As filed with the Securities and Exchange Commission on May 28, 1999
Registration No. 333-____
===========================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
West Penn Funding LLC
(Exact name as specified in registrant's Certificate of Formation)
Delaware [ ]
(State or other jurisdiction (I.R.S. Employer
of incorporation or Identification Number)
organization)
------------------------
West Penn Funding LLC
800 Cabin Hill Drive
Greensburg, PA 15601-1689
(724) 837-3000
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
[ ]
800 Cabin Hill Drive
Greensburg, PA 15601-1689
(724) 837-3000
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
Copies to:
GREGORY M. SHAW, ESQ. THOMAS K. HENDERSON, ESQ. GEOFFREY K. HURLEY, ESQ.
Cravath, Swaine & Moore Allegheny Energy, Inc. Latham & Watkins
Worldwide Plaza 10435 Downsville Pike 885 Third Avenue
825 Eighth Avenue Hagerstown, MD 21740-1766 New York, NY 10022
New York, NY 10019 ( ) - (212) 906-1200
(212) 474-1000
Approximate date of commencement of proposed sale to public: From time
to time after this Registration Statement becomes effective as determined
by market conditions.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the
following box. [ ]
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, other than securities offered only in connection
with dividend or interest reinvestment plans, please check the following
box. |X|
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act, please check the
following box and list the Securities Act registration statement number of
the earlier effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. [ ]
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
==============================================================================================================
Proposed maximum Proposed maximum
Title of securities Amount to be aggregate offering price aggregate offering Amount of
being registered registered per unit* price* registration fee
<S> <C> <C> <C> <C>
Transition Bonds ...... $1,000,000 100% $1,000,000 $278
==============================================================================================================
</TABLE>
* Estimated solely for the purposes of calculating the registration fee.
The registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the
registrant shall file a further amendment which specifically states that
this Registration Statement shall thereafter become effective in accordance
with Section 8(a) of the Securities Act of 1933, as amended, or until the
Registration Statement shall become effective on such date as the
Commission, acting pursuant to said Section 8(a), may determine.
===========================================================================
<PAGE>
The information in this prospectus supplement and the accompanying
prospectus is not complete and may be changed. We may not sell these
securities until the registration statement filed with the Securities and
Exchange Commission is effective. This prospectus supplement and the
accompanying prospectus is not an offer to sell these securities and it is
not soliciting an offer to buy these securities in any state where the
offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED MAY 28, 1999
Prospectus Supplement to Prospectus Dated [ ], 1999
WEST PENN FUNDING LLC
Issuer
WEST PENN POWER COMPANY
Originator and Servicer
SERIES 1999-A
$[ ] Transition Bonds
The Issuer will issue:
<TABLE>
<CAPTION>
Class A-1 Class A-2 Class A-3 Class A-4 [Class A-5]
<S> <C> <C> <C> <C> <C>
Principal Amount $ $ $ $ $
Price $ $ $ $ $
( %) ( %) ( %) ( %) ( %)
Underwriter's Commission $ $ $ $ $
( %) ( %) ( %) ( %) ( %)
Proceeds to the Issuer $ $ $ $ $
Bond Rate % % % % %
Interest Paid
Optional Redemption*
First Payment Date
Expected Final Payment Date
Termination Date
* All Series 1999-A Bonds are subject to optional redemption in whole
once the outstanding principal balance of the Series 1999-A Bonds has
been reduced to less than 5% of the initial principal balance.
</TABLE>
These securities are highly structured. Before you purchase these
securities, you should carefully consider the Risk Factors beginning on
Page [ ] in the accompanying prospectus.
o These securities are obligations of the Issuer only. These
securities do not represent obligations of the Seller, West Penn
or any entity other than the Issuer. These securities are not
obligations of the Pennsylvania Public Utility Commission or any
other governmental agency or instrumentality.
o The Issuer is a special purpose entity that has no property other
than the Collateral, and the Collateral is the sole source of
payment for these securities.
o There currently is no secondary market for the Series 1999-A
Bonds, and there is no assurance that one will develop.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined
that this prospectus supplement or the accompanying prospectus is accurate
or complete. Any representation to the contrary is a criminal offense.
Morgan Stanley Dean Witter
[other underwriters]
The date of this Prospectus Supplement is [ ], 1999.
<PAGE>
TABLE OF CONTENTS
WHERE TO FIND INFORMATION IN THESE DOCUMENTS.................... S-1
SUMMARY OF TERMS................................................ S-2
Securities Offered........................................... S-3
Introduction................................................. S-5
The Collateral............................................... S-6
Interest..................................................... S-6
Principal.................................................... S-6
Credit Enhancement.......................................... S-6
Optional Redemption.......................................... S-7
Repurchase by West Penn of Intangible Transition Property... S-7
ITC Adjustment Process....................................... S-7
Tax Status................................................... S-7
ERISA Considerations......................................... S-7
Servicer's and Issuer's Mailing Address
and Telephone Number of Principal Executive Office...... S-7
THE SERIES 1999-A BONDS......................................... S-8
General......................................................... S-8
Distributions from the Collection Account.................... S-8
Interest..................................................... S-8
Principal.................................................... S-8
Optional Redemption.......................................... S-9
Repurchase by West Penn of Intangible Transition Property.... S-9
Overcollateralization........................................ S-10
Other Credit Enhancement..................................... S-10
Reports to Holders of Series 1999-A Bonds.................... S-10
DESCRIPTION OF INTANGIBLE TRANSITION PROPERTY................... S-11
The Intangible Transition Charges............................... S-11
Rate Schedule Descriptions................................... S-12
Adjustments to the Intangible Transition Charges............. S-13
DESCRIPTION OF WEST PENN'S BUSINESS............................. S-13
SERVICING....................................................... S-13
Servicing Fee................................................ S-13
Servicer Advances............................................ S-13
UNDERWRITING THE SERIES 1999-A BONDS............................ S-14
RATINGS......................................................... S-15
INDEX OF PRINCIPAL DEFINITIONS.................................. S-16
<PAGE>
WHERE TO FIND INFORMATION IN THESE DOCUMENTS
We provide information to you about the Transition Bonds in two
separate documents that progressively provide more detail: (a) the
accompanying prospectus, which provides general information, some of which
may not apply to your Series of Transition Bonds and (b) this prospectus
supplement, which describes the specific terms of your Series of Transition
Bonds. This prospectus supplement and the accompanying prospectus together
contain complete information about the offering of your Series of
Transition Bonds. You are urged to read both documents. In particular, you
should read the information under the heading "Risk Factors," beginning on
Page [ ] of the accompanying prospectus.
This supplement begins with several sections describing these
securities:
o Summary of Terms provides important amounts, dates and
other terms of your Series;
o The Series 1999-A Bonds describes the key structural
features of your Series; and
o Description of Intangible Transition Property describes
the Intangible Transition Charges that provide the
source for payment of your Series and refers you to the
sections in the accompanying prospectus where you can
find further information about the Intangible
Transition Charges and other Collateral for the
Transition Bonds.
As you read through these sections, cross-references will direct
you to more information in the accompanying prospectus. You can also
directly reference key topics by looking at the table of contents in this
prospectus supplement and the accompanying prospectus.
If the terms of your Series of Transition Bonds vary between this
prospectus supplement and the accompanying prospectus, you should rely on
the information in this prospectus supplement.
This prospectus supplement and the accompanying prospectus may be
used by the Underwriters in connection with offers and sales related to
market-making transactions in your Series of Transition Bonds. The
Underwriters may act as principal or agent in such transactions. Such sales
will be made at prices related to prevailing market prices at the time of
sale.
You should rely only on the information in this prospectus
supplement and the accompanying prospectus. The Issuer has not authorized
anyone to provide you with information that is different. The information
in this prospectus supplement and the accompanying prospectus is correct
only as of the date of this prospectus supplement and the accompanying
prospectus.
To understand the structure and payment terms of these securities, you must
carefully read the accompanying prospectus and this prospectus supplement
in their entirety.
S-1
<PAGE>
SUMMARY OF TERMS
The following section is only a summary of selected information
and does not provide you with all the information you will need to make
your investment decision. There is more detailed information in this
prospectus supplement and in the accompanying prospectus. To understand all
of the terms of the offering of the Transition Bonds, carefully read this
entire document and the accompanying prospectus.
Capitalized terms used in this prospectus supplement are defined
in this prospectus supplement or in the accompanying prospectus, and you
should refer to the Index of Principal Definitions on page S-[ ] of this
prospectus supplement, or if not listed there, to the Index of Principal
Definitions on page [ ] of the accompanying prospectus, for the location of
the definitions of such terms.
For a discussion of certain material risks associated with an
investment in the Series 1999-A Bonds, you should review the discussion
under "Risk Factors," which begins on page [ ] of the accompanying
prospectus.
S-2
<PAGE>
Securities Offered
Series 1999-A Transition Bonds
$[ ]
Issuer: West Penn Funding LLC
Originator and Servicer: West Penn Power Company ("West Penn")
Seller: West Penn Funding Corporation
Bond Trustee: [ ]
Pricing Date: [ ], 1999
Series Issuance Date: [ ], 1999
Clearance and Settlement: DTC/Cedel/Euroclear
Initial Class % of Total
Principal Balance Bond Rate Series Principal
Class A-1
Class A-2
Class A-3
Class A-4
[Class A-5]
Servicing Fee: On each Payment Date, the Servicer will be entitled to
receive either [1/4] of [0.25]% of the outstanding
principal balance of the Series 1999-A Bonds as long as
Intangible Transition Charges are included in electric
bills sent to Customers or [1/4] of [1.50]% of the
outstanding principal balance of the Series 1999-A
Bonds if Intangible Transition Charges are not included
in electric bills otherwise sent to Customers but,
instead, are billed separately to Customers.
Anticipated Ratings: S&P/Fitch IBCA AAA
Moody's Aaa
Credit Enhancement: ITC adjustments; Overcollateralization, funded over the
life of the Series 1999-A Bonds and expected to reach [
]% of the initial principal balance of each Series of
Transition Bonds; capital of the Issuer, funded upon
the issuance of each Series and expected to be [ ]% of
the initial principal balance of each Series of
Transition Bonds.
Payment Dates: [ ], [ ], [ ] and [ ] of each
year or, if not a business day, the next business day.
First Payment Date: [ ], 1999.
Class A-1 Class A-2 Class A-3 Class A-4 [Class A-5]
Expected Final
Payment Date:*
Termination Date:
S-3
<PAGE>
Optional Redemption:**
*The Expected Final Payment Date is the date upon which
the Issuer expects to make the final payment on your
Series 1999-A Bond. However, the final payment on your
Series 1999-A Bond may be made after that date. Your
Series 1999-A Bond will not be in default unless it is
not paid in full by its Termination Date set forth
above.
**All Series 1999-A Bonds are subject to optional
redemption in whole once the outstanding principal
balance of the Series 1999-A Bonds has been reduced to
less than 5% of the initial principal balance.
Record Date: Close of business on the day prior to any Payment
Date.
Class A-1 Class A-2 Class A-3 Class A-4 [Class A-5]
CUSIP Numbers:
S-4
<PAGE>
Introduction
The Pennsylvania Electricity Generation Customer Choice and
Competition Act (the "Competition Act") was enacted in 1996 and provides
for the restructuring of the electric industry in Pennsylvania, including
retail competition for generation beginning in 1999. Prior to enactment of
the Competition Act, electric utilities, such as West Penn, invested in
various generation-related assets, such as electric generating facilities
and power purchase contracts with third-party generators of electricity, to
help fulfill their duties to serve the public as regulated utilities. The
electric utilities recovered such investments by charging their customers
the regulated rates approved by the Pennsylvania Public Utility Commission.
One of the expected effects of the deregulation of electricity
generation is that rates will be determined by market forces. These market
rates may not be high enough to allow the utilities to recover their
investments in generation-related assets.
The Competition Act provides for utilities to recover the
anticipated loss in value of their generation- related assets, known as
"stranded costs," as a result of the transition from a regulated
environment to competition for electric generation services by including a
new type of charge in their customers' bills. These new charges are known
as "competitive transition charges." Utilities are authorized to securitize
the right to recover all or a portion of these charges (such right,
"intangible transition property") through the issuance of transition bonds,
such as the securities described in this prospectus supplement. Once
intangible transition property is securitized, the utility's right to
recover its stranded costs through the competitive transition charges is
replaced by the intangible transition property holder's right to recover
the costs associated with servicing the transition bonds through
"intangible transition charges" included in customers' electric bills.
Intangible transition charges will reduce the amount of competitive
transition charges. Although under the Competition Act, stranded costs,
intangible transition charges and intangible transition property are terms
generally applicable to all Pennsylvania utilities, when used as
capitalized terms in this prospectus supplement and the accompanying
prospectus, they refer to West Penn's Stranded Costs, Intangible Transition
Charges and Intangible Transition Property.
Intangible Transition Property was created by the Competition Act
and a qualified rate order issued by the Pennsylvania Public Utility
Commission to West Penn on November 19, 1998, as supplemented by a
supplemental qualified rate order issued by the Pennsylvania Public Utility
Commission to West Penn on [ ], 1999 (collectively, the "QRO"). Intangible
Transition Property represents the irrevocable right to collect Intangible
Transition Charges from Customers (as defined under the caption
"Summary--Customers" in the accompanying prospectus) to recover:
o the aggregate principal amount of transition bonds; and
o an amount sufficient to provide for any credit enhancement
to fund any reserves, and to pay interest, premiums, if any,
costs of defeasance, servicing fees and other fees, costs
and charges relating to transition bonds.
Intangible Transition Charges are nonbypassable. Customers cannot
avoid paying them even if they purchase electricity from a supplier other
than West Penn.
On the Series Issuance Date, West Penn will contribute Intangible
Transition Property to the Seller, who will then sell the Intangible
Transition Property to the Issuer, who will then pledge all its property,
including the Intangible Transition Property, to the Bond Trustee as the
collateral for the Transition Bonds. The Issuer's other property that makes
up the collateral for these securities is described in this Summary under
the subcaption "The Collateral."
S-5
<PAGE>
For more information on the Competition Act, Intangible
Transition Property and Intangible Transition Charges, you should review
the material under the captions entitled "Risk Factors," "The Competition
Act," "West Penn's Restructuring Plan" and "The QRO and the Intangible
Transition Charges" in the accompanying prospectus.
The following is a summary of other specific matters related to these
securities:
The Collateral Servicing Agreement" in the
prospectus.
The Series 1999-A Bonds will
be secured by the collateral Interest
(the "Collateral"),
primarily consisting of: Holders of each Class of this
Series are expected to receive
o all the Issuer's right, interest at the Bond Rate for such
title and interest in Class as set forth on the cover of
and to the Intangible this prospectus supplement.
Transition Property
transferred by the Interest on the Series 1999-A Bonds
Seller to the Issuer will be calculated on the basis of
pursuant to the Intangible a 360-day year of twelve 30-day
Transition Property Sale months.
Agreement (the "Sale
Agreement"); You should also review the material
under the caption "The Series 1999-A
o collections of Intangible Bonds--Interest" in this prospectus
Transition Charges that are supplement.
remitted to the Issuer
pursuant to the Servicing Principal
Agreement between the
Issuer and the Servicer (the On each Payment Date, to the extent
"Servicing Agreement"); of available funds, the Bond Trustee
will make principal payments in
o the Issuer's rights, except for accordance with the Expected
certain provisions for Amortization Schedule set forth
indemnification of the Seller under the caption "The Series 1999-A
and the Issuer, under the Bonds--Principal" in this prospectus
Intangible Transition supplement. The actual amount of
Property Transfer principal paid on any Payment Date
Agreement between West on your Series 1999-A Bond may be
Penn and the Seller (the less than the amount set forth in
"Transfer Agreement"); the Expected Amortization Schedule
for that Payment Date.
o the Issuer's rights, except
for certain provisions for Other than in the event of a
indemnification of the redemption, in no event will
Issuer, under the Sale the principal paid to any Class on
Agreement; any Payment Date be greater than
the amount necessary to reduce the
o the Issuer's rights, except principal balance of such Class to
for certain provisions for the amount specified in the
indemnification of the Expected Amortization Schedule
Issuer, under the Servicing for such Class and such Payment
Agreement; and Date.
o specified bank accounts of Credit Enhancement
the Issuer and all amounts or
investment property in these Overcollateralization.
accounts (other than cash Overcollateralization is the pledge
amounts payable to the by the Issuer of Collateral, in this
Seller or Servicer described case Intangible Transition Property,
in the accompanying in excess of what is expected to be
prospectus). needed to cover the repayment of
your Series 1999-A Bond. The
For a more detailed description of Overcollateralization for these
the Collateral for the Transition securities will be funded over the
Bonds, you should review the material life of the Series 1999-A Bonds and
under the captions "The QRO and the is expected to reach [ ]% of the
Intangible Transition Charges" and initial principal balance of each
"The Indenture-- Security" in the Series of Transition Bonds.
accompanying prospectus. For a summary
of the terms of the Transfer Additional Credit Enhancement. In
Agreement, see "The Transfer addition, capital of the Issuer
Agreement" in the accompanying (expected to be [ ]% of the initial
Prospectus. For a summary of the terms principal balance of each Series
of the Sale Agreement, see "The Sale of Transition Bonds) is available
Agreement" in the accompanying to make payments on any Series of
prospectus. For a summary of the terms Transition Bonds as described in
of the Servicing Agreement, see "The the accompanying prospectus.
In addition, Intangible Transition
Charges will be subject to
S-6
<PAGE>
periodic review and adjustment, as Schedule and the amount on deposit
described below under "ITC Adjustment in the Overcollateralization
Process." Subaccount equaling the Calculated
Overcollateralization Level by
You should also review the material the Payment Date immediately
under the captions"The Transition following the next Adjustment Date.
Bonds--Credit Enhancement" and "The
Indenture--Allocations and Payment" in For a more detailed description of
the accompanying prospectus. the ITC adjustment process, you
should review the material under
Optional Redemption the caption "Description of
Intangible Transition Property--
The Series 1999-A Bonds may be Adjustments to the Intangible
redeemed in whole once the outstanding Transition Charges" and the material
principal balance of the Series 1999-A under the caption "The QRO and the
Bonds has been reduced to less than 5% Intangible Transition Charges--The
of the initial Intangible Transition Charges--The
principal balance. ITC Adjustment Process" in the
accompanying prospectus.
You should also review the material Tax Status
under the caption "The Series 1999-A
Bonds--Optional Redemption" in this West Penn has received a ruling from
prospectus supplement. the IRS that the Transition Bonds will
be classified as obligations of the
Repurchase by West Penn of Intangible federal income tax purposes, the
Transition Property Transition Bonds will be treated as
debt of the Seller secured by a pledge
West Penn is obligated to of the Collateral.
repurchase the Intangible Transition
Property for breaches of specified The Issuer will be treated as a
representations and warranties in the division of the Seller and will not
Transfer Agreement. If West Penn has be treated as a separate taxable
this repurchase obligation, it shall entity.
be required to pay a deferred
repurchase price on each Payment Date Transition Bondholders who are not
to the Bond Trustee, as collateral United States taxpayers generally
assignee of the Issuer. will not be subject to United States
federal income or withholding taxes
For more information about the on interest received on the
repurchase of the Intangible Transition Bonds.
Transition Property by West Penn and
indemnification payments by West Penn, For information regarding the
you should refer to the material application of U.S. federal income
under the caption "The Transfer tax laws, you should see the
Agreement--Representations and section captioned "United States
Warranties of West Penn" in the Taxation" in the accompanying
accompanying prospectus. prospectus.
ERISA Considerations
ITC Adjustment Process
Employee benefit plans are permitted
The Servicer is required to seek to purchase Transition Bonds.
adjustments to the Intangible
Transition Charges on each October 1, You should also review the material
commencing October 1, 1999 and under the caption "ERISA
continuing through October 1, 2007 Considerations" in the
and, commencing [date which is 12 accompanying prospectus.
months prior to Expected Final
Payment Date of last Class], on the Servicer's and Issuer's Mailing
1st day of each month (or if such day Address and Telephone Number of
is not a business day, the immediately Principal Executive Office:
preceding business day) until the
Series Termination Date (each a The mailing address of West Penn is
"Calculation Date"). The annual West Penn Power Company, 800 Cabin
adjustments through October 1, 2007 Hill Drive, Greensburg, PA 15601,
are expected to be implemented on or and its telephone number is (724)
prior to January 1 of the following 837-3000. The mailing address of
year. The monthly adjustments are the Issuer is West Penn Funding
expected to be implemented on the LLC, [ ], and its
first day of the next calendar month telephone number is [ ].
after the requests for such
adjustments are filed with the PUC.
Each Adjustment Request will be
designed to result in the outstanding
principal balance of the Series
1999-A Bonds equaling the amount
provided for in the Expected
Amortization
S-7
<PAGE>
THE SERIES 1999-A BONDS
The Series 1999-A Bonds will be issued under and secured pursuant to a
base indenture dated as of [ ], 1999 between the Issuer and [ ], as bond
trustee, as supplemented by the Series 1999-A Supplemental Indenture
thereto (as so supplemented, the "Indenture"). The following summary does
not purport to be complete and is subject to, and qualified by reference
to, the terms and provisions of the Indenture and by the terms and
provisions of the Series 1999-A Bonds.
General
The Series 1999-A Bonds will be issued on the Series Issuance Date in
denominations of $1,000 and integral multiples thereof and will be
comprised of the Classes listed above under "Summary of Terms--Securities
Offered."
Interest and principal relating to the Series 1999-A Bonds will be
paid through DTC or, if the Series 1999-A Bonds are no longer in book-entry
form, will be payable at the offices of [Trustee] at [ ]. Generally,
payment will be made by check mailed first-class, postage prepaid to a
holder's address as it appears on the transition bond register on each
Record Date. For Series 1999-A Bonds registered on a Record Date in the
name of the nominee of Cede & Co., payments will be made by wire transfer
in immediately available funds to the account designated by such nominee,
except as described below. The final installment of principal and premium,
if any, payable with respect to any Series 1999-A Bond will be payable,
after prior notice to the holder, only upon presentation and surrender of
the Series 1999-A Bond at a place specified in such notice.
Distributions from the Collection Account
Amounts distributed from the Collection Account as described in "The
Indenture--Allocations and Payments" in the accompanying prospectus will be
applied among the Classes of the Series 1999-A Bonds on each Payment Date
as follows: (i) with respect to interest, to each Class on a pro rata basis
based on the amount of interest payable to that Class and (ii) with respect
to principal, to each Class as described under "--Principal" in this
section.
Interest
Interest on each Class of the Series 1999-A Bonds will accrue from the
Series Issuance Date at the respective Bond Rates indicated in the section
at the beginning of this prospectus supplement entitled
"Summary--Securities Offered." The interest will be payable on each Payment
Date, commencing [ ], 1999, to the persons in whose names the Series 1999-A
Bonds of each Class are registered at the close of business on the Record
Date therefor.
Interest on the Series 1999-A Bonds will be calculated on the basis of
a 360-day year of twelve 30-day months.
The "Interest Accrual Period" for any Payment Date shall be the period
from and including the preceding Payment Date (or, in the case of the first
Payment Date, from and including the Series Issuance Date) to and excluding
such Payment Date.
The record date for any Payment Date shall be the close of business on
the day prior to such Payment Date (the "Record Date").
Principal
On each Payment Date, the Bond Trustee shall, as of the related
Record Date and subject to the availability of funds, make principal
payments on each Class of Transition Bonds in accordance with the Expected
Amortization Schedule.
To the extent that more than one Class of Series 1999-A Bonds is
to receive payments of principal in accordance with the Expected
Amortization Schedule on any Payment Date, the applicable funds will be
allocated pro rata between such Classes based on the principal scheduled to
be paid to such Classes on that Payment Date; except, that if one or more
Classes did not receive principal that it was scheduled to receive on prior
Payment Dates, then those Classes will be (i) allocated funds to make up
these shortfalls prior to any
S-8
<PAGE>
Classes receiving funds for principal scheduled to be paid on the current
Payment Date and (ii) allocated funds in respect of prior shortfalls on a
pro rata basis based on the amount of the shortfalls.
The principal payment on any Class on a Payment Date will not be
greater than the amount necessary to reduce the Class Principal Balance of
such Class to the amount specified in the Expected Amortization Schedule
for such Class and Payment Date unless an event of default or a redemption
occurs.
"Class Principal Balance" means the initial principal balance of
a Class, reduced by principal distributed to that Class in accordance with
the terms of the Indenture.
The entire unpaid principal amount for any Class of the Series
1999-A Bonds will be due and payable on the applicable Class Termination
Date.
The following Expected Amortization Schedule sets forth the
scheduled outstanding Class Principal Balance for each Class of the Series
1999-A Bonds at each Payment Date (after giving effect to the payments made
on that date) from the Series Issuance Date to the Expected Final Payment
Date for that Class.
TABLE 1
Expected Amortization Schedule
Outstanding Class Principal Balances
<TABLE>
<CAPTION>
Payment Date Class A-1 Class A-2 Class A-3 Class A-4 [Class A-5] Series 1999-A
- ------------ ----------- ----------- ----------- ----------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
Series Issuance
Date
</TABLE>
For various reasons, the actual Class Principal Balance of any
Class of the Series 1999-A Bonds may not be reduced by the amounts
indicated in the foregoing table on any Payment Date. Accordingly, the
actual reductions in Class Principal Balances may be delayed from those
indicated in the table. See "Risk Factors" in the accompanying prospectus
for various factors which may, individually or in the aggregate, affect the
rates of reduction of the Class Principal Balances of any Class of the
Series 1999-A Bonds.
Optional Redemption
The Series 1999-A Bonds may be redeemed in whole on any Payment
Date commencing with the Payment Date on which the outstanding principal
balance of the Series 1999-A Bonds (after giving effect to payments that
would otherwise be made on that date) has been reduced to less than 5% of
the initial principal balance of the Series 1999-A Bonds. Notice of
redemption will be given by the Issuer to the Bond Trustee and the Rating
Agencies.
Repurchase by West Penn of Intangible Transition Property
West Penn is obligated to repurchase the Intangible Transition Property
for breaches of specified representations and warranties in the Transfer
Agreement. If West Penn has this repurchase obligation, it shall be
required to pay a deferred repurchase price on each Payment Date to the
Bond Trustee, as collateral assignee of the Issuer.
West Penn will be obligated to repurchase the Intangible Transition
Property and pay the deferred repurchase price as described in "The
Transfer Agreement--Representations and Warranties of West Penn" in the
accompanying prospectus.
S-9
<PAGE>
Overcollateralization
The Overcollateralization Amount for each Series of Transition
Bonds is intended to be funded over the expected life of that Series and is
expected to be [ ]% of the initial principal amount for each Series of
Transition Bonds. The only source of cash for the Overcollateralization
Amount will be Intangible Transition Charges, which will be calculated at,
and periodically adjusted to, a level that is designed to collect the
Overcollateralization Amount ratably over the expected life of all Series
of Transition Bonds. Amounts of Intangible Transition Charges collected in
any period as a result of Overcollateralization Amounts will be available
for all Series of Transition Bonds on a pro rata basis without any
preference. The Calculated Overcollateralization Level for each Payment
Date related to the Series 1999-A Bonds, as of the date of this prospectus
supplement, is set forth below. These balances may change from time to time
with the issuance of each new Series and the redemption or refunding of a
Class or Series.
For a more detailed description of Overcollateralization, see the
material under the captions "The Transition Bonds--Credit Enhancement" and
"The Indenture--Allocations and Payments" in the accompanying prospectus.
TABLE 2
Calculated Overcollateralization Level
Required
Overcollateralization
Payment Date Level
Other Credit Enhancement
Reserve Subaccount. ITC Collections available on any Payment Date
above that amount necessary to pay the (i) amounts payable for expenses of
the Bond Trustee, the Manager and the Servicer and other fees and expenses,
(ii) amounts distributable to the Transition Bondholders for principal and
interest on that Payment Date, (iii) amounts required to replenish the
Capital Subaccount and (iv) amounts required to replenish the
Overcollateralization Subaccount (all as described under "The
Indenture--Allocations and Payments" in the prospectus), including
prepayments, if any, will be allocated to the Reserve Subaccount. On each
Payment Date, the Bond Trustee will draw on amounts in the Reserve
Subaccount, if any, to the extent amounts available in the General
Subaccount and the Loss Subaccount are insufficient to make scheduled
payments to the Transition Bondholders and pay expenses of the Issuer, the
Bond Trustee, the Manager, the Servicer and other fees and expenses.
Capital Subaccount. Upon the issuance of the Series 1999-A Bonds,
the Seller will deposit the Required Capital Amount of $[ ] million in the
Capital Subaccount. On each Payment Date, the Bond Trustee will draw on
amounts in the Capital Subaccount, if any, to the extent amounts available
in the General Subaccount, the Loss Subaccount, the Reserve Subaccount and
the Overcollateralization Subaccount are insufficient to make scheduled
payments to the Transition Bondholders and to pay expenses of the Issuer,
the Bond Trustee, the Manager and the Servicer and other specified fees and
expenses.
Reports to Holders of Series 1999-A Bonds
On or prior to each Payment Date, the Bond Trustee will prepare
and provide statements to the holders of record of the Series 1999-A Bonds.
Such statements will be available to the beneficial owners of the Series
1999-A Bonds upon request to the Bond Trustee or the Servicer. The
financial information provided will not be examined or reported upon by any
independent public accountant and no independent public accountant will
give an opinion on such financial information.
S-10
<PAGE>
For a more detailed description of the statements provided to the
holders of record of the Series 1999-A Bonds, you should review the
material under the caption "The Indenture--Reports to Transition
Bondholders" in the accompanying prospectus.
DESCRIPTION OF INTANGIBLE TRANSITION PROPERTY
The Intangible Transition Charges
The Qualified Transition Expenses authorized in the QRO issued by
the PUC to West Penn are to be recovered from Customers in each of West
Penn's separate Rate Schedules. All Series and Classes of Transition Bonds
will be secured by the Collateral. The Intangible Transition Charges
initially will be calculated by determining the total amount of Intangible
Transition Charges required to be billed to each Customer Category, based
on current estimates of sales growth, in order to generate ITC Collections
sufficient to ensure timely recovery of Qualified Transition Expenses in
accordance with the Expected Amortization Schedule. The amount determined
for each Customer Category will then be allocated to each Rate Schedule
within that Customer Category based on the allocation of Stranded Cost
recovery borne by each Rate Schedule through current electric rates
approved by the PUC. The Intangible Transition Charges will reduce
Competitive Transition Charges (as periodically adjusted) and will appear
as a separate line item on each Customer's bill. See "The QRO and the
Intangible Transition Charges--The Intangible Transition Charges--The ITC
Adjustment Process" in the accompanying prospectus.
[The unbundled Customer bills that were sent out for billing
cycles beginning January 1, 1999 separately identified charges for
generation, transmission and distribution and other services. When
Intangible Transition Charges are billed to Customers, such charges will be
applied to total projected revenue per Rate Schedule, exclusive of
transmission, energy, capacity and fixed distribution charges. This will be
reflected in the calculation of the Intangible Transition Charges.]
Initially, the Intangible Transition Charges billed will average
approximately $[ ] per month for Residential Customers, approximately $[ ]
per month for Commercial Customers and approximately $[ ] per month for
Industrial Customers. The average monthly bill for each Customer Category
of West Penn Customers during 1998 was $[ ], $[ ] and $[ ], respectively.
The following projected average Intangible Transition Charges (expressed as
a percentage of the generation rate cap applicable to each Rate Schedule)
will be imposed on Customers in the following Customer Categories beginning
with the bill rendered approximately [ten] days after the Series Issuance
Date for the Series 1999-A Bonds:
TABLE 3
Projected Average Intangible Transition Charges [1]
for the Period through [ ], 1999
Residential Customers
ITC
Rate Schedule Percentage
- ------------ ----------
Schedule 10........................................... %
Commercial Customers
ITC
Rate Schedule Percentage
- ------------ ----------
Schedule 20........................................... %
Schedule 22........................................... %
Schedule 23........................................... %
Schedule 24........................................... %
Tariff 37............................................. %
S-11
<PAGE>
Industrial Customers
ITC
Rate Schedule Percentage
- ------------ ----------
Schedule 30........................................... %
Schedule 40........................................... %
Schedule 41........................................... %
Schedule 44........................................... %
Schedule 46........................................... %
Schedule 51........................................... %
Schedule 52........................................... %
Schedule 53........................................... %
Schedule 54........................................... %
Schedule 55........................................... %
Schedule 56........................................... %
Schedule 57........................................... %
Schedule 58........................................... %
Schedule 59........................................... %
Schedule 71........................................... %
- ---------------------
[1] Excludes the Pennsylvania utilities gross receipts tax.
Rate Schedule Descriptions:
Rate Schedules are created by the PUC and are subject to change.
These changes will be reflected in any Adjustment Request filed with the
PUC by the Servicer. The current Rate Schedules (indicated above) have
remained unchanged for [ ] years. These Rate Schedules are:
Residential Rate Schedules:
Schedule 10 -- The only residential service schedule, available
to all residential customers in West Penn's
service area.
Commercial Rate Schedules:
Schedule 20 -- For small-to-medium commercial and small
industrial customers.
Schedule 22 -- For churches, schools, non-profit colleges and
universities. Closed to new customers as of
30 August 1979.
Schedule 23 -- For athletic field lighting for schools,
communities, civic organizations, and other
public institutions. Closed to new customers
as of 28 August 1985.
Schedule 24 -- For fairs, carnivals, and other similar temporary
enterprises.
Tariff 37 -- For Pennsylvania State University Main Campus.
Industrial Rate Schedules:
Schedule 30 -- For customers with demands in excess of 100
kilowatts, generally large commercial and
medium-sized industrial customers.
Schedule 40 -- For customers with demands in excess of 2000
kilowatts and service voltages in excess of 25
kilovolts, generally large industrial customers.
Schedule 41 -- For customers with demands in excess of 2000
kilowatts and service voltages in excess of 25
kilovolts, generally large industrial customers.
Closed to new customers as of 31 December 1998.
Schedule 44 -- For customers with interruptible demands in
excess of 5000 kilovolt-amperes and service
voltages in excess of 25 kilovolts, generally
large industrial customers able to withstand
interruptions in service. Closed to new customers
as of 31 December 1998.
Schedule 46 -- For customers with demands in excess of 30,000
kilovolt-amperes and service voltages in excess
of 25 kilovolts, generally very large industrial
customers. Closed to new customers as of
31 December 1998.
S-12
<PAGE>
Schedules 51-56 -- For various types of street and outdoor
lighting. Closed to new customers as of
6 June 1997.
Schedules 57-59 -- For outdoor lighting of various types.
