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File No. 70-09469
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 1
TO
FORM U-1
APPLICATION OR DECLARATION
UNDER
THE PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
West Penn Power Company
800 Cabin Hill Drive
Greensburg, PA 15601
(Name of company or companies filing this statement and addresses
of principal executive offices)
Allegheny Energy, Inc.
(Name of top registered holding company parent of each applicant
or declarant)
Thomas K. Henderson, Esq.
Vice President
Allegheny Energy, Inc.
10435 Downsville Pike
Hagerstown, MD 21740-1766
(Name and address of agent for service)
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1. Applicants hereby amend Item No. 1. Description of Proposed
Transaction by deleting it in its entirety and substituting the
following therefor:
Item No. 1. Description of Proposed Transaction
West Penn Power Company, a public utility subsidiary of
Allegheny Energy, Inc., a registered holding company, hereby
requests authority through December 31, 2007 to (a) acquire all
the limited liability company interests in a new wholly-owned
limited liability company subsidiary ("Special Purpose LLC"); (b)
transfer intangible transition property and the associated
intangible transition charges revenue stream (both as defined and
discussed below), to the new subsidiary in exchange for the net
proceeds from the sale of Transition Bonds (discussed below); and
(c) for the new subsidiary to issue Transition Bonds to the
public as discussed below. In the alternative, West Penn may
construct the securitization using an intermediate subsidiary or
subsidiaries, and in that event hereby requests authority through
December 31, 2007: (a) to form a new subsidiary corporation
("Newco"); (b) to transfer intangible transition property and the
associated intangible transition charges revenue stream (both as
defined and discussed below), to Newco in exchange for Newco's
stock; (c) for Newco to acquire all the limited liability
interests in an additional wholly-owned limited liability company
("Special Purpose LLC") in which Newco would own all the equity;
(d) for Newco to transfer the intangible transition property and
the associated intangible transition charges revenue stream to
Special Purpose LLC in exchange for the net proceeds from the
sale of Transition Bonds; (e) for Special Purpose LLC to issue
Transition Bonds to the public as discussed
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below; and (f) for
Newco to loan the net proceeds from the sale of the Transition
Bonds to West Penn or its affiliates in exchange for interest-
bearing notes.
West Penn further requests that the Commission grant such
other authorizations as may be necessary in connection with the
transactions described herein.
Background of Competition in Pennsylvania
The Electricity Generation Customer Choice and
Competition Act (Pennsylvania House Bill 1509) (the "Competition
Act") was enacted in December 1996, and provided for the
restructuring of the electric utility industry in Pennsylvania.
The Competition Act required the unbundling of electric services
into separate supply, transmission, and distribution services
with open retail competition for supply. Electric distribution
and transmission services remain regulated by the Pennsylvania
Public Utility Commission ("PUC"). The Competition Act required
utilities to submit restructuring plans to the PUC, including
transition costs which result from competition. Transition costs
include regulatory assets, long-term purchased power commitments,
and other costs, including investment in generating plants, spent-
fuel disposal, retirement costs and reorganization costs, for
which an opportunity for recovery is allowed in an amount
determined by the PUC to be just and reasonable. These costs,
after mitigation by the utility, are to be recovered through a
Competitive Transition Charge ("CTC") approved by the PUC and
collected from distribution customers for up to nine years from
the date of enactment (or for an alternate period determined by
the PUC for good cause shown). During that period, the utility
is subject to rate
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caps which provide that, for a significant
portion of that period, total charges to customers cannot exceed
the rates in place as of December 31, 1996, subject to certain
exceptions.
Full electric generation competition is being phased
in. For West Penn, the schedule called for one-third of each
customer class to have direct retail access on January 1, 1999,
and for an additional one-third to have direct retail access on
January 2, 1999. Retail access for the remaining one-third will
occur on January 2, 2000.
The Competition Act also authorized the PUC to adopt a
Qualified Rate Order ("QRO") to approve the issuance of
Transition Bonds (as defined below) by a utility, a subsidiary of
a utility or a third-party assignee of a utility, as a mechanism
to mitigate transition costs and reduce customer rates. Under
the Competition Act, proceeds of Transition Bonds are required to
be used principally to reduce qualified stranded costs and the
related capitalization of the utility. To the extent a QRO and
the rates and other charges authorized thereunder are declared to
be irrevocable, the irrevocable QRO issued by the PUC will create
"Intangible Transition Property" ("ITP") by contract which can be
used to secure the Transition Bonds. The Transition Bonds are
repayable from irrevocable Intangible Transition Charges ("ITC")
which are collected in lieu of CTC.
