<PAGE>
File No. 70-____
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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)
<PAGE>
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; (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. 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
<PAGE>
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 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.
2
<PAGE>
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,
("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 is calculated as a percentage of
expected total base rate revenue to be collected by rate class or
group of rate classes, the collection of which 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.
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
3
<PAGE>
West Penn). The new 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 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 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). 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
4
<PAGE>
of an irrevocable QRO that
specifies the amount of 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 the
Transition Bonds to obtain a higher credit rating than the debt
instruments of the electric utility.
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
(e.g., cash or demand note) by West Penn or an affiliate thereof.
The Special Purpose LLC will issue debt securities ("Transition
Bonds") secured by the ITP and the associated ITC revenue stream.
The ITC charge will be set to provide for recovery of an excess
amount (the "Overcollateralization Reserve Required Amount"). To
enhance the
5
<PAGE>
creditworthiness of the Transition Bonds, this amount
will be expected to be collected ratably 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, 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) of the Transition Bonds. ITC
collections in excess of such amounts will be used by the Special
Purpose LLC to fund credit enhancement requirements and reserves.
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 tranches. Different series may have
different maturities and coupon rates, and each series may have
tranches 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
6
<PAGE>
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, delinquencies, and
usage, which may differ from the amounts actually incurred or
achieved
Pursuant to a "Sale Agreement" between West Penn and
the Special Purpose LLC, West Penn 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 the Transition Bonds will be
rated higher than the senior unsecured long-term debt of West
Penn by one or more nationally recognized rating agencies.
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 as part of normal utility collections
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.
7
<PAGE>
West Penn will be entitled to compensation, in the form
of a "servicing fee", for its servicing activities and
reimbursement for certain of its 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 Special Purpose LLC would be able to stand on its
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.
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 deposited into its accounts and then remitted monthly (or
possibly more frequently if required by the rating agencies) to
the Collection Account. Any investment earnings with respect to
ITC amounts collected by West Penn will be retained by West Penn.
West Penn anticipates that the Special Purpose LLC will
not have its own paid employees. 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. Personnel employed by Allegheny Power Service
Corporation
8
("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 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.
Item No. 2. Fees, Commissions and Expenses
The following estimated fees and expenses are expected
to be incurred by the Applicants in connection with the formation
of a new subsidiary of West Penn, the acquisition of interests in
that company by West Penn and the issuance of interests by the
new subsidiary. (To be filed by amendment by means of a copy of
the Form S-3 Registration Statement.)
Item No. 3. Applicable Statutory Provisions
West Penn is informed by counsel that the proposed
transactions may be subject to Sections 6(a), 7, 9(a), 10, 12(b),
and 12(f) of the Public Utility Holding Company Act of 1935 and
Rules 90 and 91 thereunder.
Item No. 4. Regulatory Approval
The proposed transactions have been authorized to
the extent required by the Public Utility Commission of
Pennsylvania as to
9
<PAGE>
the formation of a new subsidiary of West
Penn and the issuance of securities by the new subsidiary.
No other regulatory agency, other than the Securities and
Exchange Commission, has jurisdiction over the proposed
transactions.
Item No. 5. Procedure
It is requested that the Commission's order granting
this Application or Declaration be issued on or before April 19,
1999. 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. West Penn consents 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 transactions covered by this Application or Declaration.
10
<PAGE>
Item No. 6. Exhibits and Financial Statements
(a) Exhibits
B-1 Form of Sale Agreement (to be
filed by amendment)
B-2 Form of Servicing Agreement (to be
filed by amendment)
B-3 Form of Service Agreement with APSC (to
be filed by amendment)
D-1 West Penn's
Settlement Agreement approved by the
Pennsylvania Public Utility Commission
(to be filed by amendment)
D-2 Orders of the
Pennsylvania Public Utility Commission
(to be filed by amendment)
F Opinion of Counsel
(to be filed by amendment)
G Financial Data
Schedule (to be filed by amendment)
H Form of Notice
Item No. 7. Information as to Environmental Effects
(a) For the reasons set forth in Item 1 above, the
authorization applied for herein does 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.