Schedule 71 -- For municipal street and highway lighting.
Closed to new customers as of 26 August 1978.
Schedules 85 & 86-- For cogeneration and alternative generation.
Schedule 90 -- For sale of surge suppression devices.
Adjustments to the Intangible Transition Charges
The Servicer is required to seek adjustments to the Intangible
Transition Charges on each October 1, commencing October 1, 1999 and
continuing through October 1, 2007 and, commencing [date which is 12 months
prior to Expected Final Payment Date of last Class], on the 1st day of each
month (or if such day is not a business day, the immediately preceding
business day) until the Series Termination Date. The annual adjustments
through October 1, 2007 are expected to be implemented on or prior to
January 1 of the following year. The monthly adjustments are expected to be
implemented on the first day of the next calendar month after the requests
for such adjustments are filed with the PUC. Each Adjustment Request will
be designed to result in the outstanding principal balance of the Series
1999-A Bonds equaling the amount provided for in the Expected Amortization
Schedule and the amount on deposit in the Overcollateralization Subaccount
equaling the Calculated Overcollateralization Level by the Payment Date
immediately following the next Adjustment Date.
The Competition Act only requires that the PUC approve annual
adjustments within 90 days. The QRO provides that, during the period
commencing 12 months prior to the Expected Final Payment Date for the Class
A-[5] Bonds, the monthly adjustments will become effective on the first day
of the next calendar month with not less than 15 days' notice.
DESCRIPTION OF WEST PENN'S BUSINESS
For a discussion of the Seller and the Servicer, you should
review the material under the captions "West Penn Power Company", "The
Seller" and "The Servicer" in the accompanying prospectus.
SERVICING
Servicing Fee
On each Payment Date, the Servicer will be entitled to receive
the Servicing Fee in an amount equal to (i) [1/4] of [0.25] percent of the
outstanding principal balance of the Series 1999-A Bonds for so long as
Intangible Transition Charges are included in electric bills otherwise sent
to Customers and (ii) [1/4] of [1.50] percent of the outstanding principal
balance of the Series 1999-A Bonds if Intangible Transition Charges are not
included in electric bills otherwise sent to Customers but, instead, are
billed separately to Customers. The Servicing Fee (together with any
portion of the Servicing Fee that remains unpaid from prior Payment Dates)
will be paid solely to the extent funds are available therefor as described
under "The Indenture--Allocations and Payments" in the accompanying
prospectus. The Servicing Fee will be paid prior to the distribution of any
amounts in respect of interest on and principal of the Series 1999-A Bonds.
The Servicer will be entitled to retain as additional compensation net
investment income on Intangible Transition Charges received by the Servicer
prior to remittance to the Collection Account and the portion of late fees,
if any, paid by Customers relating to the Intangible Transition Charges.
Servicer Advances
The Servicer will not make any advances of interest or principal
on the Series 1999-A Bonds.
S-13
<PAGE>
UNDERWRITING THE SERIES 1999-A BONDS
Subject to the terms and conditions set forth in the underwriting
agreement (the "Underwriting Agreement") among West Penn, the Seller, the
Issuer and the Underwriters named below (the "Underwriters"), for whom
Morgan Stanley Dean Witter is acting as the representative, the Issuer has
agreed to sell to the Underwriters, and the Underwriters have severally
agreed to purchase, the principal amounts of the Series 1999-A Bonds set
forth opposite each Underwriter's name below:
<TABLE>
<CAPTION>
Name Class A-1 Class A-2 Class A-3 Class A-4 [ Class A-5 ]
- ---- ------------ ------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Morgan Stanley & Co. $ $ $ $ $
Incorporated
</TABLE>
Under the terms and conditions of the Underwriting Agreement, the
Underwriters are committed to take and to pay for all of the Series 1999-A
Bonds offered hereby, if any are taken.
The Underwriters' Sales Price for the Series 1999-A Bonds. The
Underwriters propose to offer the Series 1999-A Bonds in part directly to
retail purchasers at the initial public offering prices set forth on the
cover page of this Prospectus Supplement, and in part to some securities
dealers at a price less a concession not in excess of [ ] percent of the
principal amount of the Series 1999-A Class [ ] Bonds, [ ] percent of the
principal amount of the Series 1999-A Class [ ] Bonds and [ ] percent of
the principal amount of the Series 1999-A Class [ ] Bonds. The Underwriters
may allow and the dealers may reallow a concession to some brokers and
dealers not in excess of [ ] percent of the principal amount of the Series
1999-A Class [ ] Bonds, [ ] percent of the principal amount of the Series
1999-A Class [ ] Bonds and [ ] percent of the principal amount of the
Series 1999-A Class [ ] Bonds. After the Series 1999-A Bonds are released
for sale to the public, the offering price and other selling terms may from
time to time be varied by the Underwriters.
No Assurance as to Resale Price or Resale Liquidity for the
Series 1999-A Bonds. The Series 1999-A Bonds are a new issue of securities
with no established trading market. The Series 1999-A Bonds will not be
listed on any securities exchange. The Issuer has been advised by the
Underwriters that they intend to make a market in the Series 1999-A Bonds
but are not obligated to do so and may discontinue market making at any
time without notice. No assurance can be given as to the liquidity of the
trading market for the Series 1999-A Bonds.
Various Types of Underwriter Transactions Which May Affect the
Price of the Series 1999-A Bonds. The Underwriters may engage in
overallotment transactions, stabilizing transactions, syndicate covering
transactions and penalty bids with respect to the Series 1999-A Bonds in
accordance with Regulation M under the Securities Exchange Act of 1934.
Overallotment transactions involve syndicate sales in excess of the
offering size, which creates a syndicate short position. Stabilizing
transactions permit bids to purchase the Series 1999-A Bonds so long as the
stabilizing bids do not exceed a specified maximum. Syndicate covering
transactions involve purchases of the Series 1999-A Bonds in the open
market after the distribution has been completed in order to cover
syndicate short positions. Penalty bids permit the Underwriters to reclaim
a selling concession from a syndicate member when the Series 1999-A Bonds
originally sold by the syndicate member are purchased in a syndicate
covering transaction. These overallotment transactions, stabilizing
transactions, syndicate covering transactions and penalty bids may cause
the prices of the Series 1999-A Bonds to be higher than they would
otherwise be in the absence of these transactions. None of West Penn, the
Seller, the Issuer or the Bond Trustee or any of the Underwriters represent
that the Underwriters will engage in any of these transactions or that
these transactions, once commenced, will not be discontinued without notice
at any time.
In the ordinary course of business, each Underwriter and its
affiliates have engaged and may engage in investment banking and/or
commercial banking transactions with the Issuer and its affiliates,
including West Penn. In addition, each Underwriter may from time to time
take positions in the Transition Bonds.
The Issuer, West Penn and the Seller have agreed to indemnify the
several Underwriters against certain liabilities, including liabilities
under the Securities Act.
S-14
<PAGE>
RATINGS
It is a condition of any Underwriter's obligation to purchase
that the Series 1999-A Bonds be rated "AAA" by S&P, "AAA" by Fitch IBCA,
and "Aaa" by Moody's (each of S&P, Fitch IBCA and Moody's, a "Rating
Agency") which, in each case, is in one of the four highest rating
categories of such Rating Agency.
A security rating is not a recommendation to buy, sell or hold
securities and may be subject to revision or withdrawal at any time by the
assigning Rating Agency. No person is obligated to maintain the rating on
any of the Series 1999-A Bonds, and, accordingly, there can be no assurance
that the ratings assigned to any Class of the Series 1999-A Bonds upon
initial issuance will not be revised or withdrawn by a Rating Agency at any
time thereafter. If a rating of any Class of the Series 1999-A Bonds is
revised or withdrawn, the liquidity of such Class of the Series 1999-A
Bonds may be adversely affected. In general, ratings address credit risk
and do not represent any assessment of any particular rate of principal
payments on the Series 1999-A Bonds other than payment in full of each
Class of the Series 1999-A Bonds by the applicable Class Termination Date.
S-15
<PAGE>
INDEX OF PRINCIPAL DEFINITIONS
Set forth below is a list of the defined terms used in this
prospectus supplement and defined herein and the pages on which the
definition may be found. Certain defined terms used in this prospectus
supplement are defined in the prospectus. See "Index of Principal
Definitions" on page [ ] of the accompanying prospectus.
Term Page
Bond Trustee..........................................................S-3
Calculation Date......................................................S-7
Calculation Period....................................................
Class Principal Balance...............................................S-9
Collateral............................................................S-6
Competition Act.......................................................S-5
competitive transition charges........................................S-5
Indenture.............................................................S-8
intangible transition charges.........................................S-5
intangible transition property........................................S-5
Interest Accrual Period...............................................S-8
Issuer................................................................S-3
QRO...................................................................S-5
Rating Agency.........................................................S-15
Record Date...........................................................S-8
Sale Agreement........................................................S-6
Seller................................................................S-3
Servicer..............................................................S-3
Servicing Agreement...................................................S-6
stranded costs........................................................S-5
Transfer Agreement....................................................S-6
Underwriters..........................................................S-14
Underwriting Agreement................................................S-14
West Penn.............................................................S-3
S-16
<PAGE>
PROSPECTUS
West Penn Funding LLC, Issuer
West Penn Power Company, Originator and Servicer
Up to $[ ] of Transition Bonds Issuable in Series
------------------
THE ISSUER
o may periodically issue transition bonds in one or more series with one
or more classes;
o will own:
o intangible transition property, which is the right, created by
Pennsylvania's Competition Act, to collect intangible transition
charges in amounts designed to be sufficient to repay the transition
bonds, to pay other expenses specified in the indenture and to fund
the trust accounts, and
o other property described in this Prospectus.
THE TRANSITION BONDS
o will be payable only from assets of the Issuer;
o will be supported by trust accounts held by the trustee for the
transition bonds, and, if so stated in the applicable supplement to this
Prospectus (each, a "Prospectus Supplement"), other credit enhancement;
and
o will be issued in series, each of which the Issuer may issue without the
consent of existing transition bondholders.
CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE [ ] OF THIS PROSPECTUS.
These securities are backed by an intangible asset and issued by an issuer
that has no assets other than the property described in this Prospectus. These
securities are not obligations of West Penn Power Company or any affiliate
other than the Issuer.
This Prospectus may be used to offer and sell a series of transition bonds
only if accompanied by the Prospectus Supplement for that series.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF
THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
The date of this Prospectus is _____________, 1999.
1
<PAGE>
TABLE OF CONTENTS
Page
PROSPECTUS SUMMARY........................................................ 5
RISK FACTORS.............................................................. 20
Legal, Legislative or Regulatory Actions Could Adversely Affect
Transition Bondholders............................................... 20
Nature of Intangible Transition Property.............................. 23
Servicing............................................................. 25
Bankruptcy; Creditors' Rights......................................... 29
The Transition Bonds.................................................. 33
AVAILABLE INFORMATION..................................................... 36
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE........................... 36
WEST PENN POWER COMPANY................................................... 37
THE COMPETITION ACT....................................................... 38
General............................................................... 38
Recovery of Stranded Costs............................................ 38
Securitization of Stranded Costs...................................... 38
Jurisdiction Over Disputes; Standing.................................. 40
Possible Federal Preemption of the Competition Act.................... 40
Possible Commonwealth Amendment or Repeal of the Competition Act...... 41
WEST PENN'S RESTRUCTURING PLAN............................................ 43
General............................................................... 43
Provisions of the Settlement.......................................... 43
Provider of Last Resort............................................... 46
Prior Litigation...................................................... 47
THE QRO AND THE INTANGIBLE TRANSITION CHARGES............................. 49
The QRO............................................................... 49
The Intangible Transition Charges..................................... 51
Competitive Billing................................................... 53
THE SERVICER.............................................................. 55
Retail Electric Service Territory..................................... 55
Customers and Operating Revenues...................................... 55
Forecasting Customers and Usage....................................... 60
Billing Process....................................................... 63
Limited Information on Customers' Creditworthiness.................... 63
[Electric Generation Suppliers and Other Third-Party Billers]
[To be revised]..................................................... 67
Year 2000 Compliance.................................................. 67
THE SELLER................................................................ 70
THE ISSUER................................................................ 72
USE OF PROCEEDS........................................................... 74
THE TRANSITION BONDS...................................................... 74
General............................................................... 74
Interest and Principal................................................ 75
Floating Rate Transition Bonds........................................ 76
Redemption............................................................ 76
Credit Enhancement.................................................... 77
2
<PAGE>
Book-Entry Registration............................................... 77
Definitive Transition Bonds........................................... 80
CERTAIN WEIGHTED AVERAGE LIFE
AND YIELD CONSIDERATIONS.............................................. 82
THE TRANSFER AGREEMENT.................................................... 83
Contribution of Intangible Transition Property........................ 83
Representations and Warranties of West Penn........................... 84
Certain Matters Regarding West Penn................................... 90
Governing Law......................................................... 90
THE SALE AGREEMENT........................................................ 91
Sale and Assignment of Intangible Transition Property................. 91
Seller Representations and Warranties................................. 92
Certain Matters Regarding the Seller.................................. 95
Governing Law......................................................... 95
THE SERVICING AGREEMENT................................................... 96
Servicing Procedures.................................................. 96
Servicer Advances..................................................... 97
Servicing Compensation; Releases...................................... 97
Servicer Duties....................................................... 98
Servicer Representations and Warranties............................... 98
Servicer Indemnification.............................................. 99
Statements to Issuer and Bond Trustee................................. 99
Evidence as to Compliance............................................. 100
Certain Matters Regarding the Servicer................................ 101
Servicer Defaults..................................................... 101
Rights Upon Servicer Default.......................................... 102
Successor Servicer.................................................... 102
Governing Law......................................................... 102
THE INDENTURE............................................................. 103
Security.............................................................. 103
Issuance in Series or Classes......................................... 104
Collection Account.................................................... 104
Allocations and Payments.............................................. 107
Reports to Transition Bondholders..................................... 108
Modification of Indenture............................................. 109
Enforcement of the Transfer Agreement, the Sale Agreement and the
Servicing Agreement.................................................. 111
Modifications to the Transfer Agreement, the Sale Agreement and the
Servicing Agreement.................................................. 111
Events of Default; Rights Upon Event of Default....................... 112
Certain Covenants..................................................... 113
List of Transition Bondholders........................................ 115
Annual Compliance Statement........................................... 115
Bond Trustee's Annual Report.......................................... 115
Satisfaction and Discharge of Indenture............................... 116
Legal Defeasance and Covenant Defeasance.............................. 116
The Bond Trustee...................................................... 117
Governing Law......................................................... 118
UNITED STATES TAXATION.................................................... 119
General............................................................... 119
3
<PAGE>
Taxation of the Issuer and of the Transition Bonds.................... 119
Tax Consequences to U.S. Holders...................................... 119
Tax Consequences to Non-U.S. Holders.................................. 120
ERISA CONSIDERATIONS...................................................... 123
PLAN OF DISTRIBUTION...................................................... 124
RATINGS................................................................... 125
LEGAL MATTERS............................................................. 125
INDEX OF PRINCIPAL DEFINITIONS............................................ 126
INDEX TO FINANCIAL STATEMENTS............................................. F-1
4
<PAGE>
PROSPECTUS SUMMARY
This summary contains a brief description of the Transition Bonds that
applies to all Series of Transition Bonds issued under this Prospectus.
Information that relates to a specific Series of Transition Bonds can be found
in the Prospectus Supplement related to that Series. You will find a detailed
description of the terms of the offering of Transition Bonds following this
summary. You can find a listing of the pages where capitalized terms used in
this Prospectus are defined beginning on page [ ] in this Prospectus. CONSIDER
CAREFULLY THE RISK FACTORS BEGINNING ON PAGE [ ] OF THIS PROSPECTUS.
Transaction Overview: The Pennsylvania Electricity Generation
Customer Choice and Competition Act (the
"Competition Act") was enacted in 1996 and
provides for the restructuring of the
electric industry in Pennsylvania,
including retail competition for
generation beginning in 1999. Prior to
enactment of the Competition Act, electric
utilities, such as West Penn, invested in
various generation-related assets, such as
electric generating facilities and power
purchase contracts with third-party
generators of electricity, to help fulfill
their duties to serve the public as
regulated utilities. The electric
utilities recovered such investments by
charging their customers the regulated
rates approved by the Pennsylvania Public
Utility Commission (the "PUC").
One of the expected effects of the
deregulation of electricity generation is
that rates will be determined by market
forces. These market rates may not be high
enough to allow the utilities to recover
their investments in generation-related
assets.
The Competition Act provides for utilities
to recover the anticipated loss in value
of their generation-related assets, known
as "stranded costs," as a result of the
transition from a regulated environment to
competition for electric generation
services by including a new type of charge
in their customers' bills. These new
charges are known as "competitive
transition charges." Utilities are
authorized to securitize the right to
recover all or a portion of these charges
(such right, "intangible transition
property") through the issuance of
transition bonds, such as the securities
described in this Prospectus and the
related Prospectus Supplement. Once
intangible transition property is
securitized, the utility's right to
recover its stranded costs through the
competitive transition charges is replaced
by the intangible transition property
holder's right to recover the costs
associated with servicing the transition
bonds through "intangible transition
charges" included in customers' electric
bills. Intangible transition charges will
reduce the amount of competitive
transition charges.
Although under the Competition Act,
stranded costs, competitive transition
charges, intangible transition charges and
intangible transition property are terms
generally applicable to all Pennsylvania
utilities, when used as capitalized terms
in this Prospectus, they refer to West
5
<PAGE>
Penn's Stranded Costs, Competitive
Transition Charges, Intangible Transition
Charges and Intangible Transition
Property.
Intangible Transition Property was created
by the Competition Act and a qualified
rate order issued by the Pennsylvania
Public Utility Commission to West Penn on
November 19, 1998, as supplemented by a
supplemental qualified rate order issued
by the Pennsylvania Public Utility
Commission to West Penn on [ ], 1999
(collectively, the "QRO"). Intangible
Transition Property represents the
irrevocable right to collect Intangible
Transition Charges from Customers (as
defined in this Prospectus Summary under
the subcaption "Customers") to recover:
o the aggregate principal amount of
transition bonds; and
o an amount sufficient to provide for any
credit enhancement to fund any reserves,
and to pay interest, premiums, if any,
costs of defeasance, servicing fees and
other fees, costs and charges relating to
transition bonds (collectively, "Qualified
Transition Expenses").
Intangible Transition Charges are
nonbypassable. Customers cannot avoid
paying them even if they purchase
electricity from a supplier other than
West Penn.
On the issue date for each Series, West
Penn will contribute Intangible Transition
Property (the "Transferred Intangible
Transition Property") to the Seller
pursuant to a transfer agreement (the
"Transfer Agreement") in exchange for all
of the outstanding capital stock of the
Seller. The Seller will then sell that
Transferred Intangible Transition Property
to the Issuer pursuant to a sale agreement
(the "Sale Agreement"). The Issuer will
then pledge this property and certain
other property to the Bond Trustee as the
collateral for the Transition Bonds
pursuant to an indenture (the
"Indenture"). The other property that
makes up the collateral for these
securities is described in this Prospectus
Summary under the subcaption "The Assets
of the Issuer."
For a diagram depicting the parties to
this transaction, refer to page [ ] of
this Prospectus.
For more information on the Competition
Act, Intangible Transition Property and
Intangible Transition Charges, you should
review the material under the captions
entitled "Risk Factors," "The Competition
Act," "West Penn's Restructuring Plan" and
"The QRO and the Intangible Transition
Charges" in this Prospectus.
Issuer: West Penn Funding LLC, a Delaware limited
liability company and, at the time the
Transition Bonds are issued, a wholly
owned subsidiary of West Penn Funding
Corporation, the Seller referred to below.
6
<PAGE>
The Issuer was formed on [ ]
1999, for the purpose of purchasing and
owning the Transferred Intangible
Transition Property, issuing Transition
Bonds from time to time and pledging its
interest in the Collateral to the Bond
Trustee under the Indenture to secure the
Transition Bonds. The Issuer is a special
purpose entity whose only assets are
expected to be the Collateral and whose
only revenues are expected to be
collections of the Intangible Transition
Charges ("ITC Collections"). The
Collateral is the sole source of payment
for the Transition Bonds. See "The Issuer"
in this Prospectus.
Issuer's Address: [..............]
Issuer's Telephone Number: [..............]
Manager: [..............]
Seller of the Transferred
Intangible Transition Property: West Penn Funding Corporation, a
[Delaware] corporation.
The Seller was incorporated on [ ],
1999. The Seller is wholly owned by West
Penn, which will contribute the
Transferred Intangible Transition Property
to the Seller in exchange for the
outstanding capital stock of the Seller
pursuant to the Transfer Agreement. The
Seller will sell Intangible Transition
Property from time to time to the Issuer
under the terms of the Sale Agreement. See
also "Risk Factors-Bankruptcy; Creditors'
Rights-Bankruptcy of West Penn or
Seller-True Sale or Financing" in this
Prospectus.
Seller's Address: [ ]
Seller's Telephone Number: [ ]
Bond Trustee: [ ].
The corporate trust office of the Bond
Trustee is located at [..................
...............................] and its
telephone number is [.................].
Originator and Servicer of the
Transferred Intangible Transition
Property: West Penn Power Company ("West Penn").
The Intangible Transition Property was
created under the West Penn QRO with
respect to its Stranded Costs and
initially will belong to West Penn before
being transferred to the Seller pursuant
to the Transfer Agreement.
7
<PAGE>
Pursuant to the servicing agreement (the
"Servicing Agreement") between West Penn,
as "Servicer", and the Issuer, the
Servicer will service the Transferred
Intangible Transition Property.
Incorporated in Pennsylvania in [ ],
West Penn is engaged as a public utility
in the transmission, distribution and sale
of electricity to residential, commercial,
industrial and governmental customers
within all or part of 24 counties in
Pennsylvania. West Penn's generation
facilities have in the past served those
same customers. In the future, those
generation facilities, which will continue
to serve those customers and others in the
competitive generation market, may be
transferred to an affiliated or
non-affiliated entity. See "West Penn
Power Company" in this Prospectus.
West Penn, as servicer of the Transferred
Intangible Transition Property, will
collect the Intangible Transition Charges
from Customers within its service
territory on behalf of the Issuer for a
fee specified in the Prospectus
Supplement. Due to provisions of the
Competition Act and the settlement of
restructuring issues, other entities may
be required to collect Intangible
Transition Charges from Customers within
West Penn's service territory and pay the
amounts collected to the Servicer. See
"The Servicer of the Transferred
Intangible Transition Property" in this
Prospectus.
The Assets of the Issuer: The Issuer will own:
o the Intangible Transition Property
transferred to the Issuer (see "The Sale
Agreement--Sale and Assignment of
Intangible Transition Property" in this
Prospectus);
o collections of Intangible Transition
Charges;
o trust accounts held by the Bond Trustee;
and
o other credit enhancement acquired or
held to ensure payment of the Transition
Bonds.
The "Intangible Transition Property" is
described in more detail under "The Sale
Agreement--Sale and Assignment of
Intangible Transition Property" in this
Prospectus.
Customers: West Penn's customers ("Customers") belong
to one of three customer categories (each,
a "Customer Category"). These categories
are: residential, commercial and
industrial (including street lighting).
Each customer category is further divided
into rate schedules (each, a "Rate
Schedule"). These Rate Schedules total 21.
The Customer Categories and Rate Schedules
are described in greater detail in "The
Servicer of
8
<PAGE>
the Intangible Transition Property--West
Penn's Customers" in this Prospectus.
Payment Sources: On each payment date specified in the
related Prospectus Supplement, the Bond
Trustee will pay amounts owed on all
outstanding series of Transition Bonds
from:
o amounts collected by the Servicer (or
any third party electric generation
suppliers or other third party) for the
Issuer with respect to Intangible
Transition Charges during the prior
quarter; and
o amounts available for withdrawal from
trust accounts held by the Bond Trustee,
including specified investment earnings on
amounts in the trust accounts, or paid
pursuant to contracts pledged to secure
one or more series of Transition Bonds.
All accounts referred to in this
Prospectus will be held by the Bond
Trustee in trust, and are described in
greater detail under "The Indenture--The
Collection Account for the Transition
Bonds" in this Prospectus.
State Pledge: The Commonwealth of Pennsylvania (the
"Commonwealth") has pledged in the
Competition Act that it will not limit,
alter, impair or reduce the value of
Intangible Transition Property or the
Intangible Transition Charges which were
approved by an order of the PUC until the
Transition Bonds are fully repaid or
discharged. However, the Commonwealth may
limit or alter the value of Intangible
Transition Charges or Intangible
Transition Property if adequate
compensation is made for the full
protection of the beneficial owners of the
Transition Bonds (each, a "Transition
Bondholder"). The Competition Act does not
define adequate compensation. Thus, the
amount of this compensation may not be
sufficient to protect your Transition Bond
investment.
Priority of Distributions On each payment date specified in the
related Prospectus Supplement, the Bond
Trustee will pay or allocate remittances
by the Servicer of collections of
Intangible Transition Charges and certain
investment earnings, to the extent funds
are available in the collection account,
in the following order of priority:
(1) payment of the Bond Trustee's fee and
any other amounts owed to the Bond
Trustee;
(2) payment of the servicing fee to the
Servicer (the "Servicing Fee") in the
amount specified in the related
Prospectus Supplement;
(3) payment of the administration fees
payable under the administration
agreements between the Issuer, the
Seller and an affiliate of West Penn;
9
<PAGE>
(4) so long as no event of default has
occurred and is continuing or would be
caused by such payment, payment of
current operating expenses of the
Issuer (up to an aggregate of [$12,500]
for each payment date for all series);
(5) payment of the interest then due on
the Transition Bonds;
(6) payment of any principal then payable
on the Transition Bonds (a) as a result
of acceleration triggered by an Event
of Default, (b) on a Series Termination
Date or Class Termination Date, as
applicable, or (c) on a Redemption Date;
(7) payment of the principal then
scheduled to be paid on the Transition
Bonds in accordance with the Expected
Amortization Schedule;
(8) payment of any remaining unpaid
operating expenses then owed by the
Issuer;
(9) allocation of any required amount to
the capital subaccount;
(10) allocation of any required amount to
the overcollateralization subaccount;
(11) allocation of the remainder, if any,
to the reserve subaccount; and
(12) following repayment of all outstanding
series of Transition Bonds, the
balance, if any, will be released to
the Issuer free from the lien of the
Indenture.
If, on any payment date, available
collections of Intangible Transition
Charges, together with available amounts
of the subaccounts, are not sufficient to
make the payments contemplated by clauses
(5) or (6) above with respect to a series
of Transition Bonds, then the payments
shall be made pro rata based on the
respective outstanding principal amounts
of Transition Bonds, unless, in the case
of a series comprised of two or more
classes, the related Prospectus Supplement
specifies otherwise. All payments to
Transition Bondholders of a class pursuant
to clause (5) or (6) above shall be made
pro rata based on the respective
outstanding principal amounts of
Transition Bonds of such class held by
such Transition Bondholders.
For a diagram depicting how the Intangible
Transition Charges will be allocated,
refer to page [ ] in this Prospectus.
10
<PAGE>
Credit Enhancement: Unless otherwise specified in any
Prospectus Supplement, credit enhancement
for the Transition Bonds will be as
follows:
o The servicer of the Intangible
Transition Property on behalf of the
Issuer will make periodic adjustments to
the Intangible Transition Charges it bills
to Customers, once the Pennsylvania PUC
approves these adjustments. West Penn will
make these adjustments if it determines
that Intangible Transition Charges are
either greater or lesser than the amount
necessary to make timely payments on the
Transition Bonds, to fund subaccounts to
required levels and to pay applicable fees
and expenses. The servicer can make these
changes, with the approval of the PUC,
once a year, except after the period
beginning on the date which is 12 months
before the expected final payment date for
the last class or series of Transition
Bonds, when it can make these adjustments
as frequently as monthly. See "The PUC
Order and the Intangible Transition
Charges--The PUC Order" in this
Prospectus.
o The amounts in the overcollateralization
subaccount, the capital subaccount and the
reserve subaccount will also provide
credit enhancement for the Transition
Bonds.
o Additional credit enhancement for any
series may include surety bonds, letters
of credit or maturity guarantees or other
forms of credit enhancement, as specified
in the related Prospectus Supplement. The
credit enhancement for the Transition
Bonds is intended to protect you against
losses or delays in scheduled payments on
your Transition Bonds.
Accounts: Unless otherwise specified in any
Prospectus Supplement, the Bond Trustee
will hold the following trust accounts:
o Collection Account--Under the Indenture,
the Issuer will establish a single
collection account for all series of
Transition Bonds which will be held by the
Bond Trustee. The collection account will
be divided into "subaccounts" which will
allocate the funds deposited in the
collection account to specific uses.
o General Subaccount--Funds received from
collections of the Intangible Transition
Charges will initially be allocated to the
general subaccount of the collection
account.
o Overcollateralization Subaccount--Each
Prospectus Supplement will set a funding
level for the overcollateralization
subaccount that takes into account the
issuance of the additional series of
Transition Bonds. The
overcollateralization amount to be funded
by each series of Transition Bonds will be
equal to the percentage of the principal
amount of that series stated in the
related Prospectus
11
<PAGE>
Supplement. That amount is intended to be
funded over the expected term of the
Transition Bonds through the imposition of
Intangible Transition Charges.
o Capital Subaccount--The amount of
capital required to be held by the Issuer
for a series of Transition Bonds, which
will be the amount specified in the
related Prospectus Supplement, will be
deposited into the capital subaccount by
the Seller on the date of issuance of that
series.
o Reserve Subaccount--If the Issuer
collects Intangible Transition Charges in
excess of amounts then scheduled to be
paid or due on a series of Transition
Bonds plus related expenses and amounts
need to make required deposits to the
Overcollateralization Subaccount and the
Capital Subaccount, the excess will be
held in the reserve subaccount.
o Other Accounts--If West Penn is required
to remit to the Bond Trustee loss amounts
resulting from breaches of representations
and warranties under the Transfer
Agreement, a Loss Subaccount will be
established. If funds are remitted to the
Bond Trustee in connection with a legal
defeasance or covenant defeasance under
the Indenture, a Defeasance Subaccount
will be established.
Each of the overcollateralization
subaccount, the capital subaccount and the
reserve subaccount will be available to
make payments on a series of Transition
Bonds on each payment date as described in
"The Indenture--Allocations and Payments"
in this Prospectus.
Interest and Principal: Interest will accrue on the principal
balance of Transition Bonds of a series or
class at the applicable rate of interest
(the "Bond Rate") specified in or
determined in the manner specified in the
applicable Prospectus Supplement.
On any payment date with respect to any
series, unless principal is payable (a) as
a result of acceleration triggered by an
Event of Default, (b) on a Series
Termination Date or Class Termination
Date, as applicable, or (c) on a
Redemption Date, the Issuer will make
principal payments on such Series only
until the outstanding principal balance
thereof has been reduced to the amount
specified for such payment date in the
amortization schedule (the "Expected
Amortization Schedule") set forth in the
Prospectus Supplement for such Series, and
only to the extent funds are available
therefor as described in this Prospectus.
Principal of such series or class of
Transition Bonds may be paid later than
reflected in the Expected Amortization
Schedule therefor.
12
<PAGE>
See "Risk Factors--The Transition
Bonds--Uncertain Weighted Average Life"
and "Certain Weighted Average Life and
Yield Considerations" in this Prospectus.
The entire unpaid principal amount of the
Transition Bonds will be due and payable
if an Event of Default under the Indenture
occurs and is continuing and the Bond
Trustee or the holders of a majority in
principal amount of the Transition Bonds
of all series then outstanding have
declared the Transition Bonds to be
immediately due and payable. See "The
Indenture--Events of Default; Rights Upon
Event of Default" in this Prospectus.
Repurchase by West West Penn is obligated to repurchase the
Penn of Intangible Intangible Transition Property for breaches
Transition Property: of specified representations and warranties
in the Transfer Agreement. If West Penn
has this repurchase obligation, it shall be
required to pay a deferred repurchase
price on each Payment Date to the Bond
Trustee, as collateral assignee of the
Issuer. See "The Transfer Agreement--
Representations and Warranties of West
Penn" in this Prospectus.
Optional Redemption: A Prospectus Supplement may provide for
redemption of a series of Transition Bonds
at the option of the Issuer.
Payment and Record Dates: The payment dates ("Payment Dates") and
record dates ("Record Dates") for each
series of transition bonds will be listed
in the corresponding Prospectus
Supplement.
Expected Final Payment Dates,
Series Termination Dates and
Class Termination Dates: The expected final payment date (the
"Expected Final Payment Date") for each
series or class of Transition Bonds will
be the date when all interest and
principal of that series or class is
expected to be paid in full. The series
termination date (the "Series Termination
Date") for a series or, if applicable, the
class termination date (the "Class
Termination Date") for a class of
Transition Bonds will be on or after the
expected final payment date. Failure to
pay the entire outstanding amount
of any class or series by the Expected
Final Payment Date will not result in a
default with respect to that class or
series until the Series Termination Date
or Class Termination Date for the class or
series. The Expected Final Payment Date
and the Series Termination Date or Class
Termination Date of each series and class
of Transition Bonds will be specified in
the corresponding Prospectus Supplement.
Risk Factors: Prospective investors should consider,
among other things, the following risks
associated with an investment in the
Transition Bonds. Such risks may cause
Transition Bondholders to suffer a loss of
their investment in Transition Bonds or
may adversely affect the timing of
payments to Transition Bondholders.