ITCs are generally defined as amounts authorized to be
imposed on all customer bills, pursuant to an irrevocable QRO,
for the purpose of recovering the principal and interest on the
Transition Bonds, costs to cover credit enhancements, cost of
retiring existing debt and equity, costs of defeasance, servicing
fees and other related fees, taxes, costs and expenses,
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("Qualified Transition Expenses" or "QTEs"). ITCs are collected
through non-bypassable charges imposed by an electric utility
that provides electric transmission and distribution services to
a customer located in its certificated territory, regardless of
whether that customer continues to purchase electricity from that
electric utility. The ITC will be a specified dollar amount on
each customer bill determined by applying certain rates per
kilowatthour of usage and, in some cases, per kilowatt of demand,
to each customer's bill. The collection of the ITC will likely
be dependent upon, among other things, the utility's ability to
forecast by customer class: 1) number of customers and/or usage;
2) delinquencies and charge-offs and 3) payment lags. In the
QRO, the PUC may provide for periodic adjustments to the ITC
("true-ups") in accordance with the Competition Act and the QRO.
Once the QRO declares the ITC to be irrevocable, none of the
utility, the PUC, the Commonwealth of Pennsylvania, nor any
instrumentality thereof, has any right to modify the ITC, except
in accordance with the specific terms of the QRO and the
Competition Act.
Securitization
As discussed above, the Competition Act provides for
the use of securitization as a form of transition cost
mitigation. For purposes of the securitization, an electric
utility's ITP and related ITC revenue stream are isolated from
the risks of the electric utility through their transfer to a
bankruptcy-remote assignee (in this case, a new wholly owned
subsidiary of West Penn, or in the alternative structure, its
subsidiary). The new subsidiary (or its subsidiary) issues
Transition Bonds secured by the ITP and the ITC revenue stream.
The Competition Act provides that a transfer of ITP by an
electric utility in a transaction approved in a QRO shall be
treated as
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an absolute transfer of all of the utility's right,
title and interest in the ITP as in a true sale, and not as a
pledge or other financing, other than for Federal and state
income and franchise tax purposes.
As ITCs are imposed and collected, such amounts will be
used to pay principal and interest on the Transition Bonds, as
well as fees and expenses related to the transaction. To the
extent ITCs prove insufficient (or more than sufficient) to fund
credit enhancement requirements and to pay QTEs, including
interest and principal on the Transition Bonds, the Competition
Act provides for true-ups through filings with the PUC. Aside
from these ITC adjustments, the Competition Act generally
provides that the Commonwealth of Pennsylvania will not reduce
the value of the ITP or the ITC until the Transition Bonds are
discharged.
The securitization transaction outlined above will
increase the creditworthiness of the Transition Bonds because the
underlying securitized assets (the ITP and its associated ITC
revenue stream) are isolated from the risks associated with other
assets of an electric utility upon being transferred to a
bankruptcy remote special purpose entity (the new wholly-owned
subsidiary of West Penn, or its subsidiary). The
creditworthiness of these assets is further increased by the
Commonwealth's agreement under the Competition Act and by its
issuance of an irrevocable QRO not to reduce the value of the ITP
or ITC until the Transition Bonds are discharged, and by the
PUC's issuance of an irrevocable QRO that specifies the QTEs to
be recovered through the ITC and approves a methodology for
periodic adjustments to the ITC. These aspects of the
securitization transaction will enable most of the Transition
Bonds to obtain a higher credit rating than the debt instruments
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of the electric utility (the class of Transition Bonds with the
latest expected maturity date may have a an equal or lower rating
because of the short time between the expected maturity date and
the legal final maturity date).
The Proposed Transaction
In accordance with the procedures set forth in the
Competition Act, on November 19, 1998, the Pennsylvania PUC
adopted a final QRO in response to West Penn's application,
authorizing the recovery of transition costs by West Penn of $670
million (or $630 million in the event of a merger with DQE,
Inc.).
