycles and skateboards through use of an
external borrowing program.<F11> Although the scope and amount of
Allegheny's proposed activities might eventually be more extensive
than that previously authorized by the Commission, there is no
substantive difference in the activities, which are all reasonably
incidental, or economically necessary or appropriate to utility
operations.
The specialty finance business requires certain specialized
skills and information systems. To be successful and profitable
it is helpful for a company to possess, among other things, an
experienced management team with extensive industry knowledge and
expertise, a strong sales force and an efficient and well-
developed credit and back office operation. Although Allegheny
could develop its own management team, the slow and expensive
<F9> See Item 3, Section B, Analysis of Commission Orders.
<F10> Central and South West Corp., No. 26367 (Sept. 1, 1995)
(customer financing in connection with energy management
services); Entergy Corp., No. 25718 (Dec. 28, 1992) (same).
<F11> Consolidated Natural Gas Co., No. 26234 (Feb. 23, 1995)
(financing for purchase of certain gas equipment by customers that
would, in turn, purchase gas from system operating companies).
<PAGE>
process of acquiring a seasoned management team and developing the
appropriate capabilities would necessarily hamper or damage
Allegheny's competitiveness. Consequently, Applicants propose not
only to acquire Leasing Technologies but also to retain key
management personnel. The Employment Agreement, attached to
Exhibit A-1, as Exhibit D thereto, provides that existing senior
management will be retained for at least three (3) years.<F12>
Applicants anticipate that the majority of the leases Leasing
Technologies would enter into would be capital leases with terms
of an average life of three to five years. For capital leases,
while Applicants would have credit exposure to the lessee for
lease payments, Applicants would not have financial exposure to
the value of the leased property because the lessee would own such
property at the end of the lease term. Applicants believe that
many lessees prefer to consolidate their leasing business with one
or a small number of lessors. Therefore, it will be necessary for
the leasing subsidiary to lease non-energy and non-
telecommunications related equipment to lessees who also lease
energy and telecommunications related equipment.
Applicants propose to initially rely on Leasing Technologies'
credit process and policies with respect to: due diligence
reviews; the commitment and documentation process; credit reviews;
and lease administration. To the greatest extent possible,
Applicants will operate Leasing Technologies using shared
resources. AESC will continue to operate Leasing Technologies with
Leasing Technologies' employees.
Item 2. FEES, COMMISSIONS AND EXPENSES
Fees and expenses in the estimated amount of $10,000 plus
ordinary expenses of approximately $500 expected to be incurred in
connection with the preparation of this application. None of the
fees, commissions, or expenses is to be paid to any associate or
affiliate company of Allegheny or any affiliate of any such
associate company except for legal, financial, and other services
to be performed at cost.
Item 3. APPLICABLE STATUTORY PROVISIONS
Sections 6(a), 7, 9(a), 10, 12(b) and 13(b) of the Act, and
Rules 45, 53, 54, 90, and 91 under the Act are directly or
indirectly applicable to the proposed transactions for which
authorization is sought in this Application-Declaration.
Sections 6(a), 7, and 12 of the Act and Rules 53 and 54 apply
to the issue and sale of securities, and the provision of credit
support by Allegheny.
Sections 6(a), 7 and 12 and Rule 45 apply to the issue and
sale of securities, and the provision of any non-recourse credit
support.
Section 13(b) of the Act and Rules 90 and 91 under the Act
apply to the services to be provided by AESC to Leasing
Technologies.
<F12> See Exhibit A-1, Stock Purchase Agreement.
<PAGE>
Rule 45(b)(7) applies to the issuance of a guaranty or credit
support by Allegheny or Allegheny Ventures with respect to any
security issued by any other subsidiary company of Allegheny.
A. Statutory Analysis
Section 9(a)(1) provides that unless the acquisition has been
approved by the Commission under Section 10 "it shall be unlawful
for any registered holding company or any subsidiary company
thereof . to acquire, directly or indirectly, any securities or
utility assets or any other interest in any business." The
proposed Transaction is subject to Section 9(a) of the Act and
therefore must satisfy the standards of Section 10 of the Act.
Section 10(c)(1) of the Act provides, in relevant part, that the
"Commission shall not approve . an acquisition of securities or
utility assets, or of any other interest, which is . . .
detrimental to the carrying out of the provisions of Section 11."
Section 11(b) makes it the duty of the Commission to require:
. . . that each registered holding company,
and each subsidiary company thereof, shall
take such action as the Commission shall find
necessary to limit the operations of the
holding-company system of which such company
is a part to a single integrated public-
utility system, and to such other businesses
as are reasonable incidental, or economically
necessary or appropriate to the operations of
such integrated public-utility system.