13
<PAGE>
The existence of Intangible Transition
Property and the adequacy of the
Transferred Intangible Transition Property
as a source of payment for the Transition
Bonds are dependent on relevant provisions
of the Competition Act and the QRO. The
ability of the Issuer to receive ITC
Collections and make payments on the
Transition Bonds could be affected
adversely by:
o limitations on the availability of West
Penn's repurchase obligation for breaches
of specified representations and
warranties;
o the limited rights and remedies
available to Transition Bondholders in the
event of a change in law;
o federal preemption of the Competition
Act adversely affecting Intangible
Transition Property;
o any attempted limitation or alteration
of the Competition Act, the QRO,
Intangible Transition Property or related
matters by legal challenge or amendment or
repeal of the Competition Act by the
Pennsylvania General Assembly;
o adverse effects arising from litigation
or political or legislative events in
other jurisdictions;
o regulatory changes ordered by the PUC;
o the lack of continued operation of
existing generation facilities;
o the failure of adjustments to the
Intangible Transition Charges to result in
the appropriate level of ITC Collections
or the failure of the PUC to implement
timely adjustments to the Intangible
Transition Charges;
o limitations on the Intangible Transition
Charges;
o the resignation or removal of the
Servicer;
o inaccurate forecasts of the aggregate
billed revenues from which Intangible
Transition Charges are allocated or
delinquencies and write-offs relating to
ITC Collections;
o problems in billing and metering by, and
collections by and from, electric
generation suppliers or other third
parties providing metering and billing
services;
o the commingling of ITC Collections with
the Servicer's other funds;
14
<PAGE>
o economic and technological factors and
weather patterns affecting electricity
consumption;
o the bankruptcy or insolvency of West
Penn, the Seller or the Issuer;
o the bankruptcy or insolvency of the
Servicer;
o any alteration by the Servicer or any
successor thereto of its billing and
collection practices;
o changes in the electricity industry, in
electricity usage impacting billed revenue
from which Intangible Transition Charges
are allocated or in the Customer base;
o the impact of the Year 2000 issue;
o or any of the factors described below
potentially affecting the price and
liquidity of the Transition Bonds.
The price and liquidity of the Transition
Bonds and, accordingly, the weighted
average lives thereof may be affected by:
o any delay in adjustments to the
Intangible Transition Charges;
o the limitation of adjustments to the
Intangible Transition Charges;
o a delay or failure by the Servicer or an
electric generation supplier or other
third parties providing metering and
billing services to remit ITC Collections;
or
o an incorrect evaluation by the Servicer
of the creditworthiness of a significant
number of Customers or the issuance of
additional Series.
There are no historical performance data
for Intangible Transition Property, and
the Servicer does not have any experience
administering this specific type of asset.
Also, because of the unique nature of
Intangible Transition Property,
foreclosure may not be a realistic or
practical remedy for the Bond Trustee.
The Transition Bonds will not be
obligations of any entity other than the
Issuer, will be issuable in Series, will
have ratings which are limited in nature,
will have uncertain payments of interest
and principal and weighted average lives,
will be subject to mandatory redemption
and may be subject to optional redemption,
as specified in the related Prospectus
Supplement.
15
<PAGE>
For a more detailed discussion of certain
material risks associated with an
investment in Transition Bonds,
prospective investors should review the
discussion under "Risk Factors" which
begins on page [ ].
The Transition Bonds; Issuance
of New Series: The Issuer may issue Transition Bonds in
one or more series, each comprised of one
or more classes. Each series of Transition
Bonds will be issued under the Indenture.
See "The Indenture" in this Prospectus.
Any series of Transition Bonds may include
one or more classes which differ, among
other things, as to the Bond Rate and
amortization of principal. The terms of
all Transition Bonds of the same series
will be identical, unless such series is
comprised of more than one class, in which
case the terms of all Transition Bonds of
the same class will be identical. The
particular terms of the Transition Bonds
of any series and, if applicable, classes
thereof, will be described in the related
Prospectus Supplement.
The terms of such series and any classes
thereof will not be subject to prior
review by, or consent of, the Transition
Bondholders of any previously issued
series. A new series may be issued
pursuant to the Indenture only upon
satisfaction of the conditions described
in this Prospectus under "The
Indenture--Issuance in Series or Classes."
See "Risk Factors--The Transition
Bonds--Issuance of Additional Series May
Adversely Affect Outstanding Transition
Bonds" and "The Transition Bonds" in this
Prospectus.
Denominations: Each class of Transition Bonds will
initially be issued in the minimum
denominations set forth in the related
Prospectus Supplement.
Form of the Transition
Bonds: Each series and class of Transition Bonds
will initially be issued either only in
book-entry form through The Depository
Trust Company or in another form as
specified in the applicable Prospectus
Supplement. See "The Transition
Bonds--Book-Entry Registration" in this
Prospectus.
Tax Status: West Penn has received a ruling from the
IRS that the Transition Bonds will be
classified as obligations of the Seller.
Based on the ruling, for U.S. federal
income tax purposes, the Transition Bonds
will be treated as debt of the Seller
secured by a pledge of the Collateral.
The Issuer will be treated as a division
of the Seller and will not be treated as a
separate taxable entity.
16
<PAGE>
Transition Bondholders who are not United
States taxpayers generally will not be
subject to United States federal income or
withholding taxes on interest received on
the Transition Bonds.
See "United States Taxation" in this
Prospectus.
ERISA Considerations: Employee benefit plans are permitted to
purchase Transition Bonds. A fiduciary of
any employee benefit plan or other plan or
arrangement that is subject to the
Employee Retirement Income Security Act of
1974, as amended ("ERISA"), or Section
4975 of the Internal Revenue Code of 1986,
as amended (the "Code"), should carefully
review with its legal advisers whether the
purchase or holding of the Transition
Bonds of any class or series could give
rise to a transaction prohibited or not
otherwise permissible under ERISA or the
Code. See "ERISA Considerations" in this
Prospectus.
Ratings: It is a condition of any underwriter's
obligation to purchase each series or
class of Transition Bonds that, at the
time of issuance, such series or class
receive the rating indicated in the
related Prospectus Supplement, which will
be in one of the four highest categories,
from one or more rating agencies which
have rated the Transition Bonds (each, a
"Rating Agency") specified therein.
A security rating is not a recommendation
to buy, sell or hold securities and may be
subject to revision or withdrawal at any
time. No person is obligated to maintain
any rating on any Transition Bond and,
accordingly, there can be no assurance
that the ratings assigned to any series or
class of Transition Bonds upon initial
issuance thereof will not be revised or
withdrawn by a Rating Agency at any time
thereafter.
If a rating of any series or class of
Transition Bonds is revised downward or
withdrawn, the liquidity and the price of
such series or class of Transition Bonds
may be adversely affected. In general, the
ratings address credit risk and do not
represent any assessment of any particular
rate of principal payments on the
Transition Bonds other than the payment in
full of each series or class of Transition
Bonds by the applicable Series Termination
Date or Class Termination Date.
See "Risk Factors--The Transition
Bonds--Uncertain Weighted Average Life"
and "Ratings" in this Prospectus.
17
<PAGE>
[PARTIES TO THE TRANSACTION]
WEST PENN PUC**
(Servicer) (State agency; not
affiliated with Issuer,
Applies, as Servicer, Seller or West Penn)
for ITC Adjustments
Issued the QRO and
approves adjustments to
Intangible Transition Charges
Contributes ITP* for 100%
of stock of Seller pursuant
to Transfer Agreement
Services Intangible Transition
Property of the Issuer and receives
Servicing Fee pursuant to Servicing
Agreement
SELLER
(West Penn Funding
Corporation)
Sells ITP* for cash pursuant to
Sale Agreement
ISSUER
(West Penn
Funding LLC)
Sale of Transition Bonds for cash,
pursuant to Underwriting Agreement
UNDERWRITERS
Sale of Transition
Bonds for cash
TRANSITION BOND TRUSTEE
BONDHOLDERS (acts for and on behalf of
Transition Bondholders
pursuant to Indenture)
- -----------------
* Intangible Transition Property, created by the PUC implementing the
Competition Act through approving West Penn's Restructuring Plan and
issuing the Qualified Rate Order. The PUC will also approve periodic
adjustments of Intangible Transition Charges as described in this
Prospectus.
** The PUC also supervises the implementation of the Competition Act and is
authorized to issue regulations thereunder.
18
<PAGE>
BASIC MONTHLY ALLOCATIONS AND DISTRIBUTIONS
CUSTOMERS Payment of Intangible
AND Transition Charges to
EGSs* Servicer
WEST PENN Remittance of ITC
(SERVICER) Collections**
COLLECTION
ACCOUNT
Application of amounts
in Collection Account
(including net earnings
thereon), on each Payment
Date, as follows:
(1) Bond Trustee: Fees and expenses (including Indemnity Amounts and Loss
Amounts owed to the Bond Trustee)
(2) Servicer: Servicing Fees
(3) Administrative Agent: Fees
(4) Issuer: Operating expenses (up to an aggregate $[12,500] for all Series)
(5) Transition Bondholders:
Interest for such Payment Date
Principal payable as a result of acceleraiton or payable on a Series or
Class Termination Date or payable on a Redemption Date
Principal scheduled to be paid by such Payment Date in accordance with the
Expected Amortization Schedule
(6) Issuer: All unpaid operating expenses, Indemnity Amounts and Loss Amounts
owed to the Issuer
(7) Capital Subaccount: Up to Required Capital Amount
(8) Overcollateralizatoin Subaccount: Up to Calculated Overcollateralization
Level
(9) Reserve Subaccount: All remaining amounts
- -------------------
* Electric generation suppliers providing billing and/or metering services
** Collections of Intangible Transition Charges
19
<PAGE>
RISK FACTORS
You should consider the following risk factors in deciding to purchase
Transition Bonds:
Legal, Legislative or Regulatory Actions Could
Adversely Affect Transition Bondholders
Legal Challenges Could Adversely
Affect Transition Bondholders Intangible Transition Property and its
adequacy to pay principal of and interest
on the Transition Bonds depends on the
Competition Act and the QRO. If the
Competition Act or the QRO were challenged
in a lawsuit and a court decided it was
invalid or unenforceable, West Penn would
have breached a representation in the
Transfer Agreement. In that case, West
Penn would have to repurchase the
Intangible Transition Property and pay the
ongoing costs of servicing the Transition
Bonds, including the payment of principal
and interest on the Transition Bonds, on
each Payment Date, but only if conditions
relating to the nature of the breach and
its effect on Transition Bondholders were
satisfied. See "The Transfer Agreement--
Representations and Warranties of West
Penn" in this Prospectus. Also, West Penn
may not be able to meet its repurchase
obligations. As a result, if the
Competition Act or the QRO was overturned,
Transition Bondholders could suffer a loss
of their investment. Also, the time and
expense of enforcing rights against West
Penn could result in a loss to Transition
Bondholders or delay expected payments on
the Transition Bonds.
Changes in Law May Result in
Losses to Transition Bondholders West Penn will not breach a representation
or be required to repurchase the
Intangible Transition Property for a
change in law by legislative enactment or
constitutional amendment, including an
enactment or amendment that breaches the
Commonwealth's pledge not to limit, alter
or impair Intangible Transition Property
or Intangible Transition Charges. Examples
of a change in law are a repeal of the
Competition Act, an amendment to it
voiding the existence of Intangible
Transition Property or the adoption of a
federal statute prohibiting the recovery
of stranded costs.
Under the Competition Act, the
Commonwealth may limit or alter the value
of intangible transition property or
intangible transition charges if "adequate
compensation is made by law" for the
protection of the intangible transition
charges and of transition bondholders. It
is unclear if "adequate compensation . . .
by law" would fully compensate Transition
Bondholders for their investment.
Under the United States and Pennsylvania
Constitutions, the Commonwealth could not
repeal or amend the
20
<PAGE>
Competition Act (by way of legislative
process) or take any action that violates
its pledge and agreement (described above)
without paying just compensation to the
transition bondholders if doing so would:
o constitute a permanent "taking" of the
property interest of transition
bondholders in the intangible transition
property; and
o deprive the transition bondholders of
their reasonable expectations arising from
their investments in the transition bonds.
However, even if a court awarded just
compensation, it may not be enough to pay
the full amount of principal of and
interest on the Transition Bonds.
Also, if there were a change in law
described above, there might be costly and
time-consuming litigation. There is no
judicial precedent directly on point, and
the security for the Transition
Bondholders is a new type of asset. As a
result, the outcome of any such litigation
cannot be predicted with certainty.
Federal Legislation May Result in
Losses to Transition Bondholders Congress or a federal agency may pass a
law or adopt a rule or regulation
prohibiting or limiting the collection of
intangible transition charges. Congress
considered in 1997 at least one bill
prohibiting the recovery of stranded
costs, but the bill was not enacted. The
Issuer cannot predict if any future bills
that prohibit the recovery of stranded
costs will become law or, if they become
law, what their final form or effect will
be. If the Competition Act or the QRO was
preempted by federal law, a court may
decide that it is not a "taking" for which
the government would have to pay the
estimated market value of the Transferred
Intangible Property. Even if any federal
preemption were considered a "taking," for
which the government had to pay this
value, that compensation may not be enough
to pay the full amount of principal of and
interest on the Transition Bonds. In that
case, Transition Bondholders could suffer
a loss of their investment. See "--Changes
in Law May Result in Losses to Transition
Bondholders" above. Also, in this case,
West Penn would not be required to
repurchase the Intangible Transition
Property.
The PUC May Take Actions that
Adversely Affect Transition
Bondholders The PUC will continue to regulate certain
aspects of the electric industry in
Pennsylvania. For example, it will
o regulate all aspects of the business of
electric distribution companies;
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o set financial and other requirements for
electric generation suppliers and other
third parties; and
o set customer billing guidelines and
collection, metering and disclosure
requirements for electric generation
suppliers and other third parties.
Also, subject to the Commonwealth's pledge
not to limit or alter the value of
Intangible Transition Charges or
Intangible Transition Property unless
adequate compensation is made for the full
protection of the Transition Bondholders,
the PUC could revise or rescind any of its
regulations. West Penn cannot predict
whether the PUC will make new regulations
or the timing or content of any new PUC
regulations.
West Penn agrees to take legal or
administrative actions, including bringing
lawsuits, as may be reasonably necessary
to block or overturn:
o any government attempt to repeal or
change the Competition Act, the QRO or the
Intangible Transition Property in a way
that is materially adverse to the holders
of Transition Bonds, or
o lawsuits by third parties which, if
successful, would result in a breach of
West Penn's representations concerning the
Intangible Transition Property, the QRO or
the Competition Act.
West Penn, however, may not be able to
take those actions and any action West
Penn is able to take may not be
successful.
Future PUC regulations may affect the
rating of the Transition Bonds or their
price. Those actions may also affect the
rate of ITC Collections and, as a result,
the amortization of Transition Bonds and
their weighted average lives. As a result,
Transition Bondholders could suffer a loss
of their investment.
Litigation and Other Events in
Other Jurisdictions Could
Adversely Affect Transition
Bondholders A court decision based on the U.S.
Constitution or other federal law
overturning a state statute like the
Competition Act adopted by another state
could give rise to a challenge to the
Competition Act. That decision would not
automatically invalidate the Competition
Act. It could, however, set a legal
precedent for a successful challenge to
the Competition Act that could adversely
affect Transition
22
<PAGE>
Bondholders. As a result, the market value
of the Transition Bonds could be reduced.
Also, legal actions in other states
challenging stranded cost recovery or
securitization of stranded cost recovery
could adversely affect the market for
Transition Bonds. Legal challenges brought
in jurisdictions other than Pennsylvania
based on state laws other than
Pennsylvania would not, however, directly
affect the Competition Act or the
interests of the Transition Bondholders.
These actions, however, could increase
awareness of the political and other risks
associated with these types of securities
and limit the liquidity of the Transition
Bonds and impair their value.
Nature of Intangible Transition Property
Lack of Continued Operation of
Existing Generation Facilities
May Result in Losses to
Transition Bondholders Under the Competition Act, recovery of
stranded costs associated with existing
generating facilities depends on continued
operation of these facilities. There is an
exception if such operation is uneconomic
because of the transition to a competitive
market. Although the parts of the QRO
providing for collection of Intangible
Transition Charges are stated to be
irrevocable, the collection of Intangible
Transition Charges could be challenged if
certain generating facilities of West Penn
ceased to operate at reasonable levels. If
the challenge were successful, the Issuer
may not have funds to make payments on the
Transition Bonds. As a result, Transition
Bondholders could suffer a loss of their
investment. Also, in this case, West Penn
would not be required to repurchase the
Intangible Transition Property.
Failure to Make Adequate
Adjustments to the Intangible
Transition Charges May Result
in Losses to Transition
Bondholders The actual rate of ITC Collections may
vary from projections used to set the
Intangible Transition Charges due to a
number of factors. These include
variations in electricity usage by
Customers from projected electricity usage
and delinquencies and write-offs. The
Servicer must seek an adjustment to the
Intangible Transition Charges from the PUC
on each Calculation Date to reflect
shortfalls in or excesses of ITC
Collections for prior periods, including
shortfalls or excesses resulting from
inaccurate Servicer forecasts. The
adjustments are intended to take into
account any projected trends in Customers
or usage impacting billed revenue from
which Intangible Transition Charges are
allocated to prevent shortfalls or
excesses of ITC Collections in future
periods.
If those forecasts or projected trends are
not accurate, adjustments to the
Intangible Transition Charges may not
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<PAGE>
result in the Issuer receiving funds
sufficient to pay interest on the
Transition Bonds when due and principal of
the Transition Bonds in accordance with
the expected amortization schedule.
The Competition Act and the QRO require
the PUC to approve annual Adjustment
Requests within 90 days of the applicable
Calculation Date. Also, the QRO provides
that, during the period commencing 12
months prior to the last scheduled payment
date for the payment of principal on each
Series of Transition Bonds, the monthly
adjustments will become effective on the
first day of the next calendar month. If
the PUC fails to approve these adjustments
on a timely basis or there is any
litigation challenging the approval
thereof or methodology therein, the price
and liquidity of the Transition Bonds
could be adversely affected.
Any of the factors described above could
affect the sufficiency of amounts
available to pay the principal of the
Transition Bonds or the dates of the
payment of the principal of the Transition
Bonds. As a result, Transition Bondholders
could suffer a loss of their investment or
the weighted average lives of the
Transition Bonds could be adversely
affected.
Limitations on the Intangible
Transition Charges May Result in
Losses to Transition Bondholders The Intangible Transition Charges
associated with the issuance of transition
bonds may not be imposed for service
periods after December 31, 2008. Also,
after the final Adjustment Date specified
for each Series, the Intangible Transition
Charges may no longer be adjusted for that
Series. After that date, any shortfalls in
ITC Collections available to make payments
on the Series are expected to be covered
through amounts, if any, on deposit in the
Reserve Subaccount, the Overcollateraliza
tion Subaccount and the Capital
Subaccount. If those amounts are not
enough to cover the shortfalls, the
Transition Bonds may not be paid in full
by the applicable Expected Final Payment
Date or Class or Series Termination Date,
and Transition Bondholders would suffer a
loss of their investments.
Other Uncertainties Associated
with Intangible Transition
Property The Servicer does not have historical
information for Intangible Transition
Property, although it does have customer
and energy usage records. Those usage
records, however, do not reflect
customers' payment patterns or energy
usage in a competitive market. They also
do not reflect consolidated billing by
electric generation suppliers or other
third parties. As a result, these records
may not be
24
<PAGE>
useful in predicting payments of
Intangible Transition Charges.
The Servicer does not have any experience
administering this type of asset.
In the event of a foreclosure, there is
likely to be a limited market, if any, for
the Transferred Intangible Transition
Property. Therefore, foreclosure may not
be a realistic or practical remedy. See
"--Bankruptcy; Creditors' Rights" below.
These factors may result in delays or
shortfalls in scheduled payments on the
Transition Bonds.
Servicing
Transition Bondholders Must Rely
on the Servicer The Servicer will be responsible for
calculating adjustments to the Intangible
Transition Charges, submitting Adjustment
Requests to the PUC and billing and
collecting the Intangible Transition
Charges. If West Penn ceased servicing
Intangible Transition Property, it may be
hard to obtain a Successor Servicer. Also,
a transfer of servicing functions will
require cooperation by the PUC. A
Successor Servicer may have difficulties
in collecting Intangible Transition
Charges and determining appropriate
adjustments to Intangible Transition
Charges. Also, under current law, a
Successor Servicer may not be able to shut
off service to a Customer that fails to
pay Intangible Transition Charges.
If West Penn were replaced as Servicer,
any of those factors and others could
delay the timing of payments on the
Intangible Transition Property. As a
result, Transition Bondholders could incur
a loss of their investment. See "The
Servicing Agreement" in this Prospectus.
Inaccurate Projections by Servicer
May Result in Losses to
Transition Bondholders If the Servicer incorrectly forecasts the
billed revenue from which Intangible
Transition Charges are allocated and the
delinquency and write-off experience
relating to Intangible Transition Charges,
the timely receipt of ITC Collections
could be adversely affected. A variety of
risks and uncertainties could cause actual
results to differ materially from those
projected. They include, among others,
changes in political, social and economic
conditions, weather, unexpected
demographic trends, catastrophes,
regulatory initiatives, compliance with
governmental regulations and litigation.
All of those events and circumstances are
beyond the control of the Servicer.
Adjustments to the Intangible
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<PAGE>
Transition Charges are required to be made
under the Competition Act if actual
results differ from projections. However,
until the adjustments are made, payments
on the Transition Bonds could be delayed,
and the market value of the Transition
Bonds could be reduced. There can be no
assurance that, when made, adjustments
will be sufficient.
Delays in Payments on Transition
Bonds May be Caused by Changes in
Payment Terms The Servicer is permitted to alter the
terms of billing and collection
arrangements and modify amounts due from
Customers. The Servicer cannot change the
amount of a Customer's individual
Intangible Transition Charges, but it can
take actions that it believes will
increase collections from a Customer.
These actions might include, for example,
agreeing to an extended payment schedule
or agreeing to write-off the remaining
portion of an outstanding bill. The
Servicer can also write-off outstanding
bills that it deems uncollectible in
accordance with its usual billing and
collection practices. Additionally, West
Penn or a successor to West Penn as
Servicer may change its billing and
collection practices, or the PUC may
require changes to these practices. These
changes could delay or reduce ITC
Collections and, as a result, adversely
affect the payment of interest on the
Transition Bonds on a timely basis or the
payment of principal of the Transition
Bonds in accordance with the expected
schedule. See "The Servicer--Customers and
Operating Revenues," "--Billing Process"
and "--Limited Information on Customers'
Creditworthiness" in this Prospectus.
West Penn has Limited Information
on Customers' Creditworthiness The Servicer's ability to collect
Intangible Transition Charges will depend
in part on the creditworthiness of its
Customers. Under Pennsylvania law, West
Penn generally must provide service to new
Customers in its service area. Credit
investigations of new Customers by West
Penn have been limited. If the Servicer
incorrectly determines the
creditworthiness of a large number of its
Customers, there may be significant
increases in delinquencies and write-offs.
This could result in delays in payments to
Transition Bondholders. See "--It May Be
More Difficult to Collect Intangible
Transition Charges Due To Billing by Third
Parties" below.
It May Be More Difficult to Collect
Intangible Transition Charges Due
to Billing by Third Parties Under the Competition Act, after
[ ], Intangible Transition Charges
may be collected by third parties
providing billing and metering services,
including electric generation suppliers.
Any third party that provides consolidated
billing must pay the Servicer amounts
billed by the Servicer to the third party,
including the Intangible Transition
Charges. Third party billing parties are
required
26
<PAGE>
to make these payments even if the third
party fails to collect such amounts from
Customers.
Billing by third parties as described
above could adversely affect the timely
payment of interest on the Transition
Bonds or the payment of principal of the
Transition Bonds in accordance with the
expected amortization schedule because:
o any third party that collects Intangible
Transition Charges may not use the same
customer credit standards as the Servicer;
o problems may arise from new and untested
systems or any lack of experience on the
part of third parties with Customer
billing and collections;
o the Servicer may not be able to reduce
credit risks relating to third parties in
the same manner in, or to the same extent
to which, it reduces such risks relating
to its Customers;
o the Servicer generally will not have the
right to pursue Customers of a third party
which provides consolidated billing who
defaults in the payment of Intangible
Transition Charges; and
o to the extent that Customers choose
consolidated billing by electric
generation suppliers or other third
parties, the Issuer may be relying on a
small number of electric generation
suppliers and other third parties rather
than a large number of individual
Customers, to pay ITC Collections. As a
result, a default in the payment of
Intangible Transition Charges by a single
third party that provides billing service
to a large number of Customers may
adversely affect the timing of payments on
the Transition Bonds or could result in a
loss of their investment.
Neither West Penn nor the Servicer will
pay any shortfalls resulting from the
failure of any third party to forward ITC
Collections to the Servicer. The
adjustment mechanism for the Intangible
Transition Charges, as well as the
Overcollateralization Amount and the
amounts on deposit in the Capital
Subaccount and the Reserve Subaccount are
intended to address delays in the timing
of collections and payments. However,
delays in payments to Transition
Bondholders might occur as a result of
delays in obtaining adjustments or any
lack of funds in the Reserve
27
<PAGE>
Subaccount, the Overcollateralization
Subaccount and the Capital Subaccount
after the final Adjustment Date.
Customers Within West Penn's
Service Area May Stop or Delay
Making Intangible Transition
Charge Payments Customers within West Penn's service area
may stop or delay paying Intangible
Transition Charges because:
o they may be confused by the assessment
of a charge they have not seen before or
because of changes in billing and payment
arrangements, including billing by third
parties;
o they may misdirect their payments as
they may owe amounts to several different
parties which may include both West Penn
and an electric generation supplier or
other third party;
o if a large number of Customers
self-generate, move out of West Penn's
service territory, significantly reduce
their electricity consumption or cease
consuming electricity altogether, the
Intangible Transition Charges, as
periodically adjusted, required to be paid
by remaining Customers may become
burdensome. Greater delinquencies and
write-offs or petitions to the PUC to
reduce Intangible Transition Charges might
result; and
o the Servicer may not be able to collect
Intangible Transition Charges from
Customers who partially self-generate
because the Servicer may not know which
consumers are self-generating and will not
be able to exercise full shut-off rights
against a self-generator.
Any of these factors could result in
delays or shortfalls in scheduled payments
on the Transition Bonds.
The Commingling of ITC Collections
with Servicer's Other Funds May
Result in Payment Delays Until ITC Collections are deposited with
the Bond Trustee, the Servicer will not
segregate them from its general funds. If
the Servicer does not or cannot remit the
full amount of the ITC Collections there
may be delays or reductions in payments to
Transition Bondholders. The adjustments to
the Intangible Transition Charges and
amounts, if any, on deposit in the Reserve
Subaccount, the Overcollateraliza tion
Subaccount and the Capital Subaccount are
designed to reduce this risk. However,
there may be delays in payments to
Transition Bondholders if there are delays
in implementation of the adjustment
mechanism or a lack of funds in the
Reserve Subaccount, the
Overcollateralization Subaccount and the
Capital Subaccount after the final
Adjustment Date.
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<PAGE>
Potential Computer Program Problems
Beginning In The Year 2000 May
Result in Payment Delays on
Transition Bonds There could be delays in principal and
interest payments on the Transition Bonds
if West Penn, as Servicer, or the Bond
Trustee experiences problems in its
computer programs (or those of vendors on
whom they rely) relating to the Year 2000.
Many existing computer programs use only
two digits to identify a year. These
programs could fail or produce erroneous
results during the transition from the
Year 1999 to the Year 2000 and afterwards.
West Penn has evaluated the impact of
preparing its systems for the Year 2000.
It has identified areas of potential
impact and is implementing conversion
efforts. On March 30, 1999, West Penn
reported to the PUC that, except for a few
items, its critical electricity production
and delivery systems were Year 2000 ready
pending final confirmation system testing
of its power stations in April and May.
West Penn anticipates that all of its
critical systems, including its business
applications systems as well as the
electricity production and delivery
systems, will be Year 2000 ready by June
30, 1999 [update]. See "The Servicer --
Year 2000 Compliance" in this Prospectus.
If West Penn (or a third party on whom
West Penn relies for collection of
Intangible Transition Charges) does not
have a computer system that is Year 2000
compliant by January 1, 2000, West Penn's
ability to service the Intangible
Transition Property may be materially and
adversely affected.
If the Bond Trustee does not have a
computer system that is Year 2000
compliant by January 1, 2000, the Bond
Trustee's ability to make distributions on
the Transition Bonds may be materially and
adversely affected.
The Year 2000 issue could also affect
usage if there are problems with the
generation or distribution of electricity.
There is no way to predict the impact of
the Year 2000 issue. However, if there are
significant interruptions of service to
Customers or significant business
interruptions in general caused by Year
2000 issues, there could be significant
delays in ITC Collections. In that case,
payments to Transition Bondholders could
be delayed.
Bankruptcy; Creditors' Rights
Bankruptcy of West Penn or the
Seller May Result in Losses to
Transition Bondholders General. The bankruptcy of West Penn or
the Seller could have several adverse
consequences for Transition Bondholders,
the most important of which are briefly
described below.
29
<PAGE>
True Sale/Capital Contribution or
Financing. The Competition Act provides
that a transfer of intangible transition
property by an electric utility to an
assignee that is expressly stated to be a
sale or other absolute transfer in a
transaction approved in a qualified rate
order, will be treated as a sale, rather
than a pledge or other financing, of the
intangible transition property. West Penn
will represent in the Transfer Agreement
that (i) the transfer of the Transferred
Intangible Transition Property to the
Seller is a capital contribution and (ii)
the transfer of the Transferred Intangible
Transition Property by the Seller to the
Issuer is a sale. West Penn and the Seller
will also represent that they will take
the appropriate actions under the
Competition Act, including filing an
intangible transition property notice, to
perfect these transfers.
If West Penn became a debtor in a
bankruptcy case, the bankruptcy trustee,
West Penn or another party could take the
position that the transfer of the
Transferred Intangible Transition Property
to the Seller was a financing transaction
and not a capital contribution. Similarly,
if the Seller became a debtor in a
bankruptcy case, the bankruptcy trustee,
the Seller or another party could take the
position that the sale of the Transferred
Intangible Transition Property to the
Issuer was a financing transaction and not
a "true sale". If a court agreed with
either of these positions, delays or
reductions in payments on the Transition
Bonds could result. Regardless of a
court's final decision on the character of
the transactions, the mere fact of a West
Penn or Seller bankruptcy could result in
delays in payments on the Transition
Bonds. Such a bankruptcy also could have
an adverse effect on the secondary market
for the Transaction Bonds, including the
liquidity and market value of the
Transition Bonds.
To reduce the impact of the possible
recharacterization of a sale or other
absolute transfer of intangible transition
property as a financing transaction, the
Competition Act and related regulations
provide that if an intangible transition
property notice is filed and the transfer
is later held to be a financing
transaction, that notice will be deemed to
constitute a filing with respect to a
security interest. The Competition Act
also provides that any such filing in
respect of transition bonds takes
precedence over any other filings. As a
result of these filings, the Seller would
be a secured creditor of West Penn and the
Issuer would be a secured creditor of the
Seller, entitled to recover against the
Collateral. If, however, intangible
transition property notices are not filed
for any reason, the Seller or the Issuer
fails to otherwise perfect its interest in
the
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<PAGE>
Transferred Intangible Transition Property
and the transfer is thereafter deemed not
to constitute a true sale or other
absolute transfer, the Seller would be an
unsecured creditor of West Penn or the
Issuer would be an unsecured creditor of
the Seller.
Consolidation of the Issuer, the Seller
and West Penn. If West Penn or the Seller
became a debtor in a bankruptcy case, the
bankruptcy trustee, West Penn or the
Seller or another party may attempt to
substantively consolidate the assets of
the Issuer and West Penn or the Seller.
West Penn, the Seller and the Issuer have
taken steps to attempt to reduce this
risk. However, if a court ordered that the
assets and liabilities of the Issuer be
consolidated with those of West Penn or
the Seller, delays or reductions in
payments on the Transition Bonds would
result.
Estimation of Claims; Challenge to
Liquidated Damage Claims. If West Penn
became a debtor in a bankruptcy case,
claims (including indemnity claims) by the
Issuer against West Penn under the
Transfer Agreement and the related
documents would be unsecured claims and
could be discharged. Also, the bankruptcy
trustee, West Penn or another party may
request that the Bankruptcy Court estimate
any contingent claims (including for West
Penn's repurchase obligation) of the
Issuer against West Penn and take the
position that the claims should be
estimated at zero or at a low amount
because the contingency giving rise to the
claims is unlikely to occur.
If West Penn became a debtor in a
bankruptcy case and West Penn were
obligated under the Transfer Agreement to
repurchase the Intangible Transition
Property, the bankruptcy trustee, West
Penn or another party might challenge the
enforceability of the repurchase
provisions. If a court decided that the
repurchase provisions were unenforceable,
the Issuer should have a claim against
West Penn for actual damages based on
breach of contract principles. The amount
of those actual damages would be subject
to estimation and/or calculation by the
court.
As a result of any of the above-described
actions or claims, Transition Bondholders
could suffer delays in payment, reduction
in the investment value of their
Transition Bonds or a loss of their
investment.
Status of Intangible Transition Property
as Current Property. The Competition Act
provides that the Transferred Intangible
Transition Property constitutes a current
property right on and after the date that
the QRO
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<PAGE>
became effective. West Penn has also made
a representation to that effect. However,
if West Penn became a debtor in a
bankruptcy case, the bankruptcy trustee,
West Penn or another party could argue
that, because the payments based on the
Transferred Intangible Transition Property
are indirectly usage-based charges, the
Transferred Intangible Transition Property
comes into existence only as Customers use
electricity.
If a court adopted this position, a
security interest in favor of the
Transition Bondholders may not attach to
Intangible Transition Charges in respect
of electricity used after the beginning of
a bankruptcy case for West Penn. If a
court took this position and also
determined that the Transferred Intangible
Transition Property has not been sold or
transferred absolutely to the Seller or
the Issuer, the Issuer would be an
unsecured creditor of the Seller and the
Seller would be an unsecured creditor of
West Penn and delays or reductions in
payments on the Transition Bonds could
result.
Also, a court could rule that any
Intangible Transition Charges relating to
electricity consumed after the
commencement of West Penn's bankruptcy
cannot be transferred to the Issuer or the
Bond Trustee. This could result in delays
or reductions of payments of the
Transition Bonds.
Payments based on the Intangible
Transition Charges are indirectly
usage-based charges. Therefore, if West
Penn became a debtor in a bankruptcy case,
the bankruptcy trustee, West Penn or
another party could argue that the Issuer
should pay a portion of the costs of West
Penn associated with generating,
transmitting or distributing the
electricity use of which gave rise to the
ITC Collections related to the Transition
Bonds. If a court adopted this position,
there could be delays or reductions in
payments to the Transition Bondholders.
Whether or not West Penn is the debtor in
a bankruptcy case, if a court decided that
the Transferred Intangible Transition
Property comes into existence only as
customers use electricity, a tax or
government lien or other nonconsensual
lien on property of West Penn arising
before the Transferred Intangible
Transition Property came into existence
could have priority over the Issuer's
interest in the Transferred Intangible
Transition Property. This could result in
a reduction of amounts paid to the
Transition Bondholders. Adjustments to the
Intangible Transition Charges may be
available to reduce this risk, although
32
<PAGE>
delays in implementation or challenges to
those adjustments may cause a delay in
receipt of payments.