In connection with the November 19, 1998 QRO, or any
other subsequent QRO adopted by the Pennsylvania PUC, West Penn
will transfer the ITP and associated ITC revenue stream created
by that QRO to an assignee, which will be a newly-created,
bankruptcy remote, wholly-owned Delaware limited liability
company, formed by West Penn for this purpose (the "Special
Purpose LLC"). West Penn requests authority to form the Special
Purpose LLC and to acquire all of the membership interests in the
new company for $100. The Special Purpose LLC will be
capitalized (at least 0.5% of the total principal amount of the
Transition Bonds) through some form of capital contribution by
West Penn. The Special Purpose LLC will issue debt securities
("Transition Bonds") secured by the ITP and the associated ITC
revenue stream.
In the alternative structure, West Penn will transfer
the ITP and associated ITC revenue stream created by that QRO to
an assignee, which will be a newly-created, bankruptcy remote,
wholly-owned domestic corporation,
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formed by West Penn for this
purpose (the "Newco") in exchange for the Newco stock. Newco
initially will be capitalized (at least 0.5% of the total
principal amount of the Transition Bonds) through some form of
capital contribution by West Penn. Newco will transfer the ITP
and associated ITC revenue stream to its newly-created,
bankruptcy remote, wholly-owned Special Purpose LLC company,
which will issue debt securities ("Transition Bonds") secured by
the ITP and the associated ITC revenue stream. The Special
Purpose LLC will be capitalized (at least 0.5% of the total
principal amount of the Transition Bonds) through some form of
capital contribution by Newco.
In either case, the ITC charge will be set to provide
for recovery of an excess amount (the "Overcollateralization
Reserve Required Amount") over that needed to pay expected costs
and debt service on the Transition Bonds. To enhance the
creditworthiness of the Transition Bonds, this amount will be
expected to be collected over the expected term of the Transition
Bonds.
West Penn, as the "servicer" of the ITCs, will remit
monthly (or more frequently) all amounts collected in respect of
the ITCs to a collection account maintained by the indenture
trustee for the benefit of the holders of the Transition Bonds
(the "Collection Account"). Quarterly or semiannually, the
Special Purpose LLC will pay out of the Collection Account, among
other things authorized by the QRO, the trustee fees, servicing
fees, administrative costs, operating expenses, accrued but
unpaid interest on all classes of the Transition Bonds, and
principal (to the extent scheduled) on the Transition Bonds. Any
remaining balance in the Collection Account will be used to
restore the capital subaccount, fund and replenish the
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Overcollateralization Subaccount (to the extent scheduled), and
then be added to reserves (the "Reserve Subaccount"). Because
the QTEs include West Penn's costs of retiring its own debt and
equity, as such costs are incurred, the Special Purpose LLC may
also use funds in the Reserve Subaccount to make payments to West
Penn for this purpose and to the extent that such costs are
included as QTEs and have not previously been recovered by West
Penn.
West Penn requests authority for the Special Purpose
LLC to issue up to $670 million in Transition Bonds. The Special
Purpose LLC may issue Transition Bonds in the form of debt
securities in one or more series, and each such series may be
issued in one or more classes. Different series may have
different maturities and coupon rates and each series may have
classes with different maturities and coupon rates. Overall, the
characteristics of the Transition Bonds will be substantially
similar to bonds issued by other issuers in other contexts; it is
the Competition Act and the procedures set forth therein which
add complexity to the proposed transaction rather than the terms
of the Transition Bonds. Each series will be entitled to
recover, through the ITC approved by one or more QROs, QTEs,
based on a specified principal amount of Transition Bonds for
such series, including interest at the coupon rate or rates
applicable to such series. There will be a date on which each of
the Transition Bonds is expected to be repaid and a legal final
maturity date by which the Transition Bonds must be repaid.
Neither the expected final maturity nor the legal final maturity
will be later than January 2, 2010. The expected final maturity
date may vary from the legal final maturity date due to the fact
that the ITC is calculated by taking into account such variables
as the anticipated level of charge-offs,
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delinquencies, and usage, which may differ from the amounts actually
incurred or achieved.