11
<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.
WEST PENN POWER COMPANY
By /s/ Thomas K. Henderson
Thomas K. Henderson,
Vice President
Dated: March 9, 1999
<PAGE>
EXHIBIT H
SECURITIES AND EXCHANGE COMMISSION
(Release No. 35- : )
West Penn Power Company
Notice Requesting Authority to Establish Subsidiary and for the
Subsidiary to Issue Transition Bonds
West Penn Power Company (West Penn), 800 Cabin Hill
Drive, Greensburg, Pennsylvania 15601, a public utility
subsidiary of Allegheny Energy, Inc., a registered public utility
holding company, has filed an application/declaration pursuant to
Sections 6(a), 7, 9(a), 10, 12(b), and 12(f) of the Public
Utility Holding Company Act of 1935. West Penn requests
authority through December 31, 2007 to (a) acquire all the
limited liability company interests in a new wholly-owned limited
liability company subsidiary; (b) transfer intangible transition
property and the associated intangible transition charges revenue
stream, to the new subsidiary in exchange for the net proceeds
from the sale of Transition Bonds; and (c) for the new subsidiary
to issue Transition Bonds to the public. 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 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
<PAGE>
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,
("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 is calculated as a percentage of
expected total base rate revenue to be collected by rate class or
group of rate classes, the collection of which 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.
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). The new 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 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
<PAGE>
(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 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). 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 amount of 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 the
Transition Bonds to obtain a higher credit rating than the debt
instruments of the electric utility.
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
(e.g., cash or demand note) by West Penn or an affiliate thereof.
The Special Purpose LLC will issue debt securities ("Transition
Bonds") secured by the ITP and the associated ITC revenue stream.
The ITC charge will be set to provide for recovery of an excess
amount (the "Overcollateralization Reserve Required Amount"). To
enhance the creditworthiness of the Transition Bonds, this amount
will be expected to be collected ratably 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, 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
<PAGE>
Transition Bonds, and principal (to the extent scheduled)
of the Transition Bonds. ITC collections in excess of such
amounts will be used by the Special Purpose LLC to fund credit
enhancement requirements and reserves.
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 tranches. Different series may have
different maturities and coupon rates, and each series may have
tranches 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, delinquencies, and
usage, which may differ from the amounts actually incurred or
achieved
Pursuant to a "Sale Agreement" between West Penn and
the Special Purpose LLC, West Penn 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 the Transition Bonds will be
rated higher than the senior unsecured long-term debt of West
Penn by one or more nationally recognized rating agencies.
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 as part of normal utility collections
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 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 Special Purpose LLC would be able to stand on its
own and accordingly the fee must be sufficient to retain a third
party servicer if for any reason West Penn could
<PAGE>
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.
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 deposited into its accounts and then remitted monthly (or
possibly more frequently if required by the rating agencies) to
the Collection Account. Any investment earnings with respect to
ITC amounts collected by West Penn will be retained by West Penn.
West Penn anticipates that the Special Purpose LLC will not
have its own paid employees. 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.
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 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.
Except as described herein, no associate company or
affiliate of the Applicants West Penn or any affiliate of any
such associate company has any material interest, directly or
indirectly, in the proposed transactions.
The application and any amendments thereto are
available for public inspection through the Commission's Office
of Public Reference. Interested persons wishing to comment or
request a hearing should submit their views in writing
by_______________, 1999, to the Secretary, Securities and
Exchange Commission, Washington, DC 20549, and serve a copy of
the Applicant at the address specified above. Proof of service
(by affidavit or, in case of an attorney at law, by certificate)
should be filed with the request. Any request for a hearing
shall identify specifically the issues of fact or law that are
disputed. A person who so requests will be notified of any
hearing, if ordered, and will receive a copy of any notice or
order issued in this matter. After said date, the application,
as filed or as it may be amended, may be granted.
For the Commission, by the Division of Investment
Management, pursuant to delegated authority.