Enforcement of Rights by Bond Trustee. If
there is an Event of Default under the
Indenture, the Competition Act permits the
PUC to order the segregation and payment
of all Intangible Transition Charges to
Transition Bondholders. The Competition
Act provides that the order will be
effective notwithstanding bankruptcy or
other insolvency proceedings with respect
to the utility or its assignee. The PUC,
however, may not issue such an order
because of the automatic stay provisions
of the Bankruptcy Code. Also, a bankruptcy
court may not lift the stay to permit such
action by the PUC. In that event, the Bond
Trustee may under the Indenture seek an
order from the bankruptcy court lifting
the automatic stay with respect to the PUC
action and an order requiring segregation
of the revenues arising from the
Transferred Intangible Transition
Property. However, a court may not grant
either order.
Bankruptcy of Servicer May Result
in Losses to Transition
Bondholders The Servicer can commingle ITC Collections
with its own funds until they are
deposited with the Bond Trustee. The
Competition Act provides that the priority
of a lien created under the Competition
Act is not adversely affected by the
commingling of funds arising with respect
to Intangible Transition Property with
funds of the electric utility. However, in
the event of a bankruptcy of the Servicer,
the bankruptcy trustee, the Servicer or
another party might argue that ITC
Collections held by the Servicer were
property of the Servicer included in its
bankruptcy estate. If a court adopted this
position, there may be delays in payments
due on the Transition Bonds.
If the Servicer became a debtor in a
bankruptcy case, the automatic stay may
prevent the Issuer from effecting a
transfer of servicing, even though the
Servicing Agreement provides that the Bond
Trustee appoint, or petition the PUC or a
court to appoint, a Successor Servicer.
The Transition Bonds
Absence of Secondary Market for
Transition Bonds Could Limit
Ability to Resell Transition
Bonds The underwriters for the Transition Bonds
may assist in resales of the Transition
Bonds but they are not required to do so.
A secondary market for the Transition
Bonds may not develop. If a secondary
market for the Transition Bonds does
develop, it may not continue or it may not
be sufficiently liquid to allow holders to
resell any of the Transition Bonds. See
"Plan of Distribution for the Transition
Bonds" in this Prospectus.
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<PAGE>
Limited Sources of Payments for
the Transition Bonds May Result in
Losses to Transition Bondholders The Transition Bonds are obligations of
the Issuer, a special purpose entity,
only. The Transition Bonds will not
represent an interest in or obligation of
West Penn, the Seller, the Bond Trustee or
any entity other than the Issuer. The
Issuer has no property other than the
Collateral. The Collateral is the sole
source of payment on the Transition Bonds.
None of the Transition Bonds will be
guaranteed or insured by West Penn, the
Seller, the Bond Trustee or any affiliates
thereof (other than the Issuer) or any
other entity.
Issuance of Additional Series May
Adversely Affect Outstanding
Transition Bonds The Issuer may from time to time issue
new series of Transition Bonds without
the prior review by or consent of the
Transition Bondholders of any previously
issued series. A new series of Transition
Bonds may not be issued if it would result
in the credit ratings on any outstanding
series of Transition Bonds being reduced or
withdrawn, but the issuance of any other
series of Transition Bonds might have an
impact on the timing or amount of payments
received by Transition Bondholders. See
"The Transition Bonds" and "The
Indenture--Issuance in Series or Classes"
in this Prospectus. In addition, various
matters relating to the Transition Bonds
require a vote of all Transition
Bondholders of all series, even though
there may be differences in the interests
or positions among such series or classes
of such series. This could result in
voting outcomes adverse to the interests
of one or more series or classes of
Transition Bonds.
Limited Nature of Ratings The Transition Bonds will be rated
by one or more established rating
agencies. The ratings merely analyze the
probability that the Issuer will repay the
total principal amount of the Transition
Bonds at final maturity (the series or
class termination date, as applicable) and
will make timely interest payments. The
ratings do not assess the speed at which
the Issuer will repay the principal of the
Transition Bonds. As a result, any series
or class of Transition Bonds might be paid
later than scheduled, resulting in a
weighted average life of such Transition
Bonds which is longer than expected. A
security rating is not a recommendation to
buy, sell or hold securities. There can be
no assurance that a rating will remain in
effect for any given period of time or
that a rating will not be revised or
withdrawn entirely by a rating agency if,
in its judgment, circumstances so warrant.
Uncertain Weighted Average Life The actual dates on which principal is
paid on each class of Transition Bonds
might be affected by, among other things,
the amount and timing of receipt of ITC
Collections. Since the amount of
Intangible Transition Charges collected
from each Customer will depend upon the
Customer's usage of
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<PAGE>
electricity, the aggregate amount and
timing of ITC Collections (and the
resulting amount and timing of principal
payments on the Transition Bonds) will
depend, in part, on actual usage of
electricity and the rate of delinquencies
and write-offs. See
"--Servicing--Inaccurate Projections by
Servicer May Result in Losses on
Transition Bonds" above. Although the
Intangible Transition Charges will be
adjusted from time to time based in part
on the actual rate of ITC Collections
during prior billing periods, the Servicer
may not be able to forecast accurately
actual Customer energy usage and the rate
of delinquencies and write-offs or
implement adjustments to the Intangible
Transition Charges. If ITC Collections are
received at a slower rate than expected,
payments on the Transition Bonds may be
made later than expected, resulting in a
longer weighted average life. Because
principal will generally be paid at a rate
not to exceed that reflected in the
expected amortization schedule, the
Transition Bonds are not expected to be
retired earlier than scheduled other than
in the event of a redemption or
acceleration.
If so provided in a Prospectus Supplement,
there may be optional redemptions of the
Transition Bonds. Future market conditions
may require Transition Bondholders to
reinvest the proceeds of a redemption at a
rate lower than the rate received on the
Transition Bonds. The Issuer cannot
predict whether it will redeem any series
of Transition Bonds. See "Certain Weighted
Average Life and Yield Considerations" and
"The Transition Bonds--Credit Enhancement"
in this Prospectus.
35
<PAGE>
AVAILABLE INFORMATION
The Issuer has filed with the Securities and Exchange Commission (the
"SEC") a registration statement (as amended, the "Registration Statement")
under the Securities Act of 1933, as amended (the "Securities Act"), with
respect to the Transition Bonds. This Prospectus, which forms a part of the
Registration Statement, and any Prospectus Supplement describe the material
terms of certain documents filed as exhibits to the Registration Statement;
however, this Prospectus and any Prospectus Supplement do not contain all of
the information contained in the Registration Statement and its exhibits. Any
statements contained in this Prospectus or any Prospectus Supplement
concerning the provisions of any document filed as an exhibit to the
Registration Statement or otherwise filed with the SEC are not necessarily
complete, and in each instance reference is made to the copy of such document
so filed. Each such statement is qualified in its entirety by such reference.
For further information, reference is made to the Registration Statement and
the exhibits thereto, which are available for inspection without charge at the
public reference facilities maintained by the SEC at 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at its regional offices located as follows:
Chicago Regional Office, Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661-2511; and New York Regional Office, 7 World Trade
Center, 13th Floor, New York, New York 10048. Copies of the Registration
Statement and exhibits thereto may be obtained at the above locations at
prescribed rates. Information filed with the SEC can also be inspected at the
SEC site on the World Wide Web at http:\\www.sec.gov.
The Issuer will file with the SEC such periodic reports as are required
by the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and
the rules, regulations or orders of the SEC thereunder. The Issuer may
discontinue filing periodic reports under the Exchange Act at the beginning of
the fiscal year following the issuance of the Transition Bonds of any Series
if there are fewer than 300 holders of the Transition Bonds.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All reports and other documents filed by the Issuer pursuant to Section
13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date of this
Prospectus and prior to the termination of the offering of the Transition
Bonds will be deemed to be incorporated by reference into this Prospectus and
to be a part hereof. Any statement contained in this Prospectus, in a
Prospectus Supplement or in a document incorporated or deemed to be
incorporated by reference in this Prospectus will be deemed to be modified or
superseded for purposes of this Prospectus and any Prospectus Supplement to
the extent that a statement contained in this Prospectus, in a Prospectus
Supplement or in any separately filed document which also is or is deemed to
be incorporated by reference herein modifies or supersedes such statement. Any
such statement so modified or superseded will not be deemed, except as so
modified or superseded, to constitute part of this Prospectus or any
Prospectus Supplement.
The Issuer will provide without charge to each person to whom a copy of
this Prospectus is delivered, on the written or oral request of any such
person, a copy of any or all of the documents incorporated herein by
reference, except the exhibits to such documents (unless such exhibits are
specifically incorporated by reference in such documents). Written requests
for such copies should be directed to the Issuer, c/o [ ]. Telephone
requests for such copies should be directed to the Issuer at [ ].
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<PAGE>
WEST PENN POWER COMPANY
Incorporated in Pennsylvania in [ ], West Penn is a public utility
corporation engaged in the transmission, distribution and sale of electricity
to approximately 665,000 customers throughout a 10,000 square mile service
territory covering all or portions of 24 counties in southwestern and central
Pennsylvania. West Penn's generation facilities have in the past served those
same customers. In the future, those generation facilities, which will
continue to serve those customers and others in the competitive generation
market, may be transferred to an affiliated or non-affiliated entity. See "The
Servicer" in this Prospectus.
The electric and gas utility industries in Pennsylvania are both
undergoing fundamental restructuring. See "The Competition Act" in this
Prospectus. In addition, in 1996, the Federal Energy Regulatory Commission
issued Order No. 888 providing for competition in wholesale generation by
requiring that all public utilities file non-discriminatory, open-access
transmission tariffs.
Allegheny Energy, Inc., the parent of West Penn, and DQE, Inc. (the
parent of Duquesne Light Company in Pittsburgh) have entered into an agreement
under which DQE, Inc. would merge into Allegheny Energy in a stock for stock
transaction. However, the proposed merger, which has been conditionally
approved by the PUC, is currently the subject of litigation in the United
States District Court for the Western District of Pennsylvania.
West Penn will enter into the Servicing Agreement with the Issuer under
which West Penn, as agent for the Issuer, will manage, service and administer,
and make collections in respect of, the Transferred Intangible Transition
Property. See "The Servicing Agreement" in this Prospectus. Allegheny Power
Service Corporation, an affiliate of West Penn, will enter into an
administration agreement with the Issuer and with the Seller to provide
specified administrative services (in such capacity, Allegheny Power Service
Corporation is referred to as the "Administrative Agent" in this Prospectus).
See "The Issuer" and "The Seller" in this Prospectus.
West Penn files periodic reports with the SEC as required by the Exchange
Act. Reports filed with the SEC are available for inspection without charge at
the public reference facilities maintained by the SEC at 450 Fifth Street,
N.W., Washington, D.C. 20549, and its regional offices located as follows:
Chicago Regional Office, Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661-2511; and New York Regional Office, 7 World Trade
Center, 13th Floor, New York, New York 10048. Copies of periodic reports and
exhibits thereto may be obtained at the above locations at prescribed rates.
Information filed with the SEC can also be inspected at the SEC site on the
World Wide Web at http://www.sec.gov.
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<PAGE>
THE COMPETITION ACT
General
The Competition Act was enacted in December 1996 and provides for the
restructuring of the electric utility industry in Pennsylvania. The
Competition Act requires the unbundling of electric services into separate
generation, transmission and distribution services with open retail
competition for generation services. Generation services may be provided by
electric generation suppliers licensed by the PUC. Under the Competition Act,
electric generation suppliers are subject to certain limited financial and
disclosure requirements but are otherwise unregulated by the PUC. Electric
distribution and transmission services will remain regulated.
The Competition Act requires utilities to submit restructuring plans,
including their stranded costs which will result from retail competition for
generation services. Stranded costs include regulatory assets and long-term
purchase power commitments for which full recovery is allowed and other costs,
including investment in generating plants, retirement costs and reorganization
costs, for which an opportunity for recovery is allowed in an amount
determined by the PUC as just and reasonable. Under the Competition Act,
utilities are subject to a generation rate cap through December 31, 2005 which
provides that total charges to customers cannot exceed rates in place at
December 31, 1996, subject to certain exceptions. The Competition Act also
caps transmission and distribution rates from December 31, 1996 through June
30, 2001, subject to certain exceptions. Under the Competition Act, each
regulated electric utility was required to implement a retail access pilot
program for customers representing 5% of the peak load of each customer class
for the period from November 1, 1997 through December 31, 1998.
Recovery of Stranded Costs
As a mechanism for utilities (including West Penn) to recover their
allowed stranded costs, the Competition Act provides for the imposition and
collection of nonbypassable charges on customers' bills called "competitive
transition charges." Competitive transition charges are assessed to and
collected from all retail customers who have been assigned stranded cost
responsibility and access the utilities' transmission and distribution systems
and may be collected over a maximum period of nine years, except as such
period may be extended by the PUC for good cause shown. As the competitive
transition charges are based on access to the utility's transmission and
distribution system, they will be assessed regardless of whether such customer
purchases electricity from the utility or an independent electric generation
supplier. The Competition Act provides, however, that the utility's right to
collect competitive transition charges is contingent on the continued
operation at reasonable availability levels of the assets for which the
stranded costs were awarded, except where continued operation is no longer
cost efficient because of the transition to a competitive market. See "Risk
Factors--Legal, Legislative or Regulatory Actions Could Adversely Affect
Transition Bondholders--Legal Challenges Could Adversely Affect Transition
Bondholders" and "Risk Factors--Nature of Intangible Transition Property--Lack
of Continued Operation of Existing Generation Facilities May Result in Losses
to Transition Bondholders" in this Prospectus.
Securitization of Stranded Costs
The Competition Act authorizes the PUC to issue qualified rate orders
approving the issuance of transition bonds to facilitate the recovery or
financing of qualified transition expenses of an electric utility or its
assignee. Transition bonds may be issued by a utility, a finance subsidiary of
a utility or a third-party assignee of a utility. Under the Competition Act,
proceeds of transition bonds are required to be used principally to reduce
qualified transition expenses, including stranded costs, and the related
capitalization costs of the utility. The transition bonds are secured by
intangible transition property and payable from the
38
<PAGE>
intangible transition charges and may have a maximum maturity of ten years.
Intangible transition charges can be imposed only when and to the extent that
transition bonds are issued.
The Competition Act contains a number of provisions designed to
facilitate the securitization of stranded costs.
Irrevocability of Intangible Transition Property. Under the Competition
Act, intangible transition property is created by the issuance by the PUC of a
qualified rate order and the declaration by the PUC that the relevant
paragraphs of a qualified rate order are irrevocable. The PUC is granted the
power under the Competition Act to specify that all or a portion of such
qualified rate order will be irrevocable. The Competition Act provides that to
the extent that the PUC declares all or a portion of a qualified rate order
irrevocable, the PUC may not, by any subsequent action, reduce, postpone,
impair or terminate either the order or the intangible transition charge
authorized therein. In addition, under the Competition Act, the Commonwealth
pledges and agrees with the holders of the transition bonds, and with any
assignee or finance party, not to limit or alter or in any way impair or
reduce the value of intangible transition property or the intangible
transition charges until the related transition bonds are fully discharged.
The Competition Act provides, however, that nothing precludes the Commonwealth
from limiting or altering intangible transition property or the qualified rate
order, provided that adequate compensation is made by law for the full
protection of the intangible transition charges collected pursuant to the
qualified rate order and of the holders of the transition bonds and any
assignee or finance party. See "Risk Factors--Legal, Legislative or Regulatory
Actions Could Adversely Affect Transition Bondholders" in this Prospectus.
Adjustments of the Intangible Transition Charges. The Competition Act
requires the PUC to provide in all qualified rate orders a procedure for
expeditiously approving periodic adjustments to the intangible transition
charges. The Competition Act requires that such adjustments be made on at
least an annual basis on each anniversary of the issuance of the qualified
rate order and at additional intervals as specified therein. The PUC must
approve such annual adjustments within 90 days of each request for adjustment.
Nonbypassability. The Competition Act provides that the competitive
transition charges and the intangible transition charges will be imposed on
customers accessing the utility's transmission and distribution system even if
those customers elect to purchase electricity from another supplier or if the
customer chooses to operate self-generation equipment in tandem with accessing
the utility's transmission and distribution system. The Competition Act
further provides that to the extent that the utility, or any assignee of
intangible transition property, assigns, sells, transfers or pledges any
interest in intangible transition property, the PUC authorizes the utility to
contract with such assignee for the utility:
(i) to continue to operate the system to provide electric services to the
utility's customers,
(ii) to impose and collect the applicable intangible transition charges
for the benefit and account of the assignee,
(iii) to make periodic adjustments of the intangible transition charges,
and
(iv) to account for and remit the applicable intangible transition
charges to or for the account of the assignee free of any charge, deduction or
surcharge of any kind.
In addition, to the extent specified in the qualified rate order, the
obligations of the utility under any such contract:
(i) will be binding upon the utility, its successors and assigns, and
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<PAGE>
(ii) will be required by the PUC to be undertaken and performed by the
utility and any other entity which provides electric service to a person that
is a customer of the utility located within the utility's retail electric
service territory, as a condition to providing service to such customer or the
municipal entity providing such services in place of the utility.
Creation of a Statutory Lien on Intangible Transition Property. The
Competition Act provides that a valid and enforceable security interest in
intangible transition property automatically attaches from the time the
related transition bonds are issued and is enforceable against all third
parties (including judicial lien creditors) if (i) value is given by
purchasers of the transition bonds and (ii) a filing is made with the PUC to
perfect the security interest within 10 days from issuance of the transition
bonds. The Competition Act also provides that security interests in the
intangible transition property are created and perfected only by means of a
separate filing with the PUC in accordance with the provisions of the
Competition Act. Upon perfection, the statutorily created lien attaches both
to intangible transition property and to all revenues and proceeds of
intangible transition property, whether or not accrued. The Competition Act
provides that any such filing will take precedence over any other filing and
will be enforceable against the assignee and all third parties, including
judicial lien creditors, subject only to rights of any third parties holding
security interests in intangible transition property previously perfected in
accordance with the Competition Act. The Competition Act provides that
priority of security interests in intangible transition property will not be
defeated or adversely affected by (i) commingling of revenues with other funds
of the utility or (ii) changes to the qualified rate order or the intangible
transition charges.
Characterization of Transfer of Transferred Intangible Transition
Property as True Sale. The Competition Act provides that a transfer by the
utility or an assignee of intangible transition property will be treated as a
true sale of the transferor's right, title and interest and not as a pledge or
other financing, other than for federal and state income and franchise tax
purposes, if (i) the parties expressly state in governing documents that a
transfer is to be a sale or other absolute transfer and (ii) the transaction
is approved in a qualified rate order. See "Risk Factors--Bankruptcy;
Creditors' Rights" in this Prospectus.
Jurisdiction Over Disputes; Standing
Actions against customers for nonpayment of the intangible transition
charges may only be brought by the utility, its successor or any other entity
providing electric service to the customers. In addition, the Competition Act
grants to the PUC exclusive jurisdiction over all disputes arising out of the
obligations to impose and collect the intangible transition charges by a
utility, its successor or any other entity which provides electric service to
a customer.
Possible Federal Preemption of the Competition Act
At least one bill was introduced in the 105th Congress, First Session,
prohibiting the recovery of stranded costs such as the Stranded Costs
described herein, which could negate the existence of Intangible Transition
Property. That bill, H.R. 1230 (The Consumers Electric Power Act of 1997,
"H.R. 1230"), was introduced on April 8, 1997 but died at the end of that
Congressional session after having been referred to the House Commerce
Committee and the Subcommittee on Energy and Power. No prediction can be made
as to whether any future bills that prohibit the recovery of stranded costs
will become law or, if they become law, what their final form or effect will
be. There is no assurance that the courts would consider such a preemption a
"taking." Moreover, even if such a preemption of the Competition Act or the
QRO by the federal government were considered a "taking," for which the
government had to pay the estimated market value of the Transferred Intangible
Transition Property at the time of the taking, there is no assurance that such
compensation would be sufficient to pay the full amount of principal of and
interest on the Transition Bonds, and Transition Bondholders could suffer a
loss of their investment. See "Risk Factors--Legal, Legislative or Regulatory
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<PAGE>
Actions Could Adversely Affect Transition Bondholders--Federal Legislation May
Result in Losses to Transition Bondholders" in this Prospectus and "--Possible
Commonwealth Amendment or Repeal of the Competition Act" below.
Possible Commonwealth Amendment or Repeal of the Competition Act
Under the Competition Act, the Commonwealth has pledged to and agreed
with transition bondholders that it will not limit or alter or in any way
impair or reduce the value of intangible transition property or intangible
transition charges approved by a qualified rate order, until the transition
bonds and interest thereon are fully paid and discharged. The Competition Act
also provides, however, that subject to the requirements of law, nothing
contained in the Competition Act precludes such limitation or alteration by
the Commonwealth if "adequate compensation is made by law" for the full
protection of the intangible transition charges collected pursuant to a
qualified rate order and of transition bondholders. It is unclear what
"adequate compensation . . . by law" would be afforded to Transition
Bondholders by the Commonwealth if it attempts to limit or alter Intangible
Transition Property or Intangible Transition Charges. Accordingly, no
assurance can be given that any such provision would fully compensate
Transition Bondholders for their investment and would not adversely affect the
price of the Transition Bonds or the timing of payments with respect to the
Transition Bonds. See "Risk Factors--Legal, Legislative or Regulatory Actions
Could Adversely Affect Transition Bondholders--Changes in Law May Result in
Losses to Transition Bondholders" in this Prospectus.
In the opinion of Cravath, Swaine & Moore, counsel to West Penn, under
the Contract Clause of the United States Constitution, the Commonwealth could
not repeal or amend the Competition Act (by way of legislative process) or
take any other action that substantially impairs the rights of the Transition
Bondholders, unless such action is a reasonable exercise of the Commonwealth's
sovereign powers and of a character appropriate to the public purpose
justifying such action. To date, no cases addressing these issues in the
context of transition bonds have been decided. There have been cases in which
courts have applied the Contract Clause of the United States Constitution and
parallel state constitutional provisions to strike down legislation, reducing
or eliminating taxes or public charges which supported bonds issued by public
instrumentalities, or otherwise reducing or eliminating the security for such
bonds. Based upon such case law, in the opinion of Cravath, Swaine & Moore, it
would appear unlikely that the Commonwealth could reduce, modify, alter or
take any other action with respect to intangible transition property which
would substantially impair the rights of transition bondholders, unless the
action is reasonable and appropriate to further a legitimate public purpose.
Moreover, under the Taking Clause of the United States Constitution, the
Commonwealth could not repeal or amend the Competition Act (by way of
legislative process) or take any action that violates its pledge and agreement
(described above) without paying just compensation to the transition
bondholders if doing so would constitute a permanent appropriation of the
property interest of transition bondholders in the intangible transition
property and deprive the transition bondholders of their reasonable
expectations arising from their investments in the transition bonds. There is
no assurance, however, that, even if a court were to award such just
compensation, it would be sufficient to pay the full amount of principal of
and interest on the transition bonds.
In addition, there can be no assurance that a repeal of or amendment to
the Competition Act will not be sought or adopted or that any action by the
Commonwealth may not occur, any of which might constitute a violation of the
Commonwealth's pledge and agreement with the transition bondholders. In any
such event, costly and time-consuming litigation might ensue. Any such
litigation might adversely affect the price and liquidity of the Transition
Bonds and the dates of payments of principal thereof and, accordingly, the
weighted average lives thereof. Moreover, given the lack of judicial precedent
directly on point, and the novelty of the
41
<PAGE>
security for the Transition Bondholders, the outcome of any such litigation
cannot be predicted with certainty, and accordingly, Transition Bondholders
could incur a loss of their investment.
42
<PAGE>
WEST PENN'S RESTRUCTURING PLAN
General
In accordance with the provisions of the Competition Act, in August 1997,
West Penn filed with the PUC a comprehensive restructuring plan (the
"Restructuring Plan") detailing its proposal to implement full customer choice
of electric generation suppliers. West Penn's Restructuring Plan identified
$1.2 billion of recoverable retail electric generation-related stranded costs.
On May 29, 1998, the PUC adopted an Opinion and Order which modified West
Penn's proposed Restructuring Plan (the "PUC Restructuring Order"). The PUC
Restructuring Order authorized West Penn to recover stranded costs of $593
million (or $524.2 million in the event of a merger of DQE, Inc. into
Allegheny Energy as described below). In response to West Penn's petition on
June 12, 1998 requesting reconsideration of the PUC Restructuring Order, the
PUC entered an order that increased the amount of stranded costs recoverable
by West Penn by $522,000 (the "PUC Reconsideration Order"). In response in
part to the PUC Restructuring Order and the PUC Reconsideration Order, West
Penn and other parties filed appeals to the Commonwealth Court of Pennsylvania
and a civil complaint action in the U.S. District Court for the Western
District of Pennsylvania. In addition, West Penn filed an original
jurisdiction action for declaratory judgment with the Commonwealth Court of
Pennsylvania on September 2, 1998.
On November 3, 1998, West Penn and certain of the parties who appealed
West Penn's Restructuring Plan filed a Joint Petition for Full Settlement of
West Penn's Restructuring Plan and Related Court Proceedings (the "Joint
Petition"). On November 4, 1998, the Joint Petition was tentatively approved
by the PUC. On November 19, 1998, the PUC issued the Final Order approving the
Joint Petition. The remaining appeals to the Restructuring Plan were
withdrawn. The settlement effected by the Joint Petition is referred to in
this Prospectus as the "Settlement."
Provisions of the Settlement
Recovery of Stranded Costs. The Settlement authorizes West Penn to
recover $670 million of Stranded Costs ($630 million in the event that the
merger with DQE, Inc. is consummated), together with a return of 11.0%
thereon. For good cause shown, the PUC authorized the recovery of Stranded
Costs over a 10- year transition period beginning January 1, 1999 and ending
December 31, 2008. Recovery of Stranded Costs and the allowed return are to be
through competitive transition charges (with respect to West Penn, the
"Competitive Transition Charges") designed to recover the Stranded Costs. The
Competitive Transition Charges have been established assuming a specified
annual growth in sales and will be reconciled annually to actual sales.
The following table shows the estimated average levels of Competitive
Transition Charges for the years 1999 through 2008, based on the annual sales
growth assumed in the Settlement.
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<PAGE>
[TABLE 1
Annual Stranded Cost
Amortization and Return
Revenues Excluding
Gross Receipts Tax(3)
Annual Return
Year Sales CTC(2) Total @ 11.0% Amortization
- ---- ------- -------- ------- --------- ------------
MWh(1) cents/k Wh $(000) $(000) $(000)
1999 ............ 20,740,356 0.62 128,547 71,259 51,632
2000 ............ 21,157,130 0.60 126,890 65,362 55,945
2001 ............ 21,490,380 0.56 120,367 59,212 55,859
2002 ............ 21,860,286 0.54 118,054 52,859 60,001
2003 ............ 22,146,130 0.53 117,381 45,942 66,274
2004 ............ 22,693,011 0.48 108,930 38,694 65,443
2005 ............ 23,102,818 0.45 103,950 31,366 68,010
2006 ............ 23,405,954 0.44 102,470 23,563 74,399
2007 ............ 23,697,105 0.43 101,374 15,000 81,914
2008 ............ 23,934,076 0.43 101,959 5,481 91,992
Total ........... 1,129,923 408,736 671,470]
(1) Subject to reconciliation of actual sales and collections.
(2) Figures result in the recovery of $670 million of Stranded Costs plus the
allowed return and at projected usage levels in the period during which
the Competitive Transition Charges will be collected in accordance with
the terms of the Settlement. The Competitive Transition Charges are
subject to adjustment.
(3) The utilities gross receipts tax is imposed on public utilities
(including electric utilities) organized under the laws of, or doing
business in, the Commonwealth and is currently levied at the rate of 4.4%
on each dollar of the utility's gross receipts arising from certain sales
of energy.
Authorization to Securitize up to $670 Million. As part of its approval
of the Settlement, the PUC issued the QRO allowing West Penn to securitize up
to $670 million of Stranded Cost recovery through the issuance of transition
bonds. If the merger with DQE, Inc. is consummated, West Penn will not
thereafter issue Transition Bonds of an aggregate principal amount in excess
of $630 million. If West Penn has already at such time issued Transition Bonds
in excess of $630 million in accordance with the QRO, the costs of servicing
the entire amount of such Transition Bonds, including interest, principal and
all other related fees, costs, credit enhancements and charges will
nevertheless constitute Qualified Transition Expenses which thereafter will be
recovered through Intangible Transition Charges. However, at the next
Adjustment Date, West Penn will establish a credit adjustment to Customers'
bills to account for the difference between $630 million and the actual
principal amount of the Transition Bonds outstanding. This credit adjustment
will not affect the amount of Intangible Transition Charges.
The Intangible Transition Charges associated with the issuance of
transition bonds may not be imposed for service periods after December 31,
2008. Seventy-five percent of the annual net savings resulting from West
Penn's securitization of stranded costs will be returned to retail customers
through a reduction to the Competitive Transition Charges. In addition, West
Penn's Competitive Transition Charges will be reduced by the amount of the
Intangible Transition Charges. See "The QRO and the Intangible Transition
Charges" in this Prospectus.
Unbundling of Rates and Rate Reductions and Rate Caps. The Settlement
requires West Penn to unbundle its retail electric rates on January 1, 1999
into the following components: (i) distribution and transmission charges, (ii)
Competitive Transition Charges and, if applicable, Intangible Transition
Charges and (iii) a shopping credit for generation. The sum of the Competitive
Transition Charges and the shopping
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<PAGE>
credit equals the maximum amount West Penn can charge Customers who do not or
cannot choose to purchase electricity from alternate electric generation
suppliers (referred to as serving as the "provider of last resort").
The Settlement required West Penn to reduce rates by 2.5% effective
January 1, 1999, and that 2.5% rate decrease will continue in effect through
December 31, 1999. The Settlement also extends the rate caps on generation
rates at higher levels than required by the Competition Act, until December
31, 2008 and extends rate caps on transmission and distribution rates until
December 31, 2005. West Penn's unbundled rates, rate reductions and rate caps
are reflected in the schedule of system-wide average rates included in the
Settlement and shown in Table 2 below.
[TABLE 2
Schedule of System-Wide Average Rates (per kilowatt-hour ("kWh"))(1)
<TABLE>
<CAPTION>
T&D Shopping Generation
Effective Date Transmission(2) Distribution Rate Cap(3) CTC (4) Credit Rate Cap
- -------------- --------------- ------------ ----------- ---------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
(1) (2) (3)=(1)+(2) (4) (5) (6)=(4)+(5)
$kWh $kWh $kWh $kWh $kWh $kWh
January 1, 1999... $0.0045 $0.0253 $0.0298 $0.01 $0.04 $0.0618
January 1, 2000... 0.0045 0.0253 0.0298 0.01 0.04 0.0638
January 1, 2001... 0.0045 0.0253 0.0298 0.02 0.04 0.0698
January 1, 2002... 0.0045 0.0253 0.0298 0.02 0.04 0.0698
January 1, 2003... 0.0045 0.0253 0.0298 0.02 0.04 0.0698
January 1, 2004... 0.0045 0.0253 0.0298 0.02 0.04 0.0698
January 1, 2005... 0.0045(5) 0.0253(5) 0.0298(5) 0.02 0.04 0.0698
January 1, 2006... (3) (3) N/A 0.02 0.04 0.0751
January 1, 2007... (3) (3) N/A 0.02 0.05 0.0801
January 1, 2008... (3) (3) N/A 0.02 0.05 0.0801
January 1, 2009... (3) (3) N/A 0.02 0.05 0.0801]
</TABLE>
- -----------------------------
(1) All prices reflect average retail billing for all Rate Schedules
(including gross receipts tax). The average prices as presented in this
table reflect the profile of service contained in West Penn's proof of
revenue set forth in the Restructuring Plan.
(2) The transmission prices listed are for unbundled rates only. The PUC does
not regulate the rates for transmission service.
(3) The T&D (Transmission & Distribution) Rate Cap under Section 2804(4) of
the Competition Act will be extended until December 31, 2005.
(4) Figures result in the recovery of $670 million of Stranded Costs plus the
allowed return on such costs at projected usage levels in the period
during which the Competitive Transition Charges will be collected in
accordance with the terms of the Settlement. The Competitive Transition
Charges are subject to adjustment. Intangible Transition Charges will be
deducted from the Competitive Transition Charges.
(5) Effective until December 31, 2005.
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The Competition Act authorizes electric distribution companies to recover
changes in their state tax liability resulting from the introduction of
competition in the electric market through adjustments in the rates charged to
customers, which in certain circumstances set forth in the regulations adopted
by the PUC may result in rates exceeding the applicable rate cap. West Penn
may apply for such recovery of state tax liability changes in accordance with
the procedures outlined in the PUC's regulations if West Penn in fact
experiences adverse consequences to its state tax liability as contemplated in
the Competition Act.
Competitive Metering and Billing. As provided in the Settlement, on
September 1, 1999, West Penn unbundled its retail electric rates for metering,
meter reading, and billing and collection services to provide credits for
those customers that have elected to have alternate suppliers perform these
services. Effective September 1, 1999, PUC licensed entities, including
electric generation suppliers, may act as agents to provide a single bill and
provide associated billing and collection services to retail customers located
in West Penn's retail electric service territory. The PUC-licensed entities,
including electric generation suppliers, may also finance, install, own,
maintain, calibrate and remotely read advanced meters for service to retail
customers located in West Penn's service territory. An electric generation
supplier or other third party that bills on behalf of West Penn must comply
with all applicable billing and disclosure requirements absent waiver by the
PUC, including the unbundling of transmission and distribution rates. Only
West Penn can physically disconnect or reconnect a customer's distribution
service. Physical termination of the service may only be permitted for failure
to pay for transmission and distribution service or provider of last resort
service. See also "The QRO and the Intangible Transition Charges--The
Intangible Transition Charges" in this Prospectus.
Customer Choice. Under the Settlement, customer choice of electric
generation suppliers is being phased in between January 1, 1999 and January 2,
2000 with one-third of each Rate Schedule entitled to choose their electric
generation supplier by January 1, 1999, an additional one-third by January 2,
1999 and the remaining one-third by January 2, 2000.