These provisions have been interpreted to apply both to the
acquisition of an existing company and the formation of a company
by a registered holding company. The Commission has interpreted
these provisions to require the existence of a functional
relationship between the utility operations of the registered
holding company and its non-utility activities.
Based upon Commission precedent, more fully discussed in the
following section, Applicants believe that the acquisition of
Leasing Technologies as described herein satisfies the functional
relationship test and thereby the requirements of the Act.
B. Analysis of Commission Orders
Unlike the Commission's recent determination in Old Dominion,<F13>
where the Commission ordered the divestiture of financial services
operations that were outside the parameters of the Act, Applicants
intend that Leasing Technologies would (by the end of a transition
period discussed in the next section) conduct activities that are
similar to, or ancillary to, financing activities that are either
expressly permitted by the Act or that the Commission has by order
authorized as being consistent with the Act.
There are numerous examples of Commission approval of
activities similar to the leasing and financing of energy and
telecommunications related equipment. Specifically, in a 1995
<F13> Holding Co. Act Release No. 35-27113 (Dec. 15, 1999).
<PAGE>
matter involving Consolidated Natural Gas Company, the Commission
recognized the functional relationship of a financing subsidiary,
when it authorized CNG Financial Services, Inc., a wholly owned
subsidiary of Consolidated Natural Gas Company, a registered
holding company, to provide short-term and long term loans, for a
period of time not to exceed the lesser of ten years or the
expected useful life of the equipment, for the purchase of
standard gas appliances and certain gas utilizing equipment, such
as gas heat pumps and gas turbines.<F14> In New Century Energies,
Inc., the Commission authorized the retention of subsidiaries
engaged in non-utility activities, including leasing of
substations to certain customers, development of, and investment
in, various utility projects, servicing of fuel transportation
facilities, holding of mineral interests and water rights,
customer financing for purchases of heat pumps, environmental
consulting services, engineering, design, procurement, operation,
maintenance and construction of power production facilities and
related activities, and maintenance of a personnel resource
database.<F15> Additionally, in a 1998 order, the Commission
authorized a non-utility subsidiary of Central and South West
Corporation, a registered holding company, to, among other things,
provide financing, through guarantees, capital leases, operating
leases or promissory notes with terms of one to five years, to
customers in connection with the purchase of electric bicycles,
tricycles and skateboards.<F16> In other cases the Commission has
authorized funding equipment modifications<F17> and customer energy
management services.<F18>
There is no substantive difference in the activities for
which authorization is sought - all of which are reasonably
incidental, economically necessary, and appropriate to Applicants'
energy and telecommunication business.
C. Transition Period
Applicants' objective in acquiring Leasing Technologies is to
operate it as a lessor and financier of energy and
telecommunications related equipment. Customers in the leasing
industry, however, generally prefer to consolidate their leasing
business with one or a small number of lessors. Accordingly,
established participants generally are engaged in activities that
are not entirely consistent with Applicants' business plans.
Applicants request permission to continue these non-conforming
operations, if any, for a three-year transition period to permit a
commercially reasonable exit from these non-conforming lines while
<F14> Holding Co. Act Release No. 35-26234 (Feb. 23, 1995),
<F15> Holding Co. Act Release No. 35-26748 (August 1, 1997).
<F16> Holding Co. Act Release No. 35-26910 (Aug. 24, 1998).
<F17> See Eastern Utilities Associates (now d/b/a EUA Cogentrix),
Release Nos. 35-24273, 35-25636, and 35-26546 (September 17, 1992,
July 25, 1996, and Dec. 16, 1986) (authorizing energy management
consulting services and the funding of equipment modifications).
<F18> Northeast Utilities, Release No. 35-25900 (Sept. 30, 1993)
(authorizing expansion of energy management services to include
identification of resources, such as water, cost reduction
opportunities and design of processes and equipment to realize
efficiencies); and Southern Company, Holding Co. Act Release No.
35-26221 (Jan. 25, 1995) (same); and Entergy Corp., Holding Co.
Act Release No. 35-25718 (Dec. 28, 1992) (customer financing in
connection with energy management services).
<PAGE>
it expands the activities of the acquired company in energy and
telecommunications related equipment.
The transition period is necessary for two reasons: first, to
avoid a "fire sale" of the non-conforming accounts in the
portfolio; and, second, to incorporate Leasing Technologies'
experience in financing and leasing. If Applicants were not
authorized to continue to operate Leasing Technologies in its
current manner with the existing portfolio for some transition
period Applicants would be forced to abruptly drop or sell a line
of the business. It would be unlikely that Leasing Technologies
would be able to thereafter generate sufficient revenue to support
its existing infrastructure and overhead in the short term.