Pursuant to a "Sale Agreement" between West Penn (or
Newco in the alternative structure) and the Special Purpose LLC,
West Penn (or Newco) will transfer the ITP and associated ITC
revenue stream to the Special Purpose LLC in a transfer which
will be regarded as a true sale for bankruptcy purposes. It is
anticipated that most of the Transition Bonds will be rated
higher than the senior unsecured long-term debt of West Penn by
at least two nationally recognized rating agencies (the class of
Transition Bonds with the latest expected maturity date may have
a an equal or lower rating because of the short time between the
expected maturity date and the legal final maturity date).
Pursuant to a "Servicing Agreement" between West Penn
and the Special Purpose LLC, West Penn will act as the "servicer"
of the ITC revenue stream and, in this capacity, West Penn will,
among other things, (a) bill customers and make collections on
behalf of the Special Purpose LLC and (b) file with the
Pennsylvania PUC for adjustment to the ITC to achieve a level
which allows for full recovery of QTEs in accordance with the
amortization schedule for each series of Transition Bonds. It
should be noted that West Penn may subcontract with other
companies to carry out some of its servicing responsibilities, so
long as the ratings of the Transition Bonds are neither reduced
nor withdrawn.
West Penn will be entitled to compensation, in the form of a
"servicing fee", for its servicing activities and reimbursement
for certain of its
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expenses in the manner set forth in the
documentation applicable to each series. In order to satisfy the
rating agency requirements for a "bankruptcy remote" entity, the
servicing fee must be an "arms-length" fee, which would be
reasonable and sufficient for a third party performing similar
services. The rating agency requirement is meant to assure that
the subsidiaries would be able to stand on their own and
accordingly the fee must be sufficient to retain a third party
servicer if for any reason West Penn could not continue to
perform these services. As a result, the servicing fee will be
set at an annual level of not more than 2% of the outstanding
amount of the Transition Bonds. As additional servicing
compensation, West Penn will retain all investment earnings on
ITC collections from the time of collection until the time of
remittance to the Collection Account.
Any successor to West Penn pursuant to any merger,
consolidation, bankruptcy, reorganization or other insolvency
proceeding will be required to assume West Penn's obligations
under the Sale and Servicing Agreement and under the Competition
Act. Amounts collected by West Penn in respect of the ITC will
be remitted monthly (or possibly more frequently if required by
the rating agencies) to the Collection Account.
Personnel employed by Allegheny Power Service Corporation
("APSC") will provide ministerial services on an as-needed basis
to the Special Purpose LLC pursuant to an administrative service
agreement ("Service Agreement") to be entered into between
Special Purpose LLC and APSC. The services to be provided will
consist primarily of corporate housekeeping matters relating to
the Special Purpose LLC such as providing notices required under
its Transition Bond documentation, maintaining corporate books
and records and
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maintaining authority to do business in
appropriate jurisdictions. Under the Service Agreement, Special
Purpose LLC will reimburse APSC for the cost of services
provided, computed in accordance with Rules 90 and 91 under the
Act, as well as applicable rules and regulations. As described
above, West Penn will be retained under the Servicing Agreement
to collect and manage the ITP and associated ITC revenues and to
make appropriate filings with the Pennsylvania Public Utility
Commission.
Use of Proceeds
West Penn currently anticipates using the gross
proceeds from the sale of ITP funded by the $670 million (or $630
million in the event of a merger with DQE, Inc.) of Transition
Bonds as follows. West Penn will utilize the gross proceeds to
pay issuance and refinancing costs. West Penn will use the
remaining proceeds principally to reduce its transition or
stranded costs by reducing its existing capitalization through
the retirement of outstanding debt, the retirement and repurchase
of preferred stock and the reduction of common shareholder equity
through stock buy backs and/or dividends.
The specific steps taken by West Penn to reduce its
capitalization will depend, in large part, on the date on which
the proceeds from the sale of Transition Bonds become available,
the then prevailing market conditions, and circumstances at that
time, including but not limited to the overall financial
circumstances of West Penn and other financial activities that
may be in progress or planned, as well as the advice of West
Penn's financial advisors.
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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.
WEST PENN POWER COMPANY
By /s/ Thomas K. Henderson
Thomas K. Henderson,
Vice President
Dated: March 31, 1999