Provider of Last Resort
Under the Restructuring Plan, West Penn will act as a provider of last
resort for all retail electric customers in its retail electric service
territory who do not choose or cannot choose to purchase power from
alternative suppliers through December 31, 2010, subject to certain terms,
conditions and qualifications. On January 1, 2001, 20% of all of West Penn's
residential customers, determined by random selection, including low-income
and inability-to-pay customers, and without regard to whether such customers
are obtaining generation service from an electric generation supplier, will be
assigned to a provider of last resort other than West Penn if there is a
qualifying bid (the service provided by such supplier, "Competitive Default
Service"). Such alternative supplier (the "Competitive Default Supplier") will
be selected on the basis of an energy and capacity market price bidding
process approved, established and maintained by the PUC among electric
generation suppliers who meet certain qualifications. The right to provide
Competitive Default Service will be rebid annually, unless an alternative
bidding term is approved by the PUC. If, 30 days prior to the annual bid, the
number of residential customers served by Competitive Default Service has
fallen below 17%, a further random selection of customers will be assigned to
Competitive Default Service to restore the number of customers to the 20%
level. The further random selection will be made from the customers not
already assigned to Competitive Default Service and customers served by
electric generation suppliers other than West Penn.
In February, 1999, certain utilities, customer advocates and electric
generation suppliers convened to develop proposed regulations on Competitive
Default Service. On Friday, February 26, the Chairman of the group forwarded a
suggested procedure for choosing a Competitive Default Supplier to the PUC.
Under those suggested procedures, entities that desire to act as a Competitive
Default Supplier have until April 1, 2000 to submit both their qualifications
to act as a Competitive Default Supplier and their bid for providing
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<PAGE>
such service. Competitive Default Service will begin on January 1, 2001 for
20% of West Penn's Residential Customers. The suggested procedures would
require an electric generation supplier to provide, among other things, proof
that it has received the requisite licenses from the state and federal
governments, proof that it meets certain creditworthiness standards and
assurances that it can acquire additional bonding as necessary. The supplier
of Competitive Default Service will be required to provide billing, including
its payment of Intangible Transition Charges and other revenues, to West Penn
on the terms and conditions set forth in West Penn's tariff for those entities
who currently provide competitive billing services to Customers.
The suggested procedures will not become final until the PUC adopts them.
The PUC may choose to reject or modify the suggested procedures. The PUC has
no time deadline for rendering its decision on this issue. The PUC may allow a
public comment period before reaching a final resolution of these issues.
Other Provisions. The Settlement also provides for flexible generation
service pricing for residential customers served by Competitive Default
Service, authorization of West Penn to transfer its generation assets to a
separate subsidiary, inclusion under the capped transmission and distribution
rates of .01 cent per kilowatt-hour for a sustainable energy and economic
development fund and expansion of West Penn's program for low-income
customers.
Prior Litigation
Prior litigation occurred with respect to the constitutionality of the
Competition Act in another restructuring case. Indianapolis Power & Light
Company ("IP&L") appealed the first qualified rate order granted to PECO
Energy Company ("PECO Energy") by the PUC in May, 1997, filing an action in
the Commonwealth Court challenging the Competition Act, alleging that the
Competition Act's provision allowing PECO Energy to recover Stranded Costs
discriminates against interstate commerce in violation of the Commerce Clause
of the United States Constitution. In an opinion dated May 7, 1998, the
Commonwealth Court of Pennsylvania dismissed IP&L's action, holding, as a
matter of law, that the Competition Act does not violate the Commerce Clause.
Following that dismissal, IP&L petitioned the Pennsylvania Supreme Court for
allowance of appeal. In the petition, IP&L claimed that the payment of
Stranded Costs to PECO Energy discriminates against interstate commerce by
favoring in-state electricity producers over out-of-state electricity
producers. On September 29, 1998, the Pennsylvania Supreme Court denied IP&L's
petition for allowance of appeal. On December 28, 1998, IP&L filed a petition
for a writ of certiorari with the United States Supreme Court to appeal the
Commonwealth Court's decision on the claim described above. On March 8, 1999,
the United States Supreme Court denied the petition.
Two additional actions, one filed by the Utility Workers Union of America
and one filed by a group of plaintiffs including State Senator Vincent J. Fumo
alleged that the adoption of the Competition Act violated certain provisions
of the Pennsylvania Constitution governing legislative procedure. The PUC
filed preliminary objections seeking dismissal of these actions at the
pleading stage, on the ground that enactment of the Competition Act did not
violate such Pennsylvania constitutional provisions as a matter of law. The
Commonwealth Court of Pennsylvania upheld the PUC's preliminary objections and
dismissed both actions with prejudice. The appeal period has expired without
appeals being filed and the dismissal of these actions is final and
non-appealable.
On June 26, 1998, West Penn filed a complaint in the United States
District Court for the Western District of Pennsylvania seeking injunctive and
monetary relief on the grounds that the PUC's implementation of the
Competition Act through its PUC Restructuring Order entered on May 29, 1998,
was contrary to and preempted by federal statutory law, including the Federal
Power Act and the Public Utility Regulatory Policies Act of 1978, and effected
a taking of West Penn's property without just compensation, impaired the
obligation of West Penn's regulatory compact, deprived West Penn of property
without due process of law, and deprived
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West Penn of these and other rights secured by the Civil Rights Act, 42 U.S.C.
ss.1983, and the Constitution of the United States.
On September 2, 1998, West Penn also filed a Petition for Review in the
Commonwealth Court of Pennsylvania, invoking that Court's original
jurisdiction, to enjoin the implementation of the Competition Act by the PUC
as violative of law and as a deprivation of West Penn's constitutional rights.
On June 26, 1998, West Penn filed a Petition for Review in the
Commonwealth Court of Pennsylvania appealing the Commission Order entered May
29, 1998, as violative of law and contrary to the Constitution.
Numerous petitions for reconsideration, cross-appeals and interventions
were filed in the aforesaid West Penn proceedings, and numerous appeals were
taken by parties in their own right.
All the aforesaid proceedings resulting from West Penn's restructuring
were withdrawn with prejudice by the parties pursuant to the terms of the
Joint Petition. The appeal period of the PUC's Final Order of November 19,
1998 approving the Settlement has lapsed without appeal or request for
reconsideration. However, there can be no assurance that other parties will
not bring lawsuits related to the Settlement.
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THE QRO AND THE INTANGIBLE TRANSITION CHARGES
The QRO
As part of its approval of the Settlement, the PUC issued a qualified
rate order to West Penn on November 19, 1998 which was supplemented by a
supplemental qualified rate order issued by the PUC to West Penn on
[ ], 1999 (collectively, the "QRO"). In the QRO, the PUC determined
that West Penn's recovery of Stranded Costs as set forth in the Settlement is
just and reasonable and in the public interest and that securitization of up
to $670 million of Stranded Costs as set forth in the Settlement is just and
reasonable and in the public interest.
Authorization of Issuance of Transition Bonds. In the QRO, the PUC
authorized the issuance of transition bonds in an aggregate principal amount
not to exceed $670 million. If the merger with DQE, Inc. is consummated, West
Penn will not thereafter issue Transition Bonds of an aggregate principal
amount in excess of $630 million. If West Penn has already at such time issued
Transition Bonds in excess of $630 million in accordance with the QRO, the
costs of servicing the entire amount of such Transition Bonds, including
interest, principal and all other related fees, costs, credit enhancements and
charges will nevertheless constitute Qualified Transition Expenses which
thereafter will be recovered through Intangible Transition Charges. However,
at the next Adjustment Date, West Penn will establish a credit adjustment to
Customers' bills to account for the difference between $630 million and the
actual principal amount of the Transition Bonds outstanding. This credit
adjustment will not affect the amount of Intangible Transition Charges.
West Penn, or any assignee of West Penn to whom Intangible Transition
Property is sold, may issue and sell, in reliance on the QRO, one or more
series of transition bonds, each series in one or more classes, secured by
Intangible Transition Property, provided that the final maturity of any series
of transition bonds may not be later than ten years from the date of issuance
and in no event after September 25, 2009. West Penn, or its assignee, is also
authorized to refinance transition bonds in a face amount not to exceed the
unamortized principal thereof.
The QRO provides that West Penn retains the sole discretion whether to
issue or cause the issuance of transition bonds. Within 120 days after each
issuance of transition bonds, West Penn is required to file with the PUC a
description of the financing structure of the transition bonds, including the
principal amount, the price at which each series or class of transition bonds
was sold, payment schedules, interest rate and other financing costs and the
final plans for West Penn's use of the proceeds of such offering.
Notwithstanding such filing, the final structure of each issuance of
transition bonds is not subject to change or revision by the PUC after the
date of such issuance.
Authorization to Impose Intangible Transition Charges. Pursuant to the
QRO, the PUC determined that it was just and reasonable and in the public
interest for West Penn to recover from its customers, through Intangible
Transition Charges, $670 million of Stranded Costs. Under the QRO, the PUC
authorized West Penn to impose on and collect from Customers, either directly
or through bills rendered by electric generation suppliers, Intangible
Transition Charges in an amount sufficient to recover Qualified Transition
Expenses. In accordance with the Competition Act, the PUC found that good
cause had been shown to extend the payment period for assessing new Intangible
Transition Charges for service rendered up to December 31, 2008.
In accordance with the Settlement, the rate reductions included as part
of the Settlement anticipated the benefits of securitization, and no rate
adjustment will be made upon issuance of any transition bonds. After January
1, 1999, Competitive Transition Charges will be reduced by the sum of the
amount of Intangible Transition Charges associated with the issuance of
Transition Bonds and 75% of the annual net savings resulting from West Penn's
securitization of Stranded Costs.
49
<PAGE>
In the QRO, the PUC approves the allocation and methodology for imposing
Competitive Transition Charges and Intangible Transition Charges on Customers.
The QRO also authorizes West Penn to make annual adjustments to Intangible
Transition Charges if collections of such Intangible Transition Charges fall
below or exceed the amount necessary to ensure the receipt by the transition
bond trustee of revenues sufficient to fully recover the Qualified Transition
Expenses in accordance with, among other things, the applicable Expected
Amortization Schedule, except that such adjustments after the period
commencing 12 months prior to the last scheduled payment date for the payment
of principal on each Series of Transition Bonds may be quarterly or monthly if
necessary to ensure full recovery of Intangible Transition Charges. The QRO
states that the revenues received by the transition bond trustee through
Intangible Transition Charges shall be determined to be sufficient for the
foregoing purpose if, and only if, the ITC Collections so received are
sufficient to amortize the transition bonds, fund any reserves and to pay
premiums, if any, thereon (after payment of accrued interest, redemption
premiums, if any, related credit enhancement, servicing fees and other related
costs and expenses) in accordance with the terms thereof. For each annual
adjustment, the QRO directs West Penn to file with the PUC (i) an accounting
of Intangible Transition Charges received by the transition bond trustee for
the previous annual period; (ii) a statement of any over-or-under receipts;
and (iii) the charge or credit to be added to Intangible Transition Charges to
ensure that the Intangible Transition Charges received by the transition bond
trustee will be sufficient to amortize the Qualified Transition Expenses in
accordance with the amortization schedule for the transition bonds and the
corresponding reduction or increase in Competitive Transition Charges. The QRO
provides that, in accordance with the Competition Act, the PUC shall approve
all annual adjustments within 90 days of West Penn's annual adjustment filing.
The QRO also provides that, during the period commencing 12 months prior to
the last scheduled payment date for the payment of principal on each Series of
Transition Bonds, the adjustments will become effective on the first day of
the next calendar month with not less than 15 days' notice.
Authorization to Sell Intangible Transition Property. Under the QRO, the
PUC concluded that it is in the public interest, and authorized West Penn and
any assignee of West Penn, to assign, sell, transfer or pledge Intangible
Transition Property in an amount sufficient to recover all of West Penn's
Qualified Transition Expenses. The PUC directed West Penn to use the proceeds
from the sale of Intangible Transition Property to reduce Stranded Costs and
related capitalization.
The QRO provides that, to the extent that West Penn, or any assignee,
assigns, sells, transfers, or pledges any interest in Intangible Transition
Property created by the QRO, the PUC authorizes West Penn to contract, for a
specified fee, with such assignee for West Penn to continue to operate the
system to provide electric services to West Penn's customers, to impose and
collect the applicable Intangible Transition Charges for the benefit and
account of the assignee, to make periodic adjustments of Intangible Transition
Charges contemplated under the QRO and to account for and remit the applicable
Intangible Transition Charges to or for the account of the assignee free of
any charge, deduction or surcharge of any kind (other than the specified
contractual fee referred to above). The QRO also authorizes West Penn to
contract with the issuers of transition bonds and an alternative party, which
may be a trustee, that the alternative party will replace West Penn under its
contract with such issuers and perform the obligations of West Penn
contemplated in the QRO. The obligations of West Penn (i) shall be binding
upon West Penn, its successors and assigns and (ii) shall be required by the
PUC to be undertaken and performed only by West Penn and any other entity
which provides transmission and distribution services to a person who was a
customer of West Penn located within West Penn's certificated territory on
January 1, 1997, or who became a customer of electric services within such
territory after January 1, 1997, and is still located within such territory.
Irrevocability of QRO. The QRO declares that the paragraphs in the QRO
concerning the recovery of $670 million of West Penn's Stranded Costs through
the issuance of transition bonds, the imposition of Intangible Transition
Charges on Customers in an amount sufficient to recover Qualified Transition
Expenses, the methodology and allocation and timing of adjustments to the
Intangible Transition Charges and the sale
50
<PAGE>
of Intangible Transition Property, among other things, are irrevocable for
purposes of the Competition Act, and the PUC accordingly agrees that it will
not, directly or indirectly, by any subsequent action, reduce, postpone,
impair or terminate the QRO or the Intangible Transition Charges. In the QRO,
the PUC further declared that the right, title and interest of West Penn and
any assignee in the QRO and the Intangible Transition Charges, the rates and
other charges authorized by the QRO, and all revenues, collections, claims,
payments, money or proceeds of or arising from the same constitute Intangible
Transition Property.
The Intangible Transition Charges
Calculation of the Intangible Transition Charges. The Qualified
Transition Expenses authorized in the QRO are to be recovered from Customers
in each of West Penn's separate Rate Schedules. The Intangible Transition
Charges initially will be calculated by determining the total amount of
Intangible Transition Charges required to be billed to each Customer Category,
based on current estimates of sales growth, in order to generate ITC
Collections sufficient to ensure timely recovery of Qualified Transition
Expenses in accordance with the Expected Amortization Schedule. The amount
determined for each Customer Category will then be allocated to each Rate
Schedule within that Customer Category based on the allocation of Stranded
Cost recovery borne by each Rate Schedule through current electric rates
approved by the PUC.
The Intangible Transition Charges will reduce Competitive Transition
Charges (as periodically adjusted) and will appear as a separate line item on
each Customer's bill. West Penn will adjust the non- securitized elements of
its generation charges, rather than the Intangible Transition Charges approved
by the QRO, to bring the charges into compliance with the applicable rate cap.
If Intangible Transition Charges exceed the applicable rate cap, and specified
remedies (such as adjusting other rate components and PUC approval of an
exception to the rate cap) are not appropriate, then West Penn will establish
a negative Competitive Transition Charge (with associated deferred
accounting), such that the sum of West Penn's generation charges, plus the
Intangible Transition Charges required to pay all Qualified Transition
Expenses, plus the negative Competitive Transition Charge will comply with the
applicable rate cap.
ITC Collections will vary with changes in usage, number of Customers,
rate of delinquencies and write-offs or other factors. Variations in ITC
Collections will be addressed by recalculating the Intangible Transition
Charges on each Calculation Date. See "Description of the Seller's Business"
in the related Prospectus Supplement and "The ITC Adjustment Process" below.
Initial Billing and Termination of ITC Collections. Intangible Transition
Charges for each Series of Transition Bonds will be assessed on all Customer
bills rendered on or after the effective date of the rates for Intangible
Transition Charges associated with the relevant Series Issuance Date. For
instance, if a particular Series Issuance Date is January 1 and the rates for
Intangible Transition Charges are effective January 1, bills rendered on or
after January 1 will be assessed Intangible Transition Charges with respect to
that Series. Upon each adjustment of Intangible Transition Charges or issuance
of additional Series of Transition Bonds, the adjusted Intangible Transition
Charges will be assessed in the same manner. The imposition of Intangible
Transition Charges as a result of the issuance of Transition Bonds will result
in a reduction in any Competitive Transition Charges then in effect in an
amount equal to the sum of such Intangible Transition Charges and 75% of the
annual net savings resulting from West Penn's securitization of Stranded
Costs, such that the total amount billed to Customers generally will decrease
from that which would have been billed if there had been no securitization.
The Servicer (or electric generation supplier or other third-party
biller) will continue to bill the Intangible Transition Charges until the
Series Termination Date or Class Termination Date, if applicable, with respect
to each such Series or Class, as applicable, but in no event will new
Intangible Transition Charges be imposed for service periods later than
December 31, 2008. Upon the Series Termination Date or Class
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Termination Date, as applicable, relating to the Series or Class, as
applicable, of Transition Bonds having the latest Series Termination Date or
Class Termination Date, as applicable, the Servicer will cease assessing the
Intangible Transition Charges. However, the Servicer (or electric generation
supplier or other third-party biller) will continue to collect the Intangible
Transition Charges previously billed to Customers. To the extent that ITC
Collections exceed the amount necessary to amortize fully all Transition Bonds
and pay interest thereon and applicable fees and expenses and to fund the
Overcollateralization Subaccount and Capital Subaccount, such ITC Collections
will be retained by the Issuer.
The ITC Adjustment Process. In order to enhance the likelihood that the
actual ITC Collections are neither more nor less than the amount necessary,
among other things, to amortize the Transition Bonds of each Series in
accordance with the Expected Amortization Schedule therefor, to replenish the
Capital Subaccount up to the Required Capital Amount and to fund the
Overcollateralization Subaccount to the Calculated Overcollateralization
Level, the Servicing Agreement requires the Servicer to seek, and the
Competition Act and the QRO require the PUC to approve, adjustments to the
Intangible Transition Charges based on actual ITC Collections and updated
assumptions by the Servicer as to projected future sales from which Intangible
Transition Charges are allocated, expected delinquencies and write-offs, and
future expenses relating to Intangible Transition Property and the Transition
Bonds. Adjustments will be made to the Intangible Transition Charges imposed
upon Customers to reflect shortfalls in or excesses of ITC Collections for the
period since the last adjustment, including amounts of shortfalls or excesses
resulting from inaccurate forecasts by the Servicer. For example, if actual
electricity consumption is less than the Servicer forecasted because of an
unusually mild summer, and this resulted in an ITC Collection shortfall, the
Servicer would be required to seek an adjustment from the PUC to the
Intangible Transition Charges imposed thereafter to compensate for such
shortfall as described herein.
In addition, the adjustments will take into account any projected trends
in Customers or billed revenues from which Intangible Transition Charges are
allocated in order to prevent shortfalls or excesses of ITC Collections from
arising in future periods so that if, for example, usage is declining at an
accelerating pace, such trend will be taken into account in the calculation of
the current adjustment. The QRO provides for annual adjustments, except that
adjustments after the period commencing 12 months prior to the last scheduled
payment date for the payment of principal on each Series of Transition Bonds
may be made quarterly or monthly. If at the time of issuance of a Series, the
Servicer determines such additional adjustments are required, the dates for
such adjustments will be specified in the Prospectus Supplement for such
Series. Such adjustments will cease with respect to a Series on the final
Adjustment Date specified in the related Prospectus Supplement for such
Series.
The Servicer will file an Adjustment Request with the PUC on or before
each Calculation Date, requesting modifications to the Intangible Transition
Charges which are designed, among other things, to result in the outstanding
principal balance of each Series equaling the amount provided for in the
Expected Amortization Schedule therefor, the amount on deposit in the
Overcollateralization Subaccount equaling the Calculated Overcollateralization
Level and the amount on deposit in the Capital Subaccount equaling the
Required Capital Amount, by (i) the next Adjustment Date or the Payment Date
immediately succeeding such Adjustment Date, as specified in the related
Prospectus Supplement, or (ii) the Expected Final Payment Date, as applicable,
for each Series, taking into account any amounts on deposit in the Reserve
Subaccount other than certain Customer prepayments of Intangible Transition
Charges, if any, not allocable to the period covered by the applicable
Adjustment Request. For a discussion of Customer prepayments, see "The
Servicer-Limited Information on Customers' Creditworthiness-Customer Payments"
in this Prospectus. The Competition Act and the QRO require the PUC to approve
such annual adjustments within 90 days of the Calculation Date. The
adjustments to the Intangible Transition Charges are expected to be
implemented on each Adjustment Date.
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Competitive Billing
The Restructuring Plan and subsequent orders of the PUC give customers
who purchase electric generation from electric generation suppliers the
opportunity to choose from several billing source options as of September 1,
1999: consolidated billing from the utility, consolidated billing from the
electric generation supplier or separate billing from the utility and from the
electric generation supplier providing billing services. Any electric
generation supplier that provides consolidated billing is required to pay the
utility amounts billed by the utility to the electric generation supplier,
including the Intangible Transition Charges, regardless of the electric
generation supplier's ability to collect such amounts from its Customers. In
such event, the electric generation supplier will replace the Customer as the
obligor with respect to such Intangible Transition Charges, and the Servicer,
on behalf of the Issuer, will generally have no right to collect such
Intangible Transition Charges from the Customer. The Servicer will have the
right to bill and collect Intangible Transition Charges and other amounts
payable to the Servicer directly from all of the electric generation
supplier's consolidated billing Customers following certain payment defaults
by an electric generation supplier and the expiration of the applicable grace
period [and can disconnect electric service to those Customers]. See "Risk
Factors-Servicing-It May Be More Difficult to Collect Intangible Transition
Charges Due to Billing By Third Parties" in this Prospectus.
The Restructuring Plan sets forth, and future orders of the PUC will set
forth, guidelines governing metering, billing and other activities by electric
generation suppliers. The PUC has determined that if an electric generation
supplier provides consolidated billing, the electric generation supplier must
first establish its creditworthiness by either (i) demonstrating that it has
an investment grade rating for its own long-term debt or (ii) depositing with
the PUC a letter of credit or other mechanism sufficient to cover 30 days of
its expected collections from Intangible Transition Charges. While the
Restructuring Plan and PUC orders provide that an electric generation supplier
that bills Customers must comply with all billing, financial and disclosure
requirements applicable to electric generation suppliers, the PUC may waive
any of those requirements at any time in the future. See also "Risk
Factors--Servicing--It May Be More Difficult to Collect Intangible Transition
Charges Due to Billing By Third Parties" in this Prospectus.
Termination Fees. The Restructuring Plan requires West Penn to allow
certain Customers to pay Competitive Transition Charges, including Intangible
Transition Charges, in a lump sum, based on a calculation that takes into
account each such Customer's last 12 months of demand and West Penn's weighted
average cost of capital. Electric sales revenue attributable to Customers who
will be eligible to exercise this option was [ ]% of total sales revenue for
the 1998 fiscal year. No Customer has elected to exercise this option to date.
The recovery of both Competitive Transition Charges and Intangible
Transition Charges from industrial and commercial Customers that significantly
reduce their purchases of electricity generation from West Penn through the
installation of onsite generation equipment will be governed by special rules
set forth in the Restructuring Plan. These special arrangements were designed
so that Customers who operate generation equipment in parallel with West
Penn's transmission and distribution system pay their fully allocated share of
Stranded Costs through Competitive Transition Charges and Intangible
Transition Charges. For each self-generating Customer, the Servicer will
determine annually, after the end of each calendar year in which Competitive
Transition Charges or Intangible Transition Charges are assessed, whether such
Customer purchased at least 10% fewer kilowatt-hours of electricity through
the transmission and distribution system than the Customer purchased in the
applicable base year. For Customers who began self-generation on or after
January 1, 1997, the base year is the immediately preceding calendar year. For
all others, the base year is 1996. If the ratio between (i) the amount of
usage difference caused by the onsite generation and (ii) the base year usage
is 10% or more, the Servicer will bill the Customer separately in an amount
equal to the difference between (x) the total Competitive Transition Charges
and Intangible Transition Charges that the
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Customer would have paid using usage and demand data for the base year (as
adjusted for any portion not related to self-generation) and (y) the total
Competitive Transition Charges and Intangible Transition Charges that the
Customer did pay in the preceding calendar year. There are other special rules
for Customers whose peak load during 1996 was at least 4 megawatts and who can
prove that they were actively self-generating as of December 31, 1996 or
earlier. West Penn does not expect the number of Customers who self-generate
or the kilowatt-hours produced by self-generation to be significant. The
calculation of the Intangible Transition Charges and any adjusted Intangible
Transition Charges will reflect actual self-generation at the time of such
calculation and the Servicer's projection with respect to future
self-generation.
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THE SERVICER
West Penn Power Company
Retail Electric Service Territory
West Penn serves 665,000 customers in an area of approximately 10,000
square miles in 24 counties of southwestern and central Pennsylvania. The
service area is primarily rural and suburban, and its economy is significantly
industry-based.
In order better to address the competitive environment for generation of
electricity, West Penn is in the process of establishing a separate subsidiary
to own its electric generation assets. Separation of the generation function
from transmission, distribution, and corporate services will allow for more
flexibility in West Penn's operations.
Customers and Operating Revenues
West Penn's Customer base is divided into three general Customer
categories (each, a "Customer Category"): Residential, Commercial and
Industrial. Individual rate schedules (each, a "Rate Schedule") are created by
the PUC and are subject to change. Such changes will be reflected in any
Adjustment Request filed with the PUC by the Servicer. The Rate Schedules in
each Customer Category are:
Residential Rate Schedules:
Schedule 10--The only residential service schedule, available to all
residential customers in West Penn's service area.
Commercial Rate Schedules:
Schedule 20--For small-to-medium commercial and small industrial
customers.
Schedule 22--For churches, schools, non-profit colleges and
universities. Closed to new customers as of 30 August 1979.
Schedule 23--For athletic field lighting for schools, communities,
civic organizations, and other public institutions. Closed to new
customers as of 28 August 1985.
Schedule 24--For fairs, carnivals, and other similar temporary
enterprises.
Tariff 37--For Pennsylvania State University Main Campus.
Industrial Rate Schedules:
Schedule 30--For customers with demands in excess of 100 kilowatts,
generally large commercial and medium-sized industrial customers.
Schedule 40--For customers with demands in excess of 2000 kilowatts
and service voltages in excess of 25 kilovolts, generally large
industrial customers.
Schedule 41--For customers with demands in excess of 2000 kilowatts
and service voltages in excess of 25 kilovolts, generally large
industrial customers. Closed to new customers as of 31 December 1998
Schedule 44--For customers with interruptible demands in excess of
5000 kilovolt-amperes and service voltages in excess of 25
kilovolts, generally large industrial customers able to withstand
interruptions in service. Closed to new customers as of 31 December
1998.
55
<PAGE>
Schedule 46--For customers with demands in excess of 30,000
kilovolt-amperes and service voltages in excess of 25 kilovolts,
generally very large industrial customers. Closed to new customers
as of 31 December 1998.
Schedules 51-56--For various types of street and outdoor lighting.
Closed to new customers as of 6 June 1997.
Schedules 57-59--For outdoor lighting of various types.
Schedule 71--For municipal street and highway lighting. Closed to
new customers as of 26 August 1978.
Schedules 85 and 86--For cogeneration and alternative generation.
Schedule 90--For sale of surge suppression devices.
Total Customers. The following tables show, for the last five years, the
number of retail electric Customers and the percentage of all retail electric
Customers by Rate Schedule (Table 3), retail electric usage by Rate Schedule
(Table 4), and retail electric revenues by Rate Schedule (Table 5). For the
pro forma Intangible Transition Charges assessed to individual Rate Schedules
as of any Series Issuance Date and any adjustment thereto, in each case giving
effect to the issuance of Transition Bonds on that date, see the related
Prospectus Supplement. There can be no assurance that total Customers, the
composition of total Customers by Customer Category and Rate Schedule or usage
levels or revenues for each Customer Category and Rate Schedule will remain at
or near the levels reflected in the following tables.
<TABLE>
TABLE 3
<CAPTION>
Retail Electric Customers For the Year Ended
12/31/94 12/31/95 12/31/96 12/31/97 12/31/98
Average Average Average Average Average
Number of % of Number of % of Number of % of Number of % of Number of % of
Customers Total Customers Total Customers Total Customers Total Customers Total
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Residential
Schedule 10 564,940 86.98% 569,897 86.83% 571,938 86.89% 575,526 86.61% 579,194 86.53%
Sub-Total 564,940 86.98% 569,897 86.83% 571,938 86.89% 575,526 86.61% 579,194 86.53%
Commercial(1)
Schedule 20 72,148 11.11% 73,837 11.25% 75,214 11.40% 76,485 11.51% 78,024 11.66%
Schedule 22 1,961 0.30% 1,858 0.28% 1,748 0.26% 1,724 0.26% 1,608 0.24%
Schedule 23 47 0.01% 44 0.01% 40 0.01% 38 0.01% 38 0.01%
Schedule 24 3 0.00% 5 0.00% 4 0.00% 5 0.00% 7 0.00%
Tariff 37 1 0.00% 1 0.00% 1 0.00% 1 0.00% 1 0.00%
Sub-Total 74,160 11.42% 75,745 11.54% 77,007 11.67% 78,253 11.78% 79,678 11.90%
Industrial(1)
Schedule 30 2,278 0.35% 2,256 0.34% 2,247 0.34% 2,291 0.34% 2,322 0.35%
Schedule 40 83 0.01% 88 0.01% 91 0.01% 97 0.01% 99 0.01%
Schedule 41 3 0.00% 2 0.00% 2 0.00% 2 0.00% 1 0.00%
Schedule 44 2 0.00% 2 0.00% 1 0.00% 1 0.00% 1 0.00%
Schedule 46 2 0.00% 2 0.00% 2 0.00% 2 0.00% 2 0.00%
Schedule 86 4 0.00% 4 0.00% 4 0.00% 4 0.00% 4 0.00%
Lighting 8,049 1.24% 8,354 1.27% 8,444 1.28% 8,343 1.26% 8,017 1.20%
</TABLE>
56
<PAGE>
<TABLE>
<CAPTION>
12/31/94 12/31/95 12/31/96 12/31/97 12/31/98
Average Average Average Average Average
Number of % of Number of % of Number of % of Number of % of Number of % of
Customers Total Customers Total Customers Total Customers Total Customers Total
--------- ----- --------- ----- --------- ----- --------- ----- --------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Sub-Total 10,421 1.60% 10,708 1.63% 10,791 1.64% 10,740 1.62% 10,446 1.56%
Total 649,521 100.00% 656,350 100.00% 659,726 100.00% 664,519 100.00% 669,318 100.00%
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
- -----------------------------
(1) West Penn classifies the Commercial Customer and Industrial Customer categories differently for rate-setting purposes.
[Describe how it is different]
</TABLE>
TABLE 4
<TABLE>
<CAPTION>
Actual Retail Electric Usage (per megawatt-hour "MWh") For the Year Ended
12/31/94 12/31/95 12/31/96 12/31/97 12/31/98
% of % of % of % of % of
MWh Total MWh Total MWh Total MWh Total MWh Total
---------- ------- ---------- ------- --------- ------- ---------- ------- ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Residential
Schedule 10 5,748,127 34.04% 5,767,542 33.08% 5,948,711 33.28% 5,766,850 32.22% 5,809,350 32.10%
Sub-Total 5,748,127 34.04% 5,767,542 33.08% 5,948,711 33.28% 5,766,850 32.22% 5,809,350 32.10%
Commercial(1)
Schedule 20 2,018,381 11.95% 2,090,358 11.99% 2,153,748 12.05% 2,168,078 12.12% 2,216,039 12.25%
Schedule 22 98,538 0.58% 89,102 0.51% 81,534 0.46% 64,818 0.36% 52,501 0.29%
Schedule 23 511 0.00% 474 0.00% 470 0.00% 477 0.00% 499 0.00%
Schedule 24 33 0.00% 23 0.00% 22 0.00% 21 0.00% 27 0.00%
Tariff 37 198,979 1.18% 208,512 1.20% 211,766 1.18% 211,579 1.18% 222,083 1.23%
Sub-Total 2,316,442 13.72% 2,388,469 13.70% 2,447,540 13.69% 2,444,973 13.66% 2,491,149 13.77%
Industrial(1)
Schedule 30 3,857,797 22.84% 3,927,383 22.52% 3,971,239 22.22 4,047,248 22.62% 4,071,011 22.50%
Schedule 40 3,077,059 18.22% 3,355,885 19.25% 3,540,235 19.81 3,978,829 22.23% 3,820,137 21.11%
Schedule 41 106,216 0.63% 46,904 0.27% 46,300 0.26% 46,786 0.26% 19,068 0.11%
Schedule 44 118,103 0.70% 117,590 0.67% 72,775 0.41% 69,027 0.39% 78,958 0.44%
Schedule 46 1,583,201 9.37% 1,751,510 10.05% 1,766,040 9.88 1,460,804 8.16% 1,723,975 9.53%
Schedule 86 9 0.00% 31 0.00% 182 0.00% 3 0.00% 15 0.00%
Lighting 80,639 0.48% 80,951 0.46% 81,182 0.45% 81,181 0.45% 81,271 0.45%
Sub-Total 8,823,024 52.25% 9,280,264 53.22% 9,477,953 53.03% 9,683,878 54.11% 9,794,435 54.13%
Total 16,887,593 100.00% 17,436,275 100.00% 17,874,204 100.00% 17,895,701 100.00% 18,094,934 100.00%
---------- ------- ---------- ------- ---------- ------- ---------- ------- ---------- -------
(1) West Penn classifies the Commercial Customer and Industrial Customer
categories differently for rate-setting purposes. [Describe how it is
different]
57
<PAGE>
TABLE 5
Retail Electric Revenues (dollars in thousands) For the Year Ended
12/31/94 12/31/95 12/31/96 12/31/97 12/31/98
% of % of % of % of % of
$(000s) Total $(000s) Total $(000s) Total $(000s) Total $(000s) Total
Residential
Schedule 10 $376,023 40.74% $395,209 40.18% $403,243 40.5% $389,460 39.7% $381,918 39.88%
Sub-Total 376,023 40.74% 395,209 40.18% 403,243 40.54% 389,460 39.76% 381,918 39.88%
Commercial(1)
Schedule 20 $130,657 14.1% $140,324 14.27% $143,273 14.40% $143,473 14.65% $140,749 14.70%
Schedule 22 6,597 0.71% 6,518 0.66% 5,969 0.60% 4,810 0.49% 3,539 0.37%
Schedule 23 75 0.01% 76 0.01% 72 0.01% 71 0.01% 65 0.01%
Schedule 24 4 0.00% 4 0.00% 3 0.00% 3 0.00% 4 0.00%
Tariff 37 8,490 0.92% 9,233 0.94% 9,263 0.93% 9,049 0.92% 9,120 0.95%
Sub-Total 145,823 15.80% 156,145 15.88% 158,580 15.94% 157,406 16.07% 153,477 16.02%
Industrial(1)
Schedule 30 $194,859 21.1% $206,145 20.96% $205,646 20.6% $208,172 21.25% $203,325 21.23%
Schedule 40 121,857 13.20% 136,249 13.85% 140,287 14.10% 152,368 15.56% 142,684 14.90%
Schedule 41 4,713 0.51% 2,142 0.22% 2,204 0.22% 2,090 0.21% 756 0.08%
Schedule 44 4,305 0.47% 4,296 0.44% 2,582 0.26% 1,944 0.20% 2,207 0.23%
Schedule 46 64,478 6.99% 71,817 7.30% 70,653 7.10% 56,485 5.77% 61,748 6.45%
Schedule 86 33 0.00% 37 0.00% 42 0.00% 39 0.00% 38 0.00%
Lighting 10,944 1.19% 11,494 1.17% 11,537 1.16% 11,554 1.18% 11,620 1.21%
Sub-Total 401,189 43.46% 432,180 43.94% 432,951 43.52% 432,652 44.17% 422,378 44.10%
Total $923,035 100.00% $983,534 100.00% $994,774 100.00% $979,518 100.00% $957,773 100.00%
-------- ------- -------- ------- -------- ------- -------- ------- -------- -------
</TABLE>
- -----------------------------
(1) West Penn classifies the Commercial Customer and Industrial Customer
categories differently for rate-setting purposes. [Describe how it is
different]
Concentrations. For the period ended December 31, 1998, the largest ten
Residential Customers represented approximately __% of West Penn's total
retail electric revenues. For the period ended December 31, 1998, the largest
Commercial Customer and the largest ten Commercial Customers represented
approximately 6.15% and 6.85%, respectively, of West Penn's retail electric
revenues from Commercial Customers. For the period ended December 31, 1998,
the largest Industrial Customer and the largest ten Industrial Customers
represented approximately 9.17% and 29.31%, respectively, of West Penn's
retail electric revenues from Industrial Customers. For the period ended
December 31, 1998, the largest ten Residential Customers represented
approximately % of West Penn's total retail electric sales. For the period
ended December 31, 1998, the largest Commercial Customer and the largest ten
Commercial Customers represented approximately 8.94% and 9.66%, respectively,
of West Penn's retail electric sales from Commercial Customers. For the period
ended December 31, 1998, the largest Industrial Customer and the largest ten
Industrial Customers represented approximately 10.73% and 33.08%,
respectively, of West Penn's retail electric sales from Industrial Customers.