Applicants would then be forced to subsidize the business or
operate at a loss.
Permitting a transition period is fully consistent with the
Commission's long-standing practice of permitting registered
holding companies to continue to operate non-conforming businesses
acquired in the context of a larger acquisition during a
transition period and involves no greater risk to Allegheny than
those situations. It is important to note that even after the end
of the transition period, in light of customer preferences, any
leasing business, including one developed by Allegheny, would have
some portion of its activity in items that do not constitute
Energy and telecommunications related equipment. Such activity,
however, would be solely ancillary to the main business and
undertaken only to satisfy customer preference.
D. Analysis of the 50% Limitation Rule Waiver
Applicants have requested relief from the fifty-percent
limitation which, if applied as in past orders, would limit
Leasing Technologies' non-associate financing and leasing
activities to less than 50% of its financing and leasing
activities with associated companies as well as limit the
proportion of its activities that could come from customers
located outside of Allegheny's traditional utility service area to
less 50% of its total financing and leasing activities.<F19>
In March 1994, the Commission affirmed the "fifty-percent"
limitation in a denial of an application for approval to exceed
the standard.<F20> The Commission previously has authorized the
factoring of accounts receivable of both associate and non-
associate companies. The Commission, in July 1986, authorized CSW
Credit, a special-purpose subsidiary of a registered holding
company, to process the accounts receivable of non- associate
companies.<F21> Fifty percent of the accounts receivable processed by
CSW Credit were required to be from associate companies.
Applicants are of the view that it is appropriate to grant
the requested relief in this case. A relaxation of the limitation
will enable Allegheny Ventures and Allegheny to realize fully the
<F19> See Central and South West Corp., Holding Co. Act Release No.
23767 (July 19, 1985) (associate companies); CSW Credit, Inc.,
Holding Co. Act Release No. 24157 (July 31, 1986) (non- associate
companies).
<F20> See Id., and see CSW Credit, Inc., Holding Co. Act Release No.
24157 (July 31, 1986) (non- associate companies). CSW Credit,
Inc., Holding Co. Act Release No. 25995 (March 2, 1994). As
recently as 1997, in Holding Co. Act Release No. 26684, the SEC
affirmed the 50% limitation.
<F21> Id.
<PAGE>
benefits derived from the acquisition of Leasing Technologies. In
addition, the activities of Leasing Technologies should contribute
to the economic well being of the Allegheny system. Considering
all of the relevant facts and circumstances, the relief sought is
appropriately designed to allow the applicants sufficient time to
bring the current levels of associate factoring in balance with
non- associate receivables without adversely affecting the
operations of the utility system. The business plan is not to
provide financing and leasing services to affiliates, although
some may occur, rather to provide services to customers in
connection with the energy and telecommunications related
equipment. Those customers will be both inside and outside
Allegheny's traditional utility service area reflecting the
deregulation and competition that the Allegheny system now faces.
Relaxation of the limitation will enable the Applicants to fully
realize the benefits derived from the acquisition of Leasing
Technologies as those benefits contribute to the economic well
being of the Allegheny system. The possibility of an adverse
effect upon the Allegheny system, investors or utility customers
resulting from the requested waiver of the 50% limitation is
remote. Applicants' request is consistent with the Commission
past practice of permitting the provision of certain energy-
related services regardless of service area.<F22>
In the alternative, Applicants request that if the 50%
limitation is to be applied, an expansive definition of "core"
business should be utilized which would include providing energy-
related as well as telecommunications-related equipment to
customers of affiliated companies. Based upon the facts and
circumstances presented herein, and the potential benefits to
Allegheny, the Leasing Technologies transactions should be treated
as dealings on behalf of affiliated companies and considered to be
functionally related to the operations of Allegheny. Moreover, by
artificially limiting the Leasing Technologies' operations,
revenue is also artificially constrained -- with no offsetting
reduction in costs. As a result, the 50% limitation will
interfere with the Leasing Technologies' ability to conduct its
financial services in the most efficient way, the effect of which
is to raise the overall cost of doing business and reduce the net
benefit to Allegheny. For these reasons, it is essential to
obtain a waiver of, or relief from, the 50% limitation.
In sum, the proposal would enable Allegheny to offer
competitive services in a rapidly changing marketplace. The
activities described herein will tend toward the economical and
efficient development of an integrated public utility business in
a deregulating world and the resulting increased efficiency of
operations significantly offsets any perceived added complexity
caused by such activities.<F23> For all of the foregoing reasons, the
financing and leasing activities described herein satisfy the
requirements of, and are entirely consistent with, Sections 9, 10
and 11 of the Act and Commission orders.