There can be no assurance that current Customers will remain Customers or that
the levels of Customer concentration in the future will be similar to those
set forth above.
58
<PAGE>
See "Risk Factors--Servicing--Inaccurate Projections by Servicer May Result in
Losses to Transition Bondholders" in this Prospectus.
Delinquency and Write-Off Experience. The following tables set forth the
delinquency and write-off experience with respect to payments to West Penn by
Customer Category for each of the periods indicated below. There can be no
assurance that the future delinquency and write-off experience for West Penn
or for the Intangible Transition Charges will be similar to the historical
experience set forth below:
TABLE 6
Delinquencies as a Percentage of Billed Retail Electric Revenues
For the Year Ended
12/31/94 12/31/95 12/31/96 12/31/97 12/31/98
Residential
30+ days ........... 1.13% 1.47% 2.11% 1.88% 2.36%
60+ days ........... 0.25 0.24 0.59 0.40 0.31
90+ days ........... 0.08 0.09 0.24 0.18 0.16
120+ days .......... 0.15 0.11 0.33 0.41 0.23
Commercial(1)
30+ days ........... 1.19% 2.20% 3.03% 1.42% 2.14%
60+ days ........... 0.31 1.22 0.47 0.59 0.37
90+ days ........... 0.19 0.10 0.19 0.59 0.29
120+ days .......... 0.26 0.11 0.14 0.14 0.05
Industrial(1)
30+ days ........... 17.24% 16.79% 19.04% 16.29% 17.74%
60+ days ........... 6.65 6.49 7.53 5.35 5.24
90+ days ........... 2.18 1.89 3.30 2.24 2.01
120+ days .......... 1.50 1.34 3.41 2.38 2.08
- --------------------
(1) West Penn classifies the Commercial Customer and Industrial Customer
categories differently for rate-setting purposes. [Describe how it is
different]
59
<PAGE>
TABLE 7
Net Write-Offs as a Percentage of Billed Retail Electric Revenues
For the Year Ended
12/31/94 12/31/95 12/31/96 12/31/97 12/31/98
Residential............ 0.84% 0.92% 1.36% 1.55% 1.37%
Commercial(1).......... 0.07 0.06 0.09 0.21 0.19
Industrial(1).......... 0.05 0.05 0.28 0.18 0.12
Total.................. 0.38 0.41 0.68 0.74 0.64
- -----------------------------
(1) West Penn classifies the Commercial Customer and Industrial Customer
categories differently for rate-setting purposes. [Describe how it is
different]
During the last five years, the Residential Customer Category has
experienced . . . due to . . .; the Commercial Customer Category has
experienced . . . due to . . .; and the Industrial Customer Category has
experienced . . . due to . . . .
West Penn does not expect the delinquency or write-off experience with
respect to ITC Collections to differ substantially from the rates indicated
above.
Forecasting Customers and Usage
Accurate projections of the number of Customers, usage and retail
electric revenue are important in setting and maintaining the Intangible
Transition Charges or any adjusted Intangible Transition Charges at levels
sufficient to recover interest on and principal of the Transition Bonds in
accordance with the Expected Amortization Schedule, to maintain the Calculated
Overcollateralization Level, to maintain the Required Capital Amount and to
pay the Bond Trustee's fee, the administrative agent's fee, the Servicing Fee
and the other expenses and costs included in Qualified Transition Expenses.
See "The QRO and the Intangible Transition Charges--The Intangible Transition
Charges" and "Risk Factors--Servicing--Inaccurate Projections by Servicer May
Result in Losses to Transition Bondholders" in this Prospectus.
West Penn's customer and energy forecasts are a subset of the Allegheny
Power forecasts and are produced by employees of Allegheny Power Service
Corporation ("APSC") using econometrics and end-use models based on
demographic data, historical sales and customer data, and projections of
economic and employment variables for West Penn's service territory produced
by Data Resources Inc. ("DRI"). DRI is an independent, nationally-known
economic forecasting firm. West Penn's service area forecasts are derived from
DRI's macroeconomic models of the U.S. economy. A set of disaggregated
customer and energy sales models use the national and service area economic
forecasts and end-use data as inputs to produce the detailed customer and
sales forecasts. Although the external economic projections form the
foundation of the forecast, judgment, assumptions and specific information
about certain customer segments provided by APSC employees also play important
roles in the final forecast. West Penn's forecasts of customers and energy
sales are reviewed and approved internally by senior management executives.
Residential Customer sales are forecasted using a combination of end-use
and econometric models. Separate forecasts of customers and average use per
Customer are combined to produce the forecast of Residential Customer sales.
The Customer forecasts are based primarily on service area demographics and
population forecasts. Average use per Customer forecasts are based on
electricity price, weather and saturations of electric space heating and major
household appliances and their corresponding levels of energy
60
<PAGE>
use. The model for total Residential Customers is driven by population and
persons per household in the service area. Historical and forecast values of
the population series are obtained through DRI's Regional Information Service.
Persons per household are derived from Residential Appliance Saturation
Surveys, and are forecasted as a function of national persons per household,
also obtained from DRI. The number of residential electric heat customers is
typically modeled as a function of real income per Customer, total Residential
Customers and the price of electricity relative to the competing fuel. The
models for average use per Customer are driven by use per appliance, number of
appliances, temperature and price of electricity. Regional personal income is
the primary driver in the appliance models. Some appliance models are
constrained so that the number of appliances will not exceed a pre-determined
percentage of total Residential Customers. The constraints are established in
cooperation with field contacts. The Residential Customer sales forecast is
the product of the forecast of the average use per Customer and the number of
Customers.
Service area employment, temperature and price of electricity drive the
models for Commercial Customer sales. Non-manufacturing employment is used as
the employment driver.
Industrial Customer sales are forecasted by major two-digit Standard
Industrial Classification (SIC) codes. The primary specification for the
industrial models assumes that the sale of electricity is a function of
electricity price, employment and industrial production by SIC. Primary SICs
modeled are Mining; Cement, Clay and Stone; Chemicals; Glass; Steel;
Fabricated Metals; and Other Manufacturing.
Actual sales can deviate from forecasted sales for many reasons,
including, but not limited to, weather variations, changes in the general
economic climate and levels of business activity, Customer's use of more
energy efficient appliances and technologies, and changes in laws and
regulations which affect energy use.
The temperature-sensitive nature of the residential, commercial and
wholesale loads in the West Penn service territory causes deviations from
normal weather to be potentially the largest contributor to load variances in
the near-term. As the number of electrically-heated and air conditioned
buildings in the service area increases, the sensitivity of demand to
temperature also increases. All West Penn forecasts are intended to represent
loads most likely to occur, given normal temperatures. Therefore, variances
from the forecast due to temperature deviations from normal are to be
expected, but should offset over time and have no effect on average growth.
Variations between actual and projected Customers and energy sales are
shown in Table 8 and Table 9. Weather variation played a significant role in
the forecast variances experienced in 1997 and 1998. There can be no assurance
that the future variance between actual and projected Customers and sales in
the aggregate, or by Customer Category, will be similar to the historical
experience set forth in the tables.
61
<PAGE>
TABLE 8
Variance from Year-Ahead Forecast: Number of Customers
for the Year Ended December 31
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
Residential
Forecasted.......... 570,494 576,399 581,899 584,460 586,512
Actual.............. 571,682 576,372 578,465 581,943 585,316
Variance............ 0.2% 0.0% -0.6% -0.4% -0.2%
Commercial(1)
Forecasted.......... 65,562 68,067 69,232 70,263 71,350
Actual.............. 65,896 67,720 68,764 69,941 71,158
Variance............ 0.5% -0.5% -0.7% -0.5% -0.3%
Industrial(1)
Forecasted.......... 11,280 11,538 11,870 12,144 12,351
Actual.............. 11,398 11,666 11,940 12,076 12,307
Variance............ 1.0% 1.1% 0.6% -0.6% -0.4%
Streetlighting
Forecasted.......... 520 553 550 566 563
Actual.............. 547 557 558 561 539
Variance............ 5.2% 0.7% 1.5% -0.9% -4.3%
- -----------------------------
(1) West Penn classifies the Commercial Customer and Industrial Customer
categories differently for rate-setting purposes. [Describe how it is
different]
TABLE 9
Variance from Year-Ahead Forecast: Energy Sales (GWH)
for the Year Ended December 31
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
Residential
Forecasted.......... 5,697 5,826 5,844 5,974 6,127
Actual.............. 5,763 5,781 5,963 5,781 5,823
Variance............ 1.2% -0.8% 2.0% -3.2% -5.0%
Commercial(1)
Forecasted.......... 3,640 3,741 3,856 3,986 4,080
62
<PAGE>
Actual.............. 3,632 3,769 3,854 3,872 3,993
Variance............ -0.2% 0.7% -0.1% -2.9% 2.1%
Industrial(1)
Forecasted.......... 7,604 7,659 8,204 8,256 8,608
Actual.............. 7,442 7,834 8,006 8,191 8,226
Variance............ -2.1% 2.3% -2.4% -0.8% -4.4%
Streetlighting
Forecasted.......... 53 51 52 52 52
Actual.............. 52 52 52 52 52
Variance............ -1.9% 2.0% 0.0% 0.0% 0.0%
- -----------------------------
(1) West Penn classifies the Commercial Customer and Industrial Customer
categories differently for rate-setting purposes. [Describe how it is
different]
Billing Process
West Penn operates on a continuous billing cycle, with an approximately
equal number of bills being distributed each business day. For the year ended
December 31, 1998, West Penn mailed out an average of 33,000 bills daily. West
Penn bills the majority of its Customers monthly. Accounts with potential
billing errors are held by the computer system for review. This review
examines accounts that have abnormally high or low bills, potential
meter-reading errors, safety problems as identified by the meter-reading staff
and possible meter malfunctions. Subject to statutory and legal requirements,
West Penn may change its billing policies and procedures from time to time. It
is expected that any such changes would be designed to enhance West Penn's
ability to make timely recovery of amounts billed to Customers.
Limited Information on Customers' Creditworthiness
Under the Servicing Agreement, any changes instituted by West Penn will
apply to the servicing of Intangible Transition Property so long as West Penn
is the Servicer.
Under Pennsylvania law, West Penn is obligated to provide service to new
Customers in the Residential Customer Category. West Penn initiated a Customer
Verification Process in May 1999. The primary purpose of this process is to
verify the social security number of new Customers. If the Customer is
unwilling to provide, or if West Penn is unable to verify, the provided social
security number, the Customer will be required to complete a notarized service
application to obtain electric service. West Penn is currently reviewing
options that can be taken at the earliest stages to reduce the costs
associated with delinquent accounts. West Penn relies on the information
provided by the Customer and its Customer information system audits to
indicate whether the Customer has been previously served by West Penn.
As part of its obligation to provide universal service, West Penn will
continue the reduced payment program (the Low Income Payment and Usage
Reduction Program (LIPURP)) provided to certain low income Customers who are
currently served under or otherwise qualify for Rate Schedule 10. Customers
must be referred to this program or request admittance and must demonstrate
annual household gross income below 150% of the federal poverty guidelines.
Customers in LIPURP will be placed on a payment plan based on a percentage of
income or annualized average payment. An additional $5.00 per month payment
will be required
63
<PAGE>
toward the pre-program arrearages. A LIPURP debt reduction incentive will be
awarded to those customers that reach yearly recertification and have less
than three late payments during their program year. If the Customer meets
these criteria, 20% of their accounts receivable balance will be applied to
any existing pre- program arrearage. West Penn has established the following
funding levels through the year 2002: $1,750,000 for 1999; $3,130,000 for
2000; $4,510,000 for 2001; and $5,880,000 for 2002. After 2002, West Penn
expects the annual costs of LIPURP to be $5.88 million. Pursuant to the
Restructuring Plan, West Penn estimates 18,000 Customers will participate in
LIPURP annually. This ensures all eligible Customers are able to participate
yet not exceed the total annual LIPURP costs of $5.88 million. As of March 30,
1999, there were approximately 300 Customers enrolled in the LIPURP. Pursuant
to the provisions of the Competition Act, the PUC has adopted regulations
which establish reporting requirements for universal service programs, such as
LIPURP, that are applicable to all electric distribution companies, including
West Penn.
In 1998, approximately 78% of total bill payments were received by West
Penn via the U.S. Mail. During the same period, approximately 14% of total
payments were paid in person at approximately 200 payment agencies (which are
located in unaffiliated businesses or organizations, such as supermarkets and
convenience stores) throughout the retail electric service territory. Other
payment methods include credit card payments and direct debits of Customer
accounts through local banks, which accounted for approximately 8% of bill
payments collected in 1998.
Collection Process for the Residential Customer Category
Customer bills are due approximately 20 days after mailing. If the
Customer does not pay the bill by the due date, the Customer will not be
considered for termination until the next bill is rendered, which is
approximately 30 days from the last mailing date. West Penn's collection
process is based on delinquent balance and an internal credit score, which is
derived from the Customer's credit history with West Penn. Each delinquent
Customer is scored for approximate risk based on outstanding balance, payment
habits, and previous termination history. The score has been used since late
1996 to segment Customers into three specific collection strategies. The
lowest risk Customers are sent a friendly reminder letter with no collection
activity, since most Customers in this category usually pay late and pay the
associated finance charges. The next segment of Customers are moved into a
proactive collection program which is a reminder letter and a collection call
strategy designed to remind the Customer of the delinquency. Customers in the
third segment are moved into an aggressive service termination process that is
initiated by mailing a ten-day termination notice. If no payment is made
within four business days of the termination date, a 72-hour personal contact
is attempted by telephone. If the initial phone attempt is unsuccessful, a
second attempt is made on the next business day after 6 p.m. If two telephone
attempts are not completed, a 72-hour notice will be given at the property. If
sufficient payment has not been received by the termination date, the account
is sent for service termination by a designated West Penn employee. If the
designated employee makes contact with a responsible adult, the service is
terminated. If the designated employee does not make contact, a 48-hour
deferred notice is left. Two days later, the service is terminated with or
without contact if sufficient payment has not been made.
Power is not customarily disconnected if the delinquent Customer is
subject to a PUC mandated winter moratorium (the "Winter Moratorium"), which
requires special approval from the PUC prior to the disconnection of
electricity of certain Customers in the Residential Customer Category from
December 1 through March 31 of each year. Currently, these accounts are
managed during the Winter Moratorium through a combination of letters,
proactive phone contacts and negotiated payment plans. Delinquencies which
accumulate during the Winter Moratorium continue to contribute to the credit
scoring, which can lead to termination after the Winter Moratorium.
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If a Customer's account is finaled, either because the Customer has moved
or the Customer has failed to remedy a delinquent account, the account is
acted upon with a series of letters and phone contact. When collection efforts
prove unsuccessful, the account is placed with an outside agency at
approximately 120 days from the date the final bill was issued. Once written
off, the uncollected account is monitored for four years and may be collected
at any point during that time.
If a Customer declares bankruptcy, a review is conducted to assess
whether the account is current. The accounts of bankrupt Customers having
delinquencies are finaled, and efforts are initiated to submit claims in the
bankruptcy of these Customers. Deposits are required for delinquent bankrupt
Customers for which West Penn is required to continue services. These deposits
are maintained until the bankruptcy claimed is finaled and payment history is
deemed satisfactory.
Collection Process for the Commercial and Industrial Customer Category
Customer bills are due approximately 15 days after mailing. If the
Customer does not pay the bill by the due date, the Customer will not be
considered for termination until the next bill is rendered, which is
approximately 30 days from the last mailing date. West Penn's collection
process is based on delinquent balance and an internal credit score, which is
derived from the Customer's credit history with West Penn. In addition, the
collection process of selective large Commercial and Industrial Customers is
based on providing special handling of accounts and attention to detail
because of the importance of each Customer as a source of revenue. The
delinquency of individual Customers may result from differing circumstances,
and it is the operational policy of West Penn in serving these accounts to
have a firm understanding of individual Customers so that the collection
strategy can be matched to the particular account, while ensuring that
regulations are followed and collection actions are performed legally. Each
delinquent Customer is scored for approximate risk based on outstanding
balance, payment habits, and previous termination history. The score has been
used since late 1996 to segment Customers into three specific collection
strategies. The lowest risk Customers are sent a friendly reminder letter with
no collection activity, since most Customers in this category usually pay late
and pay the associated finance charges. The next segment of Customers are
moved into a proactive collection program which is a reminder letter and a
collection call strategy designed to remind the Customer of the delinquency.
Customers in the third segment are moved into an aggressive service
termination process that is initiated by mailing a ten-day termination notice.
If no payment is made within four business days of the termination date, a
72-hour personal contact is attempted by telephone. If the initial phone
attempt is unsuccessful, a second attempt is made on the next business day
after 6 p.m. If two telephone attempts are completed, a 72-hour notice will be
given at the property. If sufficient payment has not been received by the
termination date, the account is sent for service termination by a designated
West Penn employee. Service is terminated with or without field contact if
sufficient payment has not been made.
If a Customer's account is finaled, either because the Customer has moved
or the Customer has failed to remedy a delinquent account, the account is
acted upon with a series of letters and phone contract. When collection
efforts prove unsuccessful, the account is placed with an outside agency at
approximately 120 days from the date the final bill was issued. Once written
off, the uncollected account is monitored for four years and may be collected
at any point during that time.
If a Customer declares bankruptcy, a review is conducted to assess
whether the account is current. The accounts of bankrupt Customers having
delinquencies are finaled, and efforts are initiated to submit claims in the
bankruptcy of these Customers. Deposits are required for delinquent bankrupt
Customers for which West Penn is required to continue services. These deposits
are maintained until the bankruptcy claimed is finaled and payment history is
deemed satisfactory.
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Application of Customer Payments
The Competition Act provides that the PUC require the unbundling of
electric utility services, tariffs and customer bills to separate the charges
for generation, transmission and distribution for billing cycles beginning in
January, 1999. In the event that a Customer makes a partial payment toward an
outstanding balance, the payment will be applied first to Intangible
Transition Charges, when implemented, then to the Competitive Transition
Charges, then to transmission and distribution charges and finally to electric
generation charges.
West Penn offers two billing options to choice Customers. A Customer may
elect to receive a single bill from West Penn which would include charges
incurred from the electric supplier and West Penn or the Customer may elect
dual billing. With dual billing, the Customer will receive one bill from the
electric generation supplier for electric generation and one bill from West
Penn for Intangible Transition Charges, Competitive Transition Charges and
transmission and distribution charges. Pursuant to the Settlement, a third
option, a single bill from the electric generation supplier containing West
Penn's charges will be implemented on or after September 1, 1999.
West Penn's electric tariff approved by the PUC in the Restructuring Plan
provides that when West Penn is providing dual billing and a Customer remits a
partial payment to West Penn, the payment will be applied as follows:
(1) To the outstanding balance before direct access to electric
generation from electric generation suppliers or the installment
amount for a payment agreement on this balance;
(2) To the balance due for state tax charges;
(3) To the balance due or the installment amount for a payment agreement
for Intangible Transition Charges, when implemented;
(4) To the balance due or the installment amount for a payment agreement
for Competitive Transition Charges;
(5) To the balance due or the installment amount for a payment agreement
for fixed and variable utility distribution service charges;
(6) To the current state tax charges;
(7) To the current Intangible Transition Charges, when implemented;
(8) To the current Competitive Transition Charges;
(9) To the current fixed and variable utility distribution service
charges;
(10) To the balance due for prior charges for energy and capacity (if
West Penn is the provider of last resort);
(11) To the current charges for energy and capacity charges (if West Penn
is the provider of last resort); and
(12) To the non-basic service charges.
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If the Customer elects the single bill option and remits a partial
payment, the payment is applied as follows using the allocation among the
charges as detailed under the dual bill option:
(1) West Penn's past due bills for basic service charges;
(2) West Penn's current bills for basic service charges;
(3) Suppliers' past due bills for basic service charges;
(4) Suppliers' current bills for basic service charges;
(5) West Penn's past due bills for non-basic service charges;
(6) West Penn's current bills for non-basic service charges;
(7) Suppliers' past due bills for non-basic service charges; and
(8) Suppliers' current bills for non-basic service charges.
[Electric Generation Suppliers and Other Third-Party Billers] [To be revised]
The Servicer, on behalf of the Issuer, will pursue any electric
generation supplier or other third party that fails to remit the applicable
Intangible Transition Charges in a manner similar to that by which the
Servicer will pursue any failure by a Customer to remit Intangible Transition
Charges. The Servicer will have the right to bill and collect Intangible
Transition Charges and other amounts payable to the Issuer or the Servicer
directly from all Customers electing consolidated billing from an electric
generation supplier or other third party as follows: if the Servicer does not
receive payment for undisputed charges within 25 calendar days for Customers
in the Residential Customer Category or 20 calendar days for Customers in the
Small Commercial and Industrial and Large Commercial and Industrial Customer
Categories after the charges are communicated to the electric generation
supplier or other third party, then the Servicer may provide notice of breach
to the electric generation supplier or other third party at any time
thereafter, at the Servicer's discretion. Upon notice of a breach, the
electric generation supplier or other third party will have 20 calendar days
to cure such breach. If the electric generation supplier or other third party
has not cured such breach within 20 calendar days, the Servicer may terminate
consolidated billing by the electric generation supplier or other third party
and take over billing functions for the Customer. In no event will these
procedures result in a Customer being sent two bills covering the same
service. Neither the Seller nor the Servicer will pay any shortfalls resulting
from the failure of any electric generation suppliers or other third parties
to forward ITC Collections to the Servicer. See "Risk Factors--Servicing--It
May Be More Difficult to Collect Intangible Transition Charges Due to Billing
By Third Parties" in this Prospectus.
Year 2000 Compliance
West Penn is faced with the task of addressing the Year 2000 issue. The
Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year and other programming
techniques which constrain date calculations or assign special meanings to
certain dates. Any of West Penn's computer systems that have date-sensitive
software or microprocessors may recognize a date using "00" as the year 1900
rather than the year 2000. This could result in a system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to deliver electricity, measure usage, read
meters, process transactions, send bills or operate electric generation
stations. In addition, the Year 2000 issue could affect the ability of
Customers to receive bills sent by West Penn or make payments
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on such bills. West Penn has not investigated and has no intention of
investigating the Year 2000 issue as it relates to any Customer's ability to
receive bills sent by West Penn or make payments on bills. See "Risk
Factors--Servicing--Potential Computer Program Problems Beginning In The Year
2000 May Result in Payment Delays on Transition Bonds" in this Prospectus.
To minimize problems related to the Year 2000 issue, West Penn is
proceeding with a comprehensive effort to continue operations without
significant problems in 2000 and beyond. An Executive Task Force is
coordinating the efforts of 24 separate Year 2000 teams, representing all
business and support units in West Penn.
In May 1998, the North American Electric Reliability Council (NERC), of
which West Penn is a member, accepted a request from the United States
Department of Energy to coordinate the industry's Year 2000 efforts. The
electric utility industry and West Penn have segmented the Year 2000 problem
into the following components:
o Computer hardware and software;
o Embedded chips in various equipment; and
o Vendors and other organizations on which West Penn relies
for critical materials and services.
The industry's and West Penn's efforts for each of these three components
include assessment of the problem areas and remediation, testing and
contingency plans for critical functions for which remediation and testing are
not possible or which do not provide reasonable assurance.
The NERC has established a goal of having the industry achieve a state of
Year 2000 readiness for critical systems by June 30, 1999, and, to monitor
progress, requires each utility to prepare and submit a monthly report showing
progress and dated plans. By order dated July 9, 1998, the PUC initiated a
proceeding requiring each utility that cannot meet a Year 2000 readiness date
of March 31, 1999, for mission critical systems to file contingency plans by
that date. On March 30, 1999, the Company reported to the PUC that, except for
a few items, its critical electricity production and delivery systems were
Year 2000 ready pending final confirmation system testing of its power
stations in April and May. West Penn anticipates that all of its critical
systems, including its business applications systems as well as the
electricity production and delivery systems, will be Year 2000 ready by June
30, 1999. [Update]
Integrated electric utilities are uniquely reliant on each other to
avoid, in a worst case situation, cascading failure of the entire electrical
system. West Penn is working with the Edison Electric Institute, the Electric
Power Research Institute, the NERC and the East Central Area Reliability
Agreement Group to capitalize on industry-wide experiences and to participate
in industry-wide testing and contingency planning. The NERC, on January 11,
1999, issued a press release stating, based on the individual NERC reports it
had received from 98% of the electrical industry, that "although there is
clearly much more work to be done, we have found that North America's electric
power supply and delivery systems are well on their way to being Y2K ready. "
As part of the ongoing NERC program, West Penn participated in an
industry-wide Year 2000 drill on April 9, 1999, and will participate in more
extensive industry-wide drill planned for September 9, 1999. During the April
test, West Penn was able to maintain adequate communications under a simulated
failure of selected systems, and obtained valuable information for improvement
of its plans. NERC has reported that the industry-wide tests produced similar
results. On December 31, 1999, West Penn will have extra staff in critical
areas of the system to implement these and other contingency plans if they are
required.
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It is West Penn's opinion that the "most reasonably likely worst case
scenario" is that there could be isolated problems at various West Penn
facilities or at the facilities of neighboring utilities that may have somehow
escaped discovery in the identification, remediation and testing process, and
that these problems may cause isolated disruptions of service. All utilities,
including West Penn, have experience in the implementation of existing
emergency plans and are currently expanding their emergency plans to include
contingency plans to respond quickly to any such events.
West Penn is aware of the importance of electricity to its customers and
is using its best efforts to avoid any serious Year 2000 problems. Despite the
Company's best efforts, including working with internal resources, external
vendors and industry associations, West Penn cannot guarantee that it will be
able to conduct all of its operations without Year 2000 interruptions. Any
Year 2000 problems could have a material adverse impact on the operations and
financial condition of West Penn and on the collection of Intangible
Transition Charges. The costs associated with the potential impact are
speculative and not presently quantifiable.
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THE SELLER
West Penn Funding Corporation, a special purpose corporation organized
under the laws of the State of Delaware, was formed on [ ], 1999.
Pursuant to the Transfer Agreement, West Penn will contribute the Transferred
Intangible Transition Property to the Seller in exchange for [ ] shares of the
outstanding capital stock of the Seller, representing 100% of the outstanding
capital stock of the Seller. Accordingly, the Seller will be a wholly owned
subsidiary of West Penn. The Seller is a recently formed special purpose
corporation and, as of the date of this Prospectus, has not carried on any
business activities and has no operating history.
The Seller has been created for the purpose of owning the Issuer,
entering into the LLC Agreement and the Transfer Agreement, selling the
Transferred Intangible Transition Property to the Issuer pursuant to the Sale
Agreement, receiving funds from the Issuer from the sale of the Transferred
Intangible Transition Property pursuant to the Sale Agreement, making loans to
affiliates (including making loans, on an arms- length basis, of the net
proceeds from the Transition Bonds to West Penn or its affiliates in exchange
for interest-bearing notes), engaging in investing activities and performing
activities that are necessary, suitable or convenient to accomplish these
purposes. Following the sale of the Transferred Intangible Transition Property
to the Issuer, the Seller will have no ownership or other interest in the
Transferred Intangible Transition Property and will have no right to collect
any Intangible Transition Charges.
The Administrative Agent, an affiliate of West Penn, will provide
corporate administrative services, such as providing notices and preparing
financial reports, for the Seller pursuant to an administrative agreement
between the Seller and the Administrative Agent (the "Seller Administration
Agreement"). The Seller will reimburse the Administrative Agent for the cost
of services provided computed in accordance with the applicable provisions of
the Public Utility Holding Company Act of 1935.
The following is a list of the principal officers and directors of the
Seller. All such officers have served in the capacities set forth below since
[ ], 1999, unless otherwise indicated, and all directors have served in
such capacity since [ ], 1999. The officers and directors will devote
such time as is necessary to the affairs of the Seller. The Seller will have
sufficient officers, directors and employees to carry on its business.
Name Age Title
---- --- -----
[ ] [ ] [ ]
[ ] [ ] [ ]
[ ] [ ] [ ]
[Brief bio]
[Brief bio]
[Brief bio]
No compensation has been paid by the Seller to any officer or director of
the Seller since the Seller was formed. The officers and directors of the
Seller will not be compensated by the Seller for their services on behalf of
the Seller. Each officer serves in such capacity at the discretion of the
Seller's Board of Directors. The Seller's organizational documents limit, to
the extent permitted by Delaware law, the personal liability of each officer
and director of the Seller to the Seller for monetary damages resulting from
breaches of such officer's or director's duty of care. The Seller's
organizational documents provide that officers and directors
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of the Seller shall be indemnified against liabilities incurred in connection
with their services on behalf of the Seller, including liabilities under
applicable securities laws.
The Seller has no intent to file, and West Penn has advised the Seller
that it has no intent to cause the filing of, a voluntary petition for relief
under the Bankruptcy Code with respect to the Seller so long as the Seller is
solvent and does not reasonably foresee becoming insolvent.
The Sale Agreement requires the Seller to take all reasonable steps to
continue its identity as a separate legal entity and to make it apparent to
third persons that it is an entity with assets and liabilities distinct from
those of West Penn, other affiliates or any other person, and that, except for
financial reporting purposes (to the extent required by generally accepted
accounting principles) and for state and federal income and franchise tax
purposes, it is not a division of West Penn or any of its affiliated entities
or any other person.
The principal place of business of the Seller is c/o [ ], [ ] and its
telephone number is [ ].
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THE ISSUER
West Penn Funding LLC, a special purpose, single member limited liability
company organized under the laws of the State of Delaware, was formed on
[ ], 1999 pursuant to a limited liability company agreement (as
amended and restated, the "LLC Agreement"). As of the issuance date of the
Transition Bonds, West Penn Funding Corporation is the sole member of the
Issuer. The assets of the Issuer will consist of the Transferred Intangible
Transition Property, the other Collateral and any money distributed to the
Issuer from the Collection Account in accordance with the Indenture. The
Issuer is a recently formed special purpose limited liability company and, as
of the date of this Prospectus, has not carried on any business activities and
has no operating history. Audited financial statements of the Issuer are
included as an exhibit to this Prospectus.
The Issuer has been created for the purpose of purchasing and owning the
Transferred Intangible Transition Property, issuing Transition Bonds from time
to time, pledging its interest in the Transferred Intangible Transition
Property and other Collateral to the Bond Trustee under the Indenture in order
to secure the Transition Bonds and performing activities that are necessary,
suitable or convenient to accomplish these purposes, including but not limited
to activities relating to any necessary hedge or swap transaction or credit
enhancement.
The Issuer will enter into the Servicing Agreement with West Penn under
which West Penn, as agent for the Issuer, will manage, service and administer,
and make collections in respect of, the Transferred Intangible Transition
Property. See "The Servicing Agreement" in this Prospectus. In addition,
Allegheny Power Service Corporation, an affiliate of West Penn, will provide
corporate administrative services, such as providing notices and preparing
financial reports, for the Issuer pursuant to an administration agreement
between the Issuer and the Administrative Agent (the "Issuer Administration
Agreement", and together with the Seller Administration Agreement, the
"Administration Agreements"). The Issuer will reimburse the Administrative
Agent for the cost of services provided computed in accordance with the
applicable provisions of the Public Utility Holding Company Act of 1935.
The following is a list of the principal officers and directors of the
Issuer. All such officers have served in the capacities set forth below since
[ ], 1999, unless otherwise indicated, and all directors have served in such
capacity since [ ], 1999. The officers and directors will devote such time as
is necessary to the affairs of the Issuer. The Issuer will have sufficient
officers, directors and employees to carry on its business.
Name Age Title
---- --- -----
[ ] [ ] [ ]
[ ] [ ] [ ]
[ ] [ ] [ ]
[Brief bio]
[Brief bio]
[Brief bio]
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No compensation has been paid by the Issuer to any officer or director of
the Issuer since the Issuer was formed. The officers and directors of the
Issuer, other than the Independent Director[s], will not be compensated by the
Issuer for their services on behalf of the Issuer. The initial compensation
for the Independent Director[s] will be $[5,000] per year. Each officer serves
in such capacity at the discretion of the Issuer's Board of Directors. West
Penn is an affiliate of the Issuer. The Issuer's organizational documents
limit, to the extent permitted by Delaware law, the personal liability of each
officer and director of the Issuer to the Issuer for monetary damages
resulting from breaches of such officer's or director's duty of care. The
Issuer's organizational documents provide that officers and directors of the
Issuer shall be indemnified against liabilities incurred in connection with
their services on behalf of the Issuer, including liabilities under applicable
securities laws.
The LLC Agreement provides that the Issuer shall dissolve and, after
satisfaction of the creditors of the Issuer as required by applicable law,
property held by the Issuer will be distributed to West Penn Funding
Corporation, or in the event of a transfer to any other owner, such other
owner, thirty years from the date of its formation or sooner, at the option
and expense, and upon written instruction, of West Penn Funding Corporation,
but in no event before payment in full of all Series of Transition Bonds.
The Issuer has no intent to file, and West Penn Funding Corporation has
advised the Issuer that it has no intent to cause the filing of, a voluntary
petition for relief under the Bankruptcy Code with respect to the Issuer so
long as the Issuer is solvent and does not reasonably foresee becoming
insolvent.
The LLC Agreement requires the Issuer to take all reasonable steps to
continue its identity as a separate legal entity and to make it apparent to
third persons that it is an entity with assets and liabilities distinct from
those of West Penn, West Penn Funding Corporation, other affiliates of West
Penn or any other person, and that, except for financial reporting purposes
(to the extent required by generally accepted accounting principles) and for
state and federal income and franchise tax purposes, it is not a division of
West Penn Funding Corporation or any of its affiliated entities or any other
person.
The principal place of business of the Issuer is c/o
[............................] and its telephone number is [...............].
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USE OF PROCEEDS
The Issuer will use the proceeds of the issuance of the Transition Bonds
to pay certain expenses of issuance and to purchase the Transferred Intangible
Transition Property from West Penn Funding Corporation. West Penn Funding
Corporation proposes using the proceeds it receives from the sale of the
Transferred Intangible Transition Property for general corporate purposes and
may from time to time loan, in an arms- length transaction, such net proceeds
to West Penn or its affiliates in exchange for interest-bearing notes. West
Penn or any such affiliate would use the proceeds of any such loans
principally to reduce Stranded Costs and related capitalization and to reduce
some of its existing indebtedness.
THE TRANSITION BONDS
The Transition Bonds will be issued under and secured by a base indenture
between the Issuer and the Bond Trustee substantially in the form filed as an
exhibit to the Registration Statement of which this Prospectus forms a part.
The terms of each Series of Transition Bonds will be provided in a separate
supplement to the base indenture (each such supplement, a "Supplemental
Indenture" and together with the base Indenture, the "Indenture"). The
following summary describes certain general terms and provisions of the
Transition Bonds. The particular terms of the Transition Bonds of any Series
offered by any Prospectus Supplement will be described in such Prospectus
Supplement. This summary does not purport to be complete and is subject to,
and is qualified by reference to, the terms and provisions of the Transition
Bonds and the Indenture.
General
The Transition Bonds may be issued in one or more series (each, a
"Series"), each comprised of one or more classes (each, a "Class"). The terms
of all Transition Bonds of the same Series will be identical in all respects,
unless such Series is comprised of more than one Class, in which case the
terms of all Transition Bonds of the same Class will be identical in all
respects.
The Supplemental Indenture will specify the following terms of the
related Series of Transition Bonds and, if applicable, the Classes thereof:
(1) the designation of the Series and, if applicable, the Classes
thereof;
(2) the aggregate principal amount of the Transition Bonds of the Series
and, if applicable, each Class thereof;
(3) the Bond Rate of the Series and, if applicable, each Class thereof
or the formula, if any, used to calculate the applicable Bond Rate
or Bond Rates;
(4) the Payment Dates for the Series;
(5) the Expected Final Payment Date of the Series and, if applicable,
each Class thereof;
(6) the Series Termination Date for the Series and, if applicable, the
Class Termination Dates for each Class thereof;
(7) the issuance date for the Series (the "Series Issuance Date");
(8) the place or places for payments with respect to the Series;
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(9) the authorized initial denominations for the Series;
(10) the provisions, if any, for redemption of the Series by the Issuer;
(11) the Expected Amortization Schedule for the Series;
(12) the overcollateralization amount (the "Overcollateralization
Amount") with respect to the Series and the amount anticipated to be
on deposit in the Overcollateralization Subaccount for all Series of
Transition Bonds as of each Payment Date (the "Calculated
Overcollateralization Level") for each Payment Date;
(13) the amount of capital required to be deposited by the Issuer (the
"Required Capital Amount") into the Capital Subaccount upon the
issuance of each Series of Transition Bonds, which represents a
capital contribution from the Seller;
(14) the Calculation Dates and Adjustment Dates for the Series;
(15) the terms of any credit enhancement applicable to the Series or
Class;
(16) the terms of any hedge or swap transaction applicable to the Series
or Class; and
(17) any other terms of the Series or Class that are not inconsistent
with the provisions of the Indenture.
The applicable Prospectus Supplement will set forth the procedure for the
manner of the issuance of the Transition Bonds of each Series. Generally, each
Series of Transition Bonds will initially be represented by one or more
Transition Bonds registered in the name of Cede, as the nominee of DTC. The
Transition Bonds will be available for purchase in initial denominations
specified in the applicable Prospectus Supplement (which denominations will be
not less than $1,000). Unless and until definitive Transition Bonds are issued
under the limited circumstances described in this Prospectus, no Transition
Bondholder will be entitled to receive a physical bond representing a
Transition Bond. All references in this Prospectus to actions by Transition
Bondholders will refer to actions taken by DTC upon instructions from the
Participants and all references in this Prospectus to payments, notices,
reports and statements to Transition Bondholders will refer to payments,
notices, reports and statements to DTC or Cede, as the registered holder of
each Series of Transition Bonds, for distribution to Transition Bondholders in
accordance with DTC's procedures with respect thereto. See "--Book-Entry
Registration" and "--Definitive Transition Bonds" below.
Interest and Principal
Interest will accrue on the principal balance of Transition Bonds of a
Series or Class at the Bond Rate specified in or determined in the manner
specified in the applicable Prospectus Supplement and will be payable to the
Transition Bondholders of such Series or Class on each Payment Date,
commencing on the Payment Date specified in the related Prospectus Supplement.
On any Payment Date with respect to any Series, the Issuer will make
principal payments on such Series only until the outstanding principal balance
thereof has been reduced to the principal balance specified for such Payment
Date in the Expected Amortization Schedule for such Series on such Payment
Date and only to the extent funds are available therefor as described in this
Prospectus. Accordingly, principal of such Series or Class of Transition Bonds
may be paid later than reflected in the Expected Amortization Schedule
therefor. See "Risk Factors--Nature of Intangible Transition Property," "--The
Transition Bonds--Uncertain Weighted Average Life" and "Certain Weighted
Average Life and Yield Considerations" in this Prospectus.
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The failure to make a scheduled payment of principal on the Transition
Bonds, other than upon redemption or on the Series Termination Date or, if
applicable, Class Termination Date, does not constitute an Event of Default
under the Indenture. The entire unpaid principal amount of the Transition
Bonds will be due and payable if an Event of Default under the Indenture
occurs and is continuing and the Bond Trustee or the holders of a majority in
principal amount of the Transition Bonds of all Series then outstanding have
declared the Transition Bonds to be immediately due and payable. See "The
Indenture--Events of Default; Rights Upon Event of Default" and "Certain
Weighted Average Life and Yield Considerations" in this Prospectus.
Floating Rate Transition Bonds
In connection with the issuance of a Class or Classes of floating rate
Transition Bonds, the Issuer may arrange for one or more hedge or swap
transactions. If the Issuer enters into or arranges for any hedge or swap
transaction, the applicable Prospectus Supplement will include a description
of:
(1) the material terms of such transaction;
(2) the identity of the counterparty or counterparties;
(3) any payments under such hedge or swap transaction to be made by or
to the Issuer or the Bond Trustee, as assignee of the Issuer;
(4) deposits in and withdrawals from any subaccount of the Collection
Account with respect to such Class or Classes of floating rate
Transition Bonds and such transaction;
(5) the formula for calculating the floating rate of interest of such
Class or Classes prior to termination of such transaction; and
(6) the rights of Transition Bondholders with respect to the termination
of or certain other events related to such transaction.
Redemption
Redemption provisions, if any, for any Series will be specified in the
related Prospectus Supplement, including the premiums, if any, payable upon
redemption (the redemption price in any event will not be less than the
principal balance thereof, plus interest at the applicable Bond Rate accrued
to the redemption date). Unless the context requires otherwise, all references
in this Prospectus to principal of the Transition Bonds of a Series being
redeemed includes any resulting premium that might be payable thereon, as
described in the applicable Prospectus Supplement.
Notice of redemption of any Series of Transition Bonds will be given by
the Bond Trustee to each registered holder of a Transition Bond to be redeemed
by first-class mail, postage prepaid, mailed not less than five days nor more
than 45 days prior to the date of redemption or in such other manner or at
such other time as may be specified in the related Prospectus Supplement.
Notice of optional redemption may be conditioned upon the deposit of moneys
with the Bond Trustee before the redemption date and such notice shall be of
no effect unless such moneys are so deposited.
All Transition Bonds called for redemption will cease to bear interest on
the specified redemption date, provided funds for their redemption are on
deposit with the Bond Trustee at that time, and shall no longer be considered
"outstanding" under the Indenture. The Transition Bondholders of such
Transition Bonds will
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have no further rights with respect thereto, except to receive payment of the
redemption price thereof and unpaid interest accrued to the date fixed for
redemption, from the Bond Trustee.
Credit Enhancement
Credit enhancement with respect to the Transition Bonds of all Series
will be provided by adjustments to the Intangible Transition Charges and
amounts on deposit in the Reserve Subaccount, the Overcollateralization
Subaccount and the Capital Subaccount. In addition, for any Series of
Transition Bonds or one or more Classes thereof, additional credit enhancement
may be provided with respect thereto. The amounts and types of credit
enhancement, and the provider of credit enhancement, if any, with respect to
each Series of Transition Bonds or one or more Classes thereof will be
described in the applicable Prospectus Supplement. Credit enhancement may be
in the form of an additional reserve account, additional
overcollateralization, a financial guaranty insurance policy, letter of
credit, credit or liquidity facility, maturity guaranty, repurchase
obligation, third-party payment or other support, cash deposit or other credit
enhancement, or any combination of the foregoing, as may be set forth in the
applicable Prospectus Supplement. If specified in the applicable Prospectus
Supplement, credit enhancement for a Series of Transition Bonds may cover one
or more other Series of Transition Bonds.
If any such additional credit enhancement is provided with respect to a
Series offered hereby, the applicable Prospectus Supplement will include a
description of:
(1) the amount payable under such credit enhancement;
(2) any conditions to payment thereunder not otherwise described in this
Prospectus;
(3) the conditions (if any) under which the amount payable under such
credit enhancement may be reduced and under which such credit
enhancement may be terminated or replaced; and
(4) any material provisions of any applicable agreement relating to such
credit enhancement.
Additionally, in certain cases, the applicable Prospectus Supplement may
describe certain information with respect to the provider of any third-party
credit enhancement, including:
(1) a brief description of its principal business activities;
(2) its principal place of business, place of incorporation and the
jurisdiction under which it is chartered or licensed to do business;
(3) if applicable, the identity of regulatory agencies which exercise
primary jurisdiction over the conduct of its business; and
(4) its total assets and stockholders' equity or policyholders' surplus,
if applicable, as of a date specified in the applicable Prospectus
Supplement.
Book-Entry Registration
All Classes of Transition Bonds will be book-entry Transition Bonds,
which are initially represented by one or more bonds registered in the name of
Cede & Co. ("Cede"), as nominee of The Depository Trust Company ("DTC"), or
another securities depository and are available only in the form of
book-entries ("Book- Entry Transition Bonds"); provided, however, the
applicable Prospectus Supplement relating to a Series of Transition Bonds may
provide that the Transition Bonds of such Series or a Class thereof will be
issued as
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definitive Transition Bonds. Transition Bondholders may also hold Transition
Bonds of a Class through Cedel Bank, societe anonyme ("CEDEL") or the Euroclear
System ("Euroclear") (in Europe), if they are participants in such systems or
indirectly through organizations that are participants in such systems
("Participants").
Cede, as nominee for DTC, will hold the global bond or bonds representing
the Transition Bonds. CEDEL and Euroclear will hold omnibus positions on
behalf of their participants through customers' securities accounts in CEDEL's
and Euroclear's names on the books of their respective depositaries which in
turn will hold such positions in customers' securities accounts in the
depositaries' names on the books of DTC. Citibank, N.A. will act as depositary
for CEDEL and Morgan Guaranty Trust Company of New York will act as depositary
for Euroclear (in such capacities, the "Depositaries").
DTC is a limited purpose trust company organized under the laws of the
State of New York, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the New York Uniform Commercial Code and a
"clearing agency" registered pursuant to Section 17A of the Exchange Act. DTC
was created to hold securities for its Participants and to facilitate the
clearance and settlement of securities transactions between Participants
through electronic book-entries, thereby eliminating the need for physical
movement of bonds. Participants include securities brokers and dealers, banks,
trust companies and clearing corporations, and may include certain other
organizations (including the Underwriters). Indirect access to the DTC system
also is available to others such as banks, brokers, dealers and trust
companies that clear through or maintain a custodial relationship with a
Participant, either directly or indirectly.
Transfers between Participants will occur in accordance with DTC rules.
Transfers between CEDEL Participants and Euroclear Participants will occur in
accordance with their respective rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through CEDEL or
Euroclear Participants, on the other, will be effected in DTC in accordance
with DTC rules on behalf of the relevant European international clearing
system by its Depositary. Cross-market transactions will require delivery of
instructions to the relevant European international clearing system by the
counterparty in such system in accordance with its rules and procedures and
within its established deadlines (European time). The relevant European
international clearing system will, if the transaction meets its settlement
requirements, deliver instructions to its Depositary to take action to effect
final settlement on its behalf by delivering or receiving Transition Bonds in
DTC, and making or receiving payments in accordance with normal procedures for
same-day funds settlement applicable to DTC. CEDEL Participants and Euroclear
Participants may not deliver instructions directly to the Depositaries.
Because of time-zone differences, credits of securities received in CEDEL
or Euroclear as a result of a transaction with a Participant will be made
during subsequent settlement processing and dated the Business Day following
the DTC settlement date. Such credits or any transactions in such Transition
Bonds settled during such processing will be reported to the relevant
Euroclear or CEDEL Participant on such Business Day. Cash received in CEDEL or
Euroclear as a result of sales of Transition Bonds by or through a CEDEL
Participant or a Euroclear Participant to a DTC Participant will be received
with value on the DTC settlement date but will be available in the relevant
CEDEL or Euroclear cash account only as of the Business Day following
settlement in DTC.
Transition Bondholders that are not direct or indirect Participants but
desire to purchase, sell or otherwise transfer ownership of, or other
interests in, Transition Bonds may do so only through direct or indirect
Participants. In addition, Transition Bondholders will receive all payments of
principal and interest on the Transition Bonds, through the Participants who
in turn will receive them from DTC. Under a book-entry format, Transition
Bondholders will receive payments after the related Payment Date, because,
while payments
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are required to be forwarded to Cede, as nominee for DTC, on each such date,
DTC will forward such payments to its Participants, which thereafter will be
required to forward them to indirect Participants or holders of beneficial
interests in the Transition Bonds. The Issuer and the Bond Trustee, and any
paying agent, transfer agent or registrar may treat the registered holder in
whose name any Transition Bond is registered (expected to be Cede) as the
absolute owner thereof (whether or not such Transition Bond is overdue and
notwithstanding any notice of ownership or writing thereon or any notice to
the contrary) for the purpose of making payments and for all other purposes.
Unless and until definitive Transition Bonds are issued, it is
anticipated that the only "holder" of Transition Bonds of any Series will be
Cede, as nominee of DTC. Transition Bondholders will only be permitted to
exercise their rights as Transition Bondholders indirectly through
Participants and DTC. All references herein to actions by Transition
Bondholders thus refer to actions taken by DTC upon instructions from its
Participants, and all references herein to payments, notices, reports and
statements to Transition Bondholders refer to payments, notices, reports and
statements to Cede, as the registered holder of the Transition Bonds, for
payments to the beneficial owners of the Transition Bonds in accordance with
DTC procedures.
While any Book-Entry Transition Bonds of a Series are outstanding (except
under the circumstances described below), under the rules, regulations and
procedures creating and affecting DTC and its operations (the "Rules"), DTC is
required to make book-entry transfers among Participants on whose behalf it
acts with respect to the Book-Entry Transition Bonds and is required to
receive and transmit payments of principal of, and interest on, the Book-Entry
Transition Bonds. Participants with whom Transition Bondholders have accounts
with respect to Book-Entry Transition Bonds are similarly required to make
book-entry transfers and receive and transmit such payments on behalf of their
respective Transition Bondholders. Accordingly, although Transition
Bondholders will not possess physical bonds, the Rules provide a mechanism by
which Transition Bondholders will receive payments and will be able to
transfer their interests.
Because DTC can only act on behalf of Participants, who in turn act on
behalf of indirect Participants and certain banks, the ability of holders of
beneficial interests in the Transition Bonds to pledge Transition Bonds to
persons or entities that do not participate in the DTC system, or otherwise
take actions in respect of such Transition Bonds, may be limited due to the
lack of definitive Transition Bonds.
DTC has advised the Bond Trustee that it will take any action permitted
to be taken by a Transition Bondholder under the Indenture only at the
direction of one or more Participants to whose account with DTC the Transition
Bonds are credited.
CEDEL is incorporated under the laws of Luxembourg as a professional
depository. CEDEL holds securities for its participating organizations ("CEDEL
Participants") and facilities the clearance and settlement of securities
transactions between CEDEL Participants through electronic book-entry changes
in accounts of CEDEL Participants, thereby eliminating the need for physical
movement of securities. Transactions may be settled in CEDEL in any of 28
currencies, including United States dollars. CEDEL provides to CEDEL
Participants, among other things, services for safekeeping, administration,
clearance and settlement of internationally traded securities and securities
lending and borrowing. CEDEL interfaces with domestic markets in several
countries. As a professional depository, CEDEL is subject to regulation by the
Luxembourg Monetary Institute. CEDEL Participants are recognized financial
institutions around the world including underwriters, securities brokers and
dealers, banks, trust companies, clearing corporations and certain other
organizations and may include any Underwriters, agents or dealers with respect
to a Series of Transition Bonds offered hereby. Indirect access to CEDEL is
also available to others, such as banks, brokers, dealers and trust companies
that clear through or maintain a custodial relationship with a CEDEL
Participant, either directly or indirectly.
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Euroclear was created in 1968 to hold securities for participants of the
Euroclear System ("Euroclear Participants") and to clear and settle
transactions between Euroclear Participants through simultaneous electronic
book-entry delivery against payment, thereby eliminating the need for physical
movement of securities and any risk from lack of simultaneous transfers of
securities and cash. Transactions may now be settled in any of 29 currencies,
including United States dollars. The Euroclear System includes various other
services, including securities lending and borrowing, and interfaces with
domestic markets in several countries generally similar to the arrangements
for crossmarket transfers with DTC described above. The Euroclear System is
operated by Morgan Guaranty Trust Company of New York, out of its Brussels,
Belgium office (the "Euroclear Operator"), under contract with Euroclear
Clearance System S.C., a Belgian cooperative corporation (the "Cooperative").
All operations are conducted by the Euroclear Operator, and all Euroclear
securities clearance accounts and Euroclear cash accounts are accounts with
the Euroclear Operator, not the Cooperative. The Cooperative establishes
policy for Euroclear on behalf of Euroclear Participants. Euroclear
Participants include banks (including central banks), securities brokers and
dealers and other professional financial intermediaries. Indirect access to
Euroclear is also available to other firms that clear through or maintain a
custodial relationship with a Euroclear Participant, either directly or
indirectly.
The Euroclear Operator is the Belgian branch of a New York banking
corporation that is a member bank of the Federal Reserve System. As such, it
is regulated and examined by the Board of Governors of the Federal Reserve
System and the New York State Banking Department, as well as the Belgian
Banking Commission.
Securities clearance accounts and cash accounts with the Euroclear
Operator are governed by the Terms and Conditions Governing Use of Euroclear
and the related Operating Procedures of Euroclear and applicable Belgian law
(collectively, the "Terms and Conditions"). The Terms and Conditions govern
transfers of securities and cash within Euroclear, withdrawals of securities
and cash from Euroclear and receipts of payments with respect to securities in
Euroclear. All securities in Euroclear are held on a fungible basis without
attribution of specific securities to specific securities clearance accounts.
The Euroclear Operator acts under the Terms and Conditions only on behalf of
Euroclear Participants and has no record of or relationship with persons
holding through Euroclear Participants.
Payments with respect to Transition Bonds held through CEDEL or Euroclear
will be credited to the cash accounts of CEDEL Participants or Euroclear
Participants in accordance with the relevant systems' rules and procedures, to
the extent received by its Depositary. Such payments will be subject to tax
reporting in accordance with relevant United States tax laws and regulations.
See "United States Taxation" in this Prospectus. CEDEL or the Euroclear
Operator, as the case may be, will take any other action permitted to be taken
by a Transition Bondholder under the Indenture on behalf of a CEDEL
Participant or Euroclear Participant only in accordance with its relevant
rules and procedures and subject to its Depositary's ability to effect such
actions on its behalf through DTC.
Although DTC, CEDEL and Euroclear have agreed to the foregoing procedures
in order to facilitate transfers of Transition Bonds among Participants of
DTC, CEDEL and Euroclear, they are under no obligation to perform or continue
to perform such procedures and such procedures may be discontinued at any
time.
Definitive Transition Bonds
Unless otherwise specified in the applicable Prospectus Supplement, each
Series or Class of Transition Bonds will be issued in fully registered,
certificated form to Transition Bondholders or their nominees, rather than to
DTC or its nominee, only if:
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(1) the Issuer advises the Bond Trustee in writing that DTC is no longer
willing or able to discharge properly its responsibilities as
depository with respect to such Series or Class of Transition Bonds
and the Issuer is unable to locate a qualified successor;
(2) the Issuer, at its option, elects to terminate the book-entry system
through DTC; or
(3) after the occurrence of an Event of Default under the Indenture,
Transition Bondholders representing at least a majority of the
outstanding principal amount of the Transition Bonds of all Series
advise the Bond Trustee through DTC in writing that the continuation
of a book-entry system through DTC (or a successor thereto) is no
longer in the Transition Bondholders' best interest.
Upon the occurrence of any event described in the immediately preceding
paragraph, DTC will be required to notify all affected Transition Bondholders
through Participants of the availability of definitive Transition Bonds. Upon
surrender by DTC of the definitive bonds representing the applicable
Transition Bonds and receipt of instructions for re-registration, the Bond
Trustee will authenticate and deliver definitive Transition Bonds, and
thereafter the Bond Trustee will recognize the holders of such definitive
Transition Bonds as Transition Bondholders under the Indenture.
Payments of principal of, and interest on, the applicable Transition
Bonds will thereafter be made by the Bond Trustee, as paying agent, in
accordance with the procedures set forth in the Indenture directly to holders
of definitive Transition Bonds in whose names the definitive Transition Bonds
were registered at the close of business on the related Record Date. Such
payments will be made by check mailed to the address of such holder as it
appears on the register maintained by the Bond Trustee. The final payment on
any Transition Bond, however, will be made only upon presentation and
surrender of such Transition Bond at the office or agency specified in the
notice of final payment to Transition Bondholders.
Definitive Transition Bonds will be transferable and exchangeable at the
offices of the transfer agent and registrar, which will initially be the Bond
Trustee. No service charge will be imposed for any registration of transfer or
exchange, but the transfer agent and registrar may require payment of a sum
sufficient to cover any tax or other governmental charge imposed in connection
therewith.
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CERTAIN WEIGHTED AVERAGE LIFE
AND YIELD CONSIDERATIONS
The rate of principal payments on each Series or Class of Transition
Bonds, the aggregate amount of each interest payment on each Series or Class
of Transition Bonds and the actual final Payment Date of each Series or Class
of Transition Bonds will be dependent on the rate and timing of receipt of ITC
Collections. Accelerated receipts of ITC Collections will not, however, result
in payment of principal on the Transition Bonds earlier than the related
Expected Final Payment Dates since receipts in excess of the amounts necessary
to amortize the Transition Bonds in accordance with the applicable Expected
Amortization Schedule will be deposited in the Overcollateralization
Subaccount or Reserve Subaccount. However, delayed receipts of ITC Collections
may result in principal payments on the Transition Bonds occurring more slowly
than as reflected in the Expected Amortization Schedule or later than the
related Expected Final Payment Dates. Redemption of any Class or Series of
Transition Bonds in accordance with the terms thereof will result in payment
of principal earlier than the related Expected Final Payment Dates.
The actual payments on each Payment Date for each Series or Class of
Transition Bonds and the weighted average life thereof will be affected
primarily by the rate of ITC Collections and the timing of receipt of ITC
Collections, as well as amounts available in the Reserve Subaccount, the
Overcollateralization Subaccount and the Capital Subaccount. Because the
Intangible Transition Charges will be calculated based on estimates of usage
and revenue, the aggregate amount of ITC Collections and the rate of principal
amortization on the Transition Bonds will depend, in part, on actual energy
usage by Customers and the rate of delinquencies and write-offs. Although the
Intangible Transition Charges will be adjusted from time to time based in part
on the actual rate of ITC Collections, no assurances are given that the
Servicer will be able to forecast accurately actual electricity usage
impacting billed revenue from which Intangible Transition Charges are
allocated and the rate of delinquencies and write-offs or implement
adjustments to the Intangible Transition Charges that will cause ITC
Collections to be received at any particular rate. See "Risk Factors- Unusual
Nature of Intangible Transition Property" and "The QRO and the Intangible
Transition Charges-The Intangible Transition Charges-The ITC Adjustment
Process" in this Prospectus.
If ITC Collections are received at a slower rate than expected,
Transition Bonds may be retired later than expected. Because principal will
only be paid at a rate not faster than that contemplated in the Expected
Amortization Schedule for each Series or Class, except in the event of a
redemption or the acceleration of the final payment date of the Transition
Bonds after an Event of Default as specified in the Indenture, the Transition
Bonds are not expected to be paid earlier than scheduled. A payment on a date
that is earlier than forecasted will result in a shorter weighted average
life, and a payment on a date that is later than forecasted will result in a
longer weighted average life. In addition, if a larger portion of the delayed
payments on the Transition Bonds is received in later years, this will result
in a longer weighted average life of the Transition Bonds.
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THE TRANSFER AGREEMENT
The following summary describes all material terms and provisions of the
Transfer Agreement pursuant to which West Penn is contributing to the Seller
Intangible Transition Property. The Transfer Agreement may be amended by the
parties thereto, with the consent of the Bond Trustee, provided that notice of
the substance of such amendment is provided by the Seller to each Rating
Agency. The form of the Transfer Agreement has been filed as an exhibit to the
Registration Statement of which this Prospectus forms a part. This summary
does not purport to be complete and is subject to, and is qualified by
reference to, the provisions of the Transfer Agreement.
Contribution of Intangible Transition Property
On the Series Issuance Date for the first Series of Transition Bonds (the
"Initial Contribution Date"), pursuant to the Transfer Agreement, West Penn
will contribute to the Seller, without recourse, except as provided therein,
Initial Intangible Transition Property representing the irrevocable right to
receive through Intangible Transition Charges amounts sufficient to recover
Qualified Transition Expenses with respect to such Series of Transition Bonds.
In consideration of such initial contribution, the Seller shall issue [ ]
shares of its outstanding capital stock, representing 100% of the Seller's
outstanding capital stock. In addition, West Penn may from time to time offer
to contribute additional Intangible Transition Property to the Seller, subject
to the satisfaction of certain conditions (each, a "Subsequent Contribution").
Each Subsequent Contribution may be made in consideration of the issuance by
the Seller to West Penn of additional shares of the Seller's capital stock. If
any such offer is accepted by the Seller, the Subsequent Contribution will be
effective on a date (a "Subsequent Contribution Date") specified in a written
notice provided by West Penn to the Seller.
In accordance with the Competition Act, upon the execution and delivery
of the Transfer Agreement and the related bill of sale, the contribution of
the Initial Intangible Transition Property will be perfected as against all
third persons, including judicial lien creditors, and upon the execution of a
subsequent bill of sale and an addition notice, a contribution of Subsequent
Intangible Transition Property will also be perfected against all third
persons, including judicial lien creditors.
"Initial Intangible Transition Property" means Intangible Transition
Property, as identified in the related bill of sale, contributed to the Seller
on the Initial Contribution Date pursuant to the Transfer Agreement in
connection with the issuance of the initial Series of Transition Bonds.
"Subsequent Intangible Transition Property" means Intangible Transition
Property, as identified in the related bill of sale, contributed to the Seller
on any Subsequent Contribution Date pursuant to the Transfer Agreement in
connection with the subsequent issuance of a Series of Transition Bonds.
West Penn's accounting records and computer systems will reflect the
contribution and sale of Intangible Transition Property to the Seller.
Each contribution of Intangible Transition Property under the Transfer
Agreement is subject to the satisfaction or waiver of each of the following
conditions:
(1) on or prior to the Initial Contribution Date or Subsequent
Contribution Date, as applicable, West Penn shall have delivered to
the Seller a duly executed bill of sale identifying the Intangible
Transition Property to be conveyed on that date, in the form
required by the Transfer Agreement;
(2) as of the Initial Contribution Date or the Subsequent
Contribution Date, as applicable, West Penn was not insolvent and
will not have been made insolvent by such sale, and West Penn is not
aware of any pending insolvency with respect to itself;
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(3) as of the Initial Contribution Date or the Subsequent
Contribution Date, as applicable, no breach by West Penn of its
representations, warranties or covenants in the Transfer Agreement
shall exist, and no Servicer Default shall have occurred and be
continuing;
(4) as of the Initial Contribution Date or the Subsequent
Contribution Date, as applicable, the Issuer shall have sufficient
funds available to pay the purchase price for the Transferred
Intangible Transition Property to be conveyed on such date pursuant
to the Sale Agreement, and all conditions to the issuance of one or
more Series of Transition Bonds intended to provide such funds set
forth in the Indenture shall have been satisfied or waived;
(5) on or prior to the Initial Contribution Date or Subsequent
Contribution Date, as applicable, West Penn shall have taken all
action required to transfer to the Seller ownership of the
Transferred Intangible Transition Property to be conveyed on such
date, free and clear of all liens other than liens created by the
Issuer pursuant to the Indenture, and the Seller shall have taken
any action required for the Seller to transfer to the Issuer
ownership of the Transferred Intangible Transition Property to be
conveyed on such date, free and clear of all liens other than liens
created by the Issuer pursuant to the Indenture, and the Issuer
shall have taken, or the Servicer shall have taken on behalf of the
Issuer, any action required for the Issuer to grant the Bond Trustee
a first priority perfected security interest in the Collateral and
maintain such security interest as of such date;
(6) in the case of a contribution of Subsequent Intangible
Transition Property only, West Penn shall have provided the Seller,
the Issuer and the Rating Agencies with a timely addition notice
specifying the Subsequent Contribution Date for such Subsequent
Intangible Transition Property, on or prior to such Subsequent
Contribution Date;
(7) West Penn shall have delivered to the Rating Agencies, the
Seller and the Issuer the opinion of counsel specified in the
Transfer Agreement and certain other opinions of counsel to the Bond
Trustee; and
(8) West Penn shall have delivered to the Seller, the Bond
Trustee and the Issuer an officers' certificate confirming the
satisfaction of each condition precedent specified above.