E. Rule 54
<F22> See Cinergy Corp, et al., and New Century Energies, Inc., et al.
Holding Co. Act Release No. 35-27124 (Jan. 11, 2000) (permitting
certain energy-related services across the entire United States
and abroad) and Eastern Utilities Associates, Holding Co. Act
Release No. 35-26232 (Feb. 15, 1995) (removing a 50% restriction
on out of area management services revenue).
<F23> See Wisconsin's Environmental Decade, Inc. v SEC, 882 F.2d 523,
527 (D.C. Cir. 1989); Northeast Utilities, Holding Company Act
Release No. 25,221 (Dec. 21, 1990); Entergy Corp., Holding Company
Act Release No. 25, 136 (Aug. 27, 1990).
<PAGE>
Concerning Rules 53 and 54, as of September 30, 2000,
Allegheny's consolidated retained earnings were approximately
$917.6 million, and Allegheny's aggregate investment in EWGs and
FUCOs was approximately $27.5 million.<F24> The proposed financing
arrangements will be structured so that Allegheny's "aggregate
investment" in EWGs and FUCOs will not exceed 50% of the system's
consolidated retained earnings (approximately $458.8 million).
The conditions specified under Rule 53(a) are otherwise satisfied
and none of the conditions set forth in Rule 53(b) exist or will
exist as a result of the proposed financing transactions.
Rule 54 provides that the Commission, in determining whether
to approve certain transactions by such registered holding company
or its subsidiaries other than with respect to EWGs and FUCOs,
will not consider the effect of the capitalization or earnings of
any subsidiary which is an EWG or FUCO upon the registered holding
company system if the provisions of Rule 53(a), (b) and (c) are
satisfied. For purposes of Rule 54, the conditions in Rule 53(a)
are satisfied and none of the conditions specified in Rule 53(b)
exist or will exist as a result of the proposed transactions.
Accordingly, Rule 53(c) is not implicated and Rule 54 is
satisfied.
Item 4. REGULATORY APPROVALS
No Federal or State commission or regulatory body, other than
this Commission, has jurisdiction over this Transaction.
Item 5. PROCEDURE
It is requested that the Commission's order granting this
Application or Declaration be issued on or before April 30, 2001.
There should be no recommended decision by a hearing or other
responsible officer of the Commission and no 30-day waiting period
between the issuance of the Commission's order and its effective
date. Applicants consent to the Division of Corporate
Regulation's assisting in the preparation of the Commission's
decision and order in this matter, unless the Division opposes the
Transaction covered by this Application or Declaration.
Item 6. EXHIBITS AND FINANCIAL STATEMENTS
A. Exhibits
A-1 Stock Purchase Agreement
(filed December 29, 2000)
A-2 Form Service Agreement
(to be filed by amendment)
<F24> In file number 70-9801 (the AE Supply - Enron application),
which is currently pending before this Commission, Applicants have
requested authority to finance the acquisition with a combination
of debt and equity that is consistent with Allegheny's existing
limits on "aggregate investment" under Rule 53. Thus, subject to
Commission approval of 70-9801, Applicants will have invested up
to the existing Aggregate Investment Limitation.
<PAGE>
D Hart-Scott Rodino Notification Filing
(to be filed by amendment)
F Opinion of Counsel
(to be filed by amendment).
H Form of Notice
(filed December 29, 2000)
B. Financial Statements
FS-1 Allegheny Energy, Inc. and subsidiaries
consolidated balance
sheet, consolidated statement of income and
retained earnings per books and pro forma
(to be filed by amendment)
FS-2 Leasing Technologies International, Inc.
balance sheet, consolidated
statement of income and retained earnings
per books and pro forma
(to be filed by amendment)
Item 7. INFORMATION AS TO ENVIRONMENTAL EFFECTS
A. The authorizations applied for herein do not require
major federal action significantly affecting the quality of the
human environment for purposes of Section 102(2)(C) of the
National Environmental Policy Act (42 U.S.C. 4232(2)(C)).
B. Not applicable.
SIGNATURE
Pursuant to the requirements of the Public Utility
Holding Company Act of 1935, the undersigned companies have duly
caused this statement to be signed on their behalf by the
undersigned thereunto duly authorized.
ALLEGHENY ENERGY, INC.
ALLEGHENY VENTURES, INC.
ALLEGHENY ENERGY SERVICE CORPORATION
By: /S/ THOMAS K. HENDERSON
Dated: December 29, 2000 Thomas K. Henderson
<PAGE>