Representations and Warranties of West Penn
In the Transfer Agreement, West Penn will make representations and
warranties to the Seller (and acknowledge that such representations and
warranties are also for the benefit of the Issuer, as assignee of the Seller,
and the Bond Trustee, as collateral assignee of the Issuer) as of the Initial
Contribution Date and any Subsequent Contribution Date to the effect, among
other things, that:
(1) all information provided by West Penn to the Seller with
respect to the Transferred Intangible Transition Property is correct
in all material respects;
(2) the transfers and assignments contemplated by the Transfer
Agreement constitute outright transfers of the Initial Intangible
Transition Property or the Subsequent Intangible Transition
Property, as the case may be, from West Penn to the Seller, and the
beneficial interest in and title to the Transferred Intangible
Transition Property would not be part of the debtor's estate in the
event of the filing of a bankruptcy petition by or against West Penn
under any bankruptcy law;
(3) West Penn is the sole owner of the Intangible Transition
Property being contributed to the Seller on the Initial Contribution
Date or Subsequent Contribution Date, as applicable, the Transferred
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Intangible Transition Property has been validly transferred to the
Seller free and clear of all liens other than liens created by the
Issuer pursuant to the Indenture and all filings (including filings
with the PUC under the Competition Act) necessary in any
jurisdiction to give the Seller a valid ownership interest in
Transferred Intangible Transition Property free and clear of all
liens of West Penn or anyone claiming through West Penn and to give
the Seller a first priority perfected security interest in
Transferred Intangible Transition Property have been made, other
than any such filings (except for filings with the PUC under the
Competition Act and filings under the Uniform Commercial Code with
the Secretary of State of the State of Delaware) the absence of
which would not have an adverse impact on (x) the ability of the
Servicer to collect Intangible Transition Charges with respect to
the Transferred Intangible Transition Property or (y) the rights of
the Seller with respect to the Transferred Intangible Transition
Property;
(4) the QRO has been issued by the PUC in accordance with the
Competition Act, the QRO and the process by which it was issued
comply with all applicable laws, rules and regulations and the QRO
is in full force and effect;
(5) as of the date of issuance of any Series of Transition
Bonds, such Transition Bonds are entitled to the protections
provided by the Competition Act and, accordingly, the provisions of
the QRO relating to the Intangible Transition Property and
Intangible Transition Charges are not revocable by the PUC;
(6) (x) under the Competition Act, neither the Commonwealth of
Pennsylvania nor the PUC may limit, alter or in any way impair or
reduce the value of Intangible Transition Property or Intangible
Transition Charges approved by the QRO or any rights thereunder,
except such a limitation or alteration may be made by the
Commonwealth of Pennsylvania or the PUC if adequate compensation is
made by law for the full protection of the Intangible Transition
Charges and of Transition Bondholders;
(y) under the Contract Clauses of the Constitutions of the
Commonwealth of Pennsylvania and the United States, neither the
Commonwealth of Pennsylvania nor the PUC can take any action
that substantially impairs the rights of the Transition
Bondholders unless such action is a reasonable exercise of the
Commonwealth of Pennsylvania's sovereign powers and appropriate
to further a legitimate public purpose; and
(z) under the Takings Clauses of the Constitutions of the
Commonwealth of Pennsylvania and the United States, if such
action constitutes a permanent appropriation of the property
interest of Transition Bondholders in the Intangible Transition
Property and deprives the Transition Bondholders of their
reasonable expectations arising from their investments in
Transition Bonds, just compensation, as determined by a court
of competent jurisdiction, must be provided to Transition
Bondholders;
(7) there is no order by any court providing for the
revocation, alteration, limitation or other impairment of the
Competition Act, QRO, Intangible Transition Property or the
Intangible Transition Charges or any rights arising under any of
them or which seeks to enjoin the performance of any obligations
under the QRO;
(8) no other approval, authorization, consent, order or other
action of, or filing with any court, federal or state regulatory
body, administrative agency or other governmental instrumentality is
required in connection with the creation of Intangible Transition
Property, except those that have been obtained or made;
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(9) except as disclosed by West Penn to the Seller there are no
proceedings or investigations pending or, to the best of West Penn's
knowledge, threatened before any court, federal or state regulatory
body, administrative agency or other governmental instrumentality
having jurisdiction over West Penn or its properties challenging the
QRO or the Competition Act;
(10) no failure on the Initial Contribution Date or any
Subsequent Contribution Date or any time thereafter to satisfy any
condition imposed by the Competition Act with respect to the
recovery of stranded costs will adversely affect the creation or
contribution under the Transfer Agreement of the Intangible
Transition Property or the right to collect Intangible Transition
Charges;
(11) the assumptions used in calculating Intangible Transition
Charges are reasonable and made in good faith;
(12) (x) Intangible Transition Property, other than Intangible
Transition Property, if any, retained by West Penn, constitutes a
current property right;
(y) Intangible Transition Property includes, without
limitation, (A) the irrevocable right of the Seller and the
Issuer, as assignee of the Seller, to receive through
Intangible Transition Charges an amount sufficient to recover
all of West Penn's Qualified Transition Expenses described in
the QRO in an amount equal to the aggregate principal amount of
Transition Bonds plus an amount sufficient to provide for any
credit enhancement (including the Overcollateralization Amount
relating to each Series of Transition Bonds), to fund any
reserves and to pay interest, premium, if any, servicing fees
and other expenses relating to the Transition Bonds, and (B)
all right, title and interest of West Penn or its assignee
applicable to the Transition Bonds in the QRO and in all
revenues, collections, claims, payments, money, or proceeds of
or arising from the Intangible Transition Charges applicable to
the Transition Bonds set forth in the QRO to the extent that in
accordance with the Competition Act, the QRO and the rates and
charges authorized under the QRO are declared to be
irrevocable; and
(z) the QRO, including the right to collect Intangible
Transition Charges, has been declared to be irrevocable by the
PUC;
(13) West Penn is a corporation duly organized and in good
standing under the laws of the Commonwealth of Pennsylvania, with
corporate power and authority to own its properties and conduct its
business as currently owned or conducted;
(14) West Penn has the corporate power and authority to execute
and deliver the Transfer Agreement and to carry out its terms, West
Penn has full corporate power and authority to own the Intangible
Transition Property and transfer the Initial Intangible Transition
Property, in the case of the Initial Contribution Date, and the
Subsequent Intangible Transition Property, in the case of each
Subsequent Contribution Date, as applicable, and West Penn has duly
authorized such transfer to the Seller by all necessary corporate
action and the execution, delivery and performance of the Transfer
Agreement have been duly authorized by West Penn by all necessary
corporate action;
(15) the Transfer Agreement constitutes a legal, valid and
binding obligation of West Penn, enforceable against West Penn in
accordance with its terms, subject to customary exceptions relating
to bankruptcy and equitable principles;
(16) the consummation of the transactions contemplated by the
Transfer Agreement and the fulfillment of the terms thereof do not
conflict with, result in any breach of any of the terms and
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provisions of, nor constitute (with or without notice or lapse of
time) a default under, the articles of incorporation or by-laws of
West Penn, or any indenture, agreement or other instrument to which
West Penn is a party or by which it shall be bound; nor result in
the creation or imposition of any lien upon any of its properties
(other than the lien of the West Penn mortgage indenture on West
Penn's interest in the Servicing Fee and any other rights under the
Transfer Agreement) pursuant to the terms of any such indenture,
agreement or other instrument; nor violate any law or any order,
rule or regulation applicable to West Penn of any court or of any
federal or state regulatory body, administrative agency or other
governmental instrumentality having jurisdiction over the Seller or
its properties;
(17) except for continuation filings under the Uniform
Commercial Code, no approval, authorization, consent, order or other
action of, or filing with, any court, federal or state regulatory
body, administrative agency or other governmental instrumentality is
required in connection with the execution and delivery by West Penn
of the Transfer Agreement, the performance by West Penn of the
transactions contemplated by the Transfer Agreement or the
fulfillment by West Penn of the terms of the Transfer Agreement,
except those which have previously been obtained or made:
(18) there are no proceedings or investigations pending or, to
West Penn's best knowledge, threatened, before any court, federal or
state regulatory body, administrative agency or other governmental
instrumentality having jurisdiction over West Penn or its
properties:
(x) asserting the invalidity of the Transfer Agreement,
the Sale Agreement, the Servicing Agreement, any bills of sale
for Intangible Transition Property, the LLC Agreement, the
certificate of formation filed with the State of Delaware to
form the Issuer or the Certificate of Incorporation of the
Seller (collectively, the "Basic Documents") or the Transition
Bonds;
(y) seeking to prevent the issuance of Transition Bonds or
the consummation of the transactions contemplated by the Basic
Documents or the Transition Bonds; or
(z) except as disclosed by West Penn to the Seller,
seeking any determination or ruling that could be reasonably
expected to materially and adversely affect the performance by
West Penn of its obligations under, or the validity or
enforceability of, the Basic Documents or the Transition Bonds;
(19) after giving effect to the contribution of any Transferred
Intangible Transition Property under the Transfer Agreement, West
Penn
(v) is solvent and expects to remain solvent;
(w) is adequately capitalized to conduct its business and
affairs considering its size and the nature of its business and
intended purposes;
(x) is not engaged nor does it expect to engage in a
business for which its remaining property represents an
unreasonably small capital;
(y) believes that it will be able to pay its debts as they
become due and that such belief is reasonable;
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(z) is able to pay its debts as they mature and does not
intend to incur, or believe that it will incur, indebtedness
that it will not be able to repay at its maturity; and
(20) West Penn is duly qualified to do business as a foreign
corporation in good standing, and has obtained all necessary
licenses and approvals, in all jurisdictions in which the ownership
or lease of property or the conduct of its business shall require
such qualifications, licenses or approvals (except where the failure
to so qualify would not be reasonably likely to have a material
adverse effect on West Penn's business, operations, assets,
revenues, properties or prospects).
Subject to the conditions set forth below, West Penn will be required to
repurchase the Intangible Transition Property and pay the deferred repurchase
price specified below in the following two circumstances: first, if West Penn
breaches any representation or warranty specified in (2), (3), (4), (5), (7)
or (12) above that has a material adverse effect on the Transition
Bondholders or second, if West Penn breaches any representation or warranty
specified in (6), (8), (9), (13), (14), (15) or (16) above and the full
amount of losses attributable to such breach are reasonably expected to be
incurred beyond a 90-day period immediately following such breach. In both
circumstances, West Penn will be required to repurchase the Intangible
Transition Property and, on each Payment Date following such repurchase, West
Penn will be required to pay (any such payment by West Penn is referred to as
the "Deferred Repurchase Price") to the Bond Trustee, as assignee of the
Issuer, for deposit in the General Subaccount of the Collection Account, an
amount sufficient to make the payments contemplated by clauses (1) through (8)
in the first paragraph of "The Indenture-- Allocations and Payments".
West Penn will not be obligated, however, for a breach in the first
circumstance (i.e., a breach of the representations or warranties in (2), (3),
(4), (5), (7) or (12) above) if, within 90 days after the date of the
occurrence thereof, such breach is cured or West Penn takes remedial action
such that there is not and will not be a material adverse effect on the
Transition Bondholders as a result of such breach.
In the event that within such 90-day period, the breach is cured or West
Penn takes the remedial action described in the paragraph above, any amounts
paid by West Penn to the Bond Trustee, as assignee of the Issuer, which have
not been distributed pursuant to the Indenture will be returned to West Penn
at the end of such 90-day period.
In the second circumstance (i.e., a breach of the representations or
warranties in (6), (8), (9), (13), (14), (15) or (16) above), West Penn need
not repurchase the Intangible Transition Property or pay the Deferred
Repurchase Price or any indemnification described in the next paragraph, if
the full amount of losses attributable to the breach is reasonably expected
not to exceed [ ]% of the annual outstanding balance of the Transition Bonds
per Payment Date (the "De Minimis Loss Amount"). In that case, on the Payment
Date immediately following the date which is 90 days after receipt of written
notice from the Issuer or the Bond Trustee of an event requiring
indemnification by West Penn (the "Initial Loss Calculation Date"), West Penn
shall pay to the Bond Trustee, as assignee of the Issuer, for deposit in the
Loss Subaccount of the Collection Account, the aggregate expected amount of
such losses for all Payment Dates on which losses are expected to be incurred.
Following this deposit, West Penn's obligation to pay indemnification or the
Deferred Repurchase Price, as applicable, as a result of such losses shall be
waived so long as actual losses incurred on any Payment Date do not exceed the
De Minimis Loss Amount. If the amount of such losses on any Payment Date
exceeds the amounts paid by West Penn, on the next Payment Date, West Penn
shall pay to the Bond Trustee, as assignee of the Issuer, the amount of such
excess for such Payment Date and the expected amount of excess for all
subsequent Payment Dates. If the amount of such losses on any Payment Date
exceeds the De Minimis Loss Amount, the full indemnification amount or
Deferred Repurchase Price, as applicable, are payable on the next Payment
Date.
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West Penn also shall indemnify the Seller, the Issuer and the Bond
Trustee and certain other related parties, against:
(1) all taxes (other than any taxes imposed on Transition
Bondholders solely as a result of their ownership of Transition
Bonds) resulting from the acquisition or holding of Transferred
Intangible Transition Property by the Seller or the Issuer or the
issuance and sale by the Issuer of Transition Bonds; and
(2) any liabilities, obligations, losses, damages, payments or
expenses which result from (x) West Penn's willful misconduct, bad
faith or gross negligence in the performance of its duties under the
Transfer Agreement, (y) West Penn's reckless disregard of its
obligations and duties under the Transfer Agreement, or (z) West
Penn's breach of any representations or warranties in (1), (10),
(11), (17), (18) or (19) above; provided, that the amount of such
losses for which West Penn shall be obligated to provide
indemnification shall not exceed the amount of the Deferred
Repurchase Price.
If such an event occurs, upon receipt of written notice of the breach by
West Penn from the Seller, the Issuer or Bond Trustee, West Penn will notify
the Servicer of the occurrence of such event so that the Servicer may
calculate the amount of indemnification in accordance with the provisions of
the Servicing Agreement. If such breach continues unremedied beyond the
Initial Loss Calculation Date, West Penn shall pay such amount to the Bond
Trustee for deposit into the General Subaccount of the Collection Account.
Amounts on deposit in the Reserve Subaccount and the Capital Subaccount shall
not be available to satisfy any indemnification amounts owed by West Penn
under the Transfer Agreement.
West Penn will not indemnify the Seller, the Issuer or the Bond Trustee
on behalf of the Transition Bondholders as a result of the Commonwealth of
Pennsylvania's exercise of its power under the Competition Act or a change in
law by legislative enactment or constitutional amendment or the Commonwealth's
limitation, alteration, impairment or reduction of the value of Intangible
Transition Property or Intangible Transition Charges after the Issuance Date
of any Series of Transition Bonds in breach of the pledge of the Commonwealth
under the Competition Act. See "Risk Factors--Legal, Legislative or Regulatory
Actions Could Adversely Affect Transition Bondholders--Legal Challenges Could
Adversely Affect Transition Bondholders" and "--Changes in Law May Result in
Losses to Transition Bondholders" in this Prospectus.
In addition to the foregoing representations and warranties, West Penn
has also covenanted, among other things, that it will deliver all ITC
Collections it receives or the proceeds thereof, other than collections of
Intangible Transition Charges relating to Intangible Transition Property
retained by West Penn, to the Servicer and will promptly notify the Bond
Trustee of any lien on any Intangible Transition Property other than the
conveyances under the Transfer Agreement, the Sale Agreement or the Indenture.
West Penn shall also be obligated to take such legal or administrative
actions, including defending against or instituting and pursuing legal actions
and appearing or testifying at hearings or similar proceedings, as may be
reasonably necessary
(i) to protect the Seller, the Issuer and the Transition
Bondholders from claims, state actions or other actions or
proceedings of third parties which, if successfully pursued, would
result in a breach of any of West Penn's representations and
warranties in the Transfer Agreement; or
(ii) to block or overturn any attempts to cause a repeal of,
modification of or supplement to the Competition Act, the QRO or the
rights of holders of Intangible Transition Property by legislative
enactment or constitutional amendment that would be adverse to the
holders of Intangible Transition Property.
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In addition, West Penn is required to execute and file such filings,
including filings with the PUC pursuant to the Competition Act, as may be
required to fully preserve, maintain and protect the interests of the Seller
in the Transferred Intangible Transition Property. Other than as described
above, West Penn shall not be under any obligation to appear in, prosecute or
defend any legal action that shall not be incidental to its obligations under
the Transfer Agreement and that in its opinion may involve it in any expense
or liability.
Certain Matters Regarding West Penn
The Transfer Agreement provides that certain persons which succeed to the
major part of the electric distribution business of West Penn shall be the
successor to West Penn if such persons execute an agreement of assumption to
perform every obligation of West Penn under the Transfer Agreement. The
Transfer Agreement further requires that:
(i) immediately after giving effect to such transaction, no
representation or warranty made in the Transfer Agreement shall have
been breached and no Servicer Default, and no event that, after
notice or lapse of time, or both, would become a Servicer Default
shall have occurred and be continuing;
(ii) the Rating Agencies shall have received prior written
notice of such transaction; and
(iii) certain officers' certificates and opinions of counsel
shall have been delivered to the Seller, the Issuer and the Bond
Trustee.
Governing Law
The Transfer Agreement will be governed by and construed under the laws
of the State of New York.
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THE SALE AGREEMENT
The following summary describes all material terms and provisions of the
Sale Agreement pursuant to which the Seller is selling and the Issuer is
purchasing Intangible Transition Property. The Sale Agreement may be amended
by the parties thereto, with the consent of the Bond Trustee, provided notice
of the substance of such amendment is provided by the Issuer to each Rating
Agency. The form of the Sale Agreement has been filed as an exhibit to the
Registration Statement of which this Prospectus forms a part. This summary
does not purport to be complete and is subject to, and is qualified by
reference to, the provisions of the Sale Agreement.
Sale and Assignment of Intangible Transition Property
On the Series Issuance Date for the first Series of Transition Bonds (the
"Initial Transfer Date"), pursuant to the Sale Agreement, the Seller will sell
and assign to the Issuer, without recourse, except as provided therein, the
Initial Intangible Transition Property contributed by West Penn to the Seller
pursuant to the Transfer Agreement and all rights of the Seller under the
Transfer Agreement. The net proceeds received from the sale of the Transition
Bonds issued on the Initial Transfer Date will be applied to the purchase of
such Transferred Intangible Transition Property. In addition, the Seller may
from time to time offer to sell any additional Intangible Transition Property
which may be contributed to the Seller by West Penn pursuant to the Transfer
Agreement to the Issuer, subject to the satisfaction of certain conditions
(each, a "Subsequent Sale"). Each Subsequent Sale will be financed through the
issuance of an additional Series of Transition Bonds. If any such offer is
accepted by the Issuer, the Subsequent Sale will be effective on a date (a
"Subsequent Transfer Date") specified in a written notice provided by the
Seller to the Issuer.
In accordance with the Competition Act, upon the execution and delivery
of the Sale Agreement and the related bill of sale, the transfer of the
Initial Intangible Transition Property will be perfected as against all third
persons, including judicial lien creditors, and upon the execution of a
subsequent bill of sale and an addition notice, a transfer of Subsequent
Intangible Transition Property will also be perfected against all third
persons, including judicial lien creditors.
The Seller's accounting records and computer systems will reflect the
sale and assignment of Intangible Transition Property to the Issuer, and the
Seller shall treat the Transition Bonds as debt of the Seller for federal
income tax purposes so long as any of the Transition Bonds are outstanding.
Each sale of Intangible Transition Property under the Sale Agreement is
subject to the satisfaction or waiver of each of the following conditions:
(1) on or prior to the Initial Transfer Date or Subsequent
Transfer Date, as applicable, the Seller shall have delivered to the
Issuer a duly executed bill of sale identifying the Intangible
Transition Property to be conveyed on that date, in the form
required by the Sale Agreement;
(2) as of the Initial Transfer Date or the Subsequent Transfer
Date, as applicable, the Seller was not insolvent and will not have
been made insolvent by such sale, and the Seller is not aware of any
pending insolvency with respect to itself;
(3) as of the Initial Transfer Date or the Subsequent Transfer
Date, as applicable, no breach by the Seller of its representations,
warranties or covenants in the Sale Agreement shall exist, no
Servicer Default shall have occurred and be continuing and no breach
by West Penn of its representations and warranties in the Transfer
Agreement shall exist;
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(4) as of the Initial Transfer Date or the Subsequent Transfer
Date, as applicable, the Issuer shall have sufficient funds
available to pay the purchase price for the Transferred Intangible
Transition Property to be conveyed on such date, and all conditions
to the issuance of one or more Series of Transition Bonds intended
to provide such funds set forth in the Indenture shall have been
satisfied or waived;
(5) on or prior to the Initial Transfer Date or Subsequent
Transfer Date, as applicable, the Seller shall have taken all action
required to transfer to the Issuer ownership of the Transferred
Intangible Transition Property to be conveyed on such date, free and
clear of all liens other than liens created by the Issuer pursuant
to the Indenture, and the Issuer shall have taken, or the Servicer
shall have taken on behalf of the Issuer, any action required for
the Issuer to grant the Bond Trustee a first priority perfected
security interest in the Collateral and maintain such security
interest as of such date;
(6) in the case of a sale of Subsequent Intangible Transition
Property only, the Seller shall have provided the Issuer and the
Rating Agencies with a timely addition notice specifying the
Subsequent Transfer Date for such Subsequent Intangible Transition
Property, on or prior to such Subsequent Transfer Date;
(7) the Seller shall have delivered to the Rating Agencies and
the Issuer the opinion of counsel specified in the Sale Agreement
and certain other opinions of counsel to the Bond Trustee; and
(8) the Seller shall have delivered to the Bond Trustee and the
Issuer an officers' certificate confirming the satisfaction of each
condition precedent specified above.
Seller Representations and Warranties
In the Sale Agreement, the Seller will make representations and
warranties to the Issuer as of the Initial Transfer Date and any Subsequent
Transfer Date to the effect, among other things, that:
(1) all information provided by the Seller to the Issuer with
respect to the Transferred Intangible Transition Property is correct
in all material respects;
(2) the transfers and assignments contemplated by the Sale
Agreement constitute sales of the Initial Intangible Transition
Property or the Subsequent Intangible Transition Property, as the
case may be, from the Seller to the Issuer, and the beneficial
interest in and title to the Transferred Intangible Transition
Property would not be part of the debtor's estate in the event of
the filing of a bankruptcy petition by or against the Seller under
any bankruptcy law;
(3) the Seller is the sole owner of the Intangible Transition
Property being sold to the Issuer on the Initial Transfer Date or
Subsequent Transfer Date, as applicable, the Transferred Intangible
Transition Property has been validly transferred and sold to the
Issuer free and clear of all liens other than liens created by the
Issuer pursuant to the Indenture and all filings (including filings
with the PUC under the Competition Act) necessary in any
jurisdiction to give the Issuer a valid ownership interest in
Transferred Intangible Transition Property free and clear of all
liens of the Seller or anyone claiming through the Seller and to
give the Bond Trustee a first priority perfected security interest
in Transferred Intangible Transition Property have been made, other
than any such filings (except for filings with the PUC under the
Competition Act and filings under the Uniform Commercial Code with
the Secretary of State of the State of Delaware) the absence of
which would not have an adverse impact on (x) the ability of the
Servicer to collect Intangible Transition Charges with respect to
the
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Transferred Intangible Transition Property or (y) the rights of the
Issuer or the Bond Trustee with respect to the Transferred
Intangible Transition Property;
(4) the Seller is a corporation duly organized and in good
standing under the laws of the State of [Delaware], with corporate
power and authority to own its properties and conduct its business
as currently owned or conducted;
(5) the Seller has the corporate power and authority to execute
and deliver the Sale Agreement and to carry out its terms, the
Seller has full corporate power and authority to own the Intangible
Transition Property and sell and assign the Initial Intangible
Transition Property, in the case of the Initial Transfer Date, and
the Subsequent Intangible Transition Property, in the case of each
Subsequent Transfer Date, as applicable, and the Seller has duly
authorized such sale and assignment to the Issuer by all necessary
corporate action and the execution, delivery and performance of the
Sale Agreement have been duly authorized by the Seller by all
necessary corporate action;
(6) the Sale Agreement constitutes a legal, valid and binding
obligation of the Seller, enforceable against the Seller in
accordance with its terms, subject to customary exceptions relating
to bankruptcy and equitable principles;
(7) the consummation of the transactions contemplated by the
Sale Agreement and the fulfillment of the terms thereof do not
conflict with, result in any breach of any of the terms and
provisions of, nor constitute (with or without notice or lapse of
time) a default under, the articles of incorporation or by-laws of
the Seller, or any indenture, agreement or other instrument to which
the Seller is a party or by which it shall be bound; nor result in
the creation or imposition of any lien upon any of its properties
pursuant to the terms of any such indenture, agreement or other
instrument; nor violate any law or any order, rule or regulation
applicable to the Seller of any court or of any federal or state
regulatory body, administrative agency or other governmental
instrumentality having jurisdiction over the Seller or its
properties;
(8) except for continuation filings under the Uniform
Commercial Code, no approval, authorization, consent, order or other
action of, or filing with, any court, federal or state regulatory
body, administrative agency or other governmental instrumentality is
required in connection with the execution and delivery by the Seller
of the Sale Agreement, the performance by the Seller of the
transactions contemplated by the Sale Agreement or the fulfillment
by the Seller of the terms of the Sale Agreement, except those which
have previously been obtained or made;
(9) there are no proceedings or investigations pending or, to
the Seller's best knowledge, threatened, before any court, federal
or state regulatory body, administrative agency or other
governmental instrumentality having jurisdiction over the Seller or
its properties:
(x) asserting the invalidity of the Basic Documents or the
Transition Bonds;
(y) seeking to prevent the issuance of Transition Bonds or
the consummation of the transactions contemplated by the Basic
Documents or the Transition Bonds; or
(z) except as disclosed by the Seller to the Issuer,
seeking any determination or ruling that could be reasonably
expected to materially and adversely affect the performance by
the Seller of its obligations under, or the validity or
enforceability of, the Basic Documents or the Transition Bonds;
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(10) after giving effect to the sale of any Transferred
Intangible Transition Property under the Sale Agreement, the Seller:
(v) is solvent and expects to remain solvent;
(w) is adequately capitalized to conduct its business and
affairs considering its size and the nature of its business and
intended purposes;
(x) is not engaged nor does it expect to engage in a
business for which its remaining property represents an
unreasonably small capital;
(y) believes that it will be able to pay its debts as they
become due and that such belief is reasonable; and
(z) is able to pay its debts as they mature and does not
intend to incur, or believe that it will incur, indebtedness
that it will not be able to repay at its maturity; and
(11) the Seller is duly qualified to do business as a foreign
corporation in good standing, and has obtained all necessary
licenses and approvals, in all jurisdictions in which the ownership
or lease of property or the conduct of its business shall require
such qualifications, licenses or approvals (except where the failure
to so qualify would not be reasonably likely to have a material
adverse effect on the Seller's business, operations, assets,
revenues, properties or prospects).
The Seller shall indemnify the Issuer and the Bond Trustee and certain
other related parties, against:
(1) all taxes (other than any taxes imposed on Transition
Bondholders solely as a result of their ownership of Transition
Bonds) resulting from the acquisition or holding of Transferred
Intangible Transition Property by the Issuer or the issuance and
sale by the Issuer of Transition Bonds; and
(2) any liabilities, obligations, losses, damages, payments or
expenses which result from (x) the Seller's willful misconduct, bad
faith or gross negligence in the performance of its duties under the
Sale Agreement, (y) the Seller's reckless disregard of its
obligations and duties under the Sale Agreement, or (z) the Seller's
breach of any representations or warranties.
If such an event occurs, upon receipt of written notice of the breach by
the Seller from the Issuer or Bond Trustee, the Seller will notify the
Servicer of the occurrence of such event so that the Servicer may calculate
the amount of indemnification in accordance with the provisions of the
Servicing Agreement. Amounts on deposit in the Reserve Subaccount and the
Capital Subaccount shall not be available to satisfy any indemnification
amounts owed by the Seller under the Sale Agreement.
In addition to the foregoing representations and warranties, the Seller
has also covenanted, among other things, that it will deliver all ITC
Collections it receives or the proceeds thereof, other than collections of
Intangible Transition Charges relating to Intangible Transition Property
retained by the Seller, to the Servicer and will promptly notify the Bond
Trustee of any lien on any Intangible Transition Property other than the
conveyances under the Sale Agreement or the Indenture.
The Seller is required to execute and file such filings, including
filings with the PUC pursuant to the Competition Act, as may be required to
fully preserve, maintain and protect the interests of the Issuer in the
Transferred Intangible Transition Property. Other than as described above, the
Seller shall not be under any
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obligation to appear in, prosecute or defend any legal action that shall not
be incidental to its obligations under the Sale Agreement and that in its
opinion may involve it in any expense or liability.
Certain Matters Regarding the Seller
The Sale Agreement requires the Seller to take all reasonable steps to
continue its identity as a separate legal entity and to make it apparent to
third persons that it is an entity with assets and liabilities distinct from
those of West Penn, other affiliates or any other person, and that, except for
financial reporting purposes (to the extent required by generally accepted
accounting principles) and for state and federal income and franchise tax
purposes, it is not a division of West Penn or any of its affiliated entities
or any other person.
Governing Law
The Sale Agreement will be governed by and construed under the laws of
the State of New York.
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THE SERVICING AGREEMENT
The following summary describes all material terms and provisions of the
Servicing Agreement pursuant to which the Servicer is undertaking to service
Intangible Transition Property. The form of the Servicing Agreement has been
filed as an exhibit to the Registration Statement of which this Prospectus
forms a part. This summary does not purport to be complete and is subject to,
and is qualified by reference to, the provisions of the Servicing Agreement.
The Servicing Agreement may be amended by the parties thereto with the
consent of the Bond Trustee under the Indenture.
Servicing Procedures
General. The Servicer, as agent for the Issuer, will manage, service and
administer, and make collections in respect of the Transferred Intangible
Transition Property. The Servicer's duties will include:
(1) calculating and billing the Intangible Transition Charges
and collecting (from Customers, electric generation suppliers and
other third parties, as applicable) and posting all ITC Collections;
(2) responding to inquiries by Customers, electric generation
suppliers and other third parties, the PUC, or any federal, local or
other state governmental authority with respect to the Transferred
Intangible Transition Property and Intangible Transition Charges;
(3) accounting for ITC Collections, investigating
delinquencies, processing and depositing collections and making
periodic remittances, furnishing periodic reports to the Issuer, the
Bond Trustee and the Rating Agencies;
(4) selling, as agent for the Issuer, defaulted or written-off
accounts in accordance with the Servicer's usual and customary
practices; and
(5) taking action in connection with adjustments to the
Intangible Transition Charges as described below.
See also "The QRO and the Intangible Transition Charges--Competitive Billing"
in this Prospectus. The Servicer shall notify the Issuer, the Bond Trustee and
the Rating Agencies in writing of any laws or PUC regulations promulgated
after the execution of the Servicing Agreement that have a material adverse
effect on the Servicer's ability to perform its duties under the Servicing
Agreement.
The Servicer shall institute any action or proceeding necessary to compel
performance by the PUC or the Commonwealth of any of their obligations or
duties under the Competition Act or the QRO with respect to the Intangible
Transition Property. The cost of any such action shall be payable from ITC
Collections as an operating expense at the time such costs are incurred.
ITC Adjustment Process. Among other things, the Servicing Agreement
requires the Servicer to seek, and the Competition Act and the QRO require the
PUC to approve, adjustments to the Intangible Transition Charges charged to
each Rate Schedule within any Customer Category based on actual ITC
Collections and updated assumptions by the Servicer as to projected future
sales from which Intangible Transition Charges are allocated, expected
delinquencies and write-offs and future payments and expenses relating to the
Intangible Transition Property and the Transition Bonds. The Servicer is
required to file requests with the PUC for such adjustments (each, an
"Adjustment Request") on October 1 of each year and on such additional date or
dates specified in the
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Prospectus Supplement for any Series of Transition Bonds (each, a "Calculation
Date"). In accordance with the Competition Act and the QRO, the PUC has 90
days to approve annual adjustments. In addition, the QRO provides that
adjustments after the period commencing 12 months prior to the last scheduled
payment date for the payment of principal on each Series of Transition Bonds
may be implemented quarterly or monthly. The Servicer agrees to calculate
these adjustments to result in the outstanding principal balance of each
Series equaling the amount provided in the Expected Amortization Schedule, and
the amount on deposit in the Overcollateralization Subaccount equaling the
Calculated Overcollateralization Level, by (1) the next Adjustment Date or the
Payment Date immediately succeeding such Adjustment Date, as specified in the
related Prospectus Supplement, or (2) the Expected Final Payment Date, as
applicable, for each Series, taking into account any amounts on deposit in the
Reserve Subaccount other than certain Customer prepayments of Intangible
Transition Charges, if any, not allocable to the period covered by the
applicable Adjustment Request. For a discussion of Customer prepayments, see
"The Servicer--Limited Information on Customers' Creditworthiness--Customer
Payments" in this Prospectus. The adjustments to the Intangible Transition
Charges are expected to be implemented on or prior to January 1 of each year,
and, with respect to each Series of Transition Bonds, after the period
commencing 12 months prior to the last scheduled payment date for the payment
of principal on each Series of Transition Bonds on the date or dates specified
in the related Prospectus Supplement (each, an "Adjustment Date"). Such
adjustments to the Intangible Transition Charges will cease with respect to
each Series on the final Adjustment Date specified in the Prospectus
Supplement for that Series.
ITC Collections. The Servicer is required to remit all ITC Collections
(from whatever source) and all proceeds of other Collateral, if any, of the
Issuer received by the Servicer, to the Bond Trustee for deposit pursuant to
the Indenture on each Remittance Date. As long as West Penn or any successor
to West Penn's electric distribution business is the Servicer, the "Remittance
Date" is the [ ] day of each month (or if the [ ] is not a Business Day, the
immediately succeeding Business Day), provided that, among other things, (i)
West Penn or its successor maintains a short-term rating of at least "A-1" by
S&P, "P-1" by Moody's and, if rated by Fitch IBCA, Inc. ("Fitch IBCA"), "F-2"
by Fitch IBCA (and for five Business Days following a reduction in, any such
rating) or (ii) the Rating Agency Condition will have been satisfied with
respect to each of the Rating Agencies other than Moody's (to which notice
will be sent) (and any conditions or limitations imposed by such Rating
Agencies in connection therewith are complied with). Otherwise, the Remittance
Date is two Business Days after any ITC Collections or proceeds of other
Collateral are received by the Servicer. A "Business Day" shall mean any day
other than a Saturday, Sunday or a day on which banking institutions in the
City of Greensburg, Pennsylvania, the City of New York or the State of
Delaware are required by law or executive order to remain closed. The period
from the 1st day of the month to and including the last day of the same month
is referred to in this Prospectus as the "Collection Period." Until ITC
Collections are remitted to the Collection Account, the Servicer will not
segregate them from its general funds. Remittances of ITC Collections will not
include interest thereon prior to the Remittance Date or late fees from
customers, which the Servicer will be entitled to retain.
Servicer Advances
If specified in the related annex to the Servicing Agreement, the
Servicer will make advances of interest or principal on the related Series of
Transition Bonds in the manner and to the extent specified in such annex.
Servicing Compensation; Releases
The Issuer agrees to pay the Servicer the Servicing Fees with respect to
their respective series of transition bonds. The Servicing Fee for each Series
(together with any portion of such Servicing Fee that remains unpaid from
prior Payment Dates) will be paid solely to the extent funds are available
therefor as described under "The Indenture--Allocations and Payments" in this
Prospectus. The Servicing Fee will be paid prior to the payment of or
provision for any amounts in respect of interest on and principal of the
Transition Bonds.
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In the Servicing Agreement, the Servicer releases the Issuer and the Bond
Trustee from any and all claims, subject to certain exceptions relating to the
Transferred Intangible Transition Property or the Servicer's servicing
activities with respect thereto.
Servicer Duties
In the Servicing Agreement, the Servicer has agreed, among other things,
that, in servicing the Transferred Intangible Transition Property:
(1) except where the failure to comply with any of the
following would not adversely affect the Issuer's or the Bond
Trustee's interests in Intangible Transition Property;
(w) it will manage, service, administer and make
collections in respect of the Transferred Intangible Transition
Property with reasonable care and in material compliance with
applicable law, including all applicable PUC regulations and
guidelines, using the same degree of care and diligence that
the Servicer exercises with respect to billing and collection
activities that the Servicer conducts for itself and others;
(x) it will follow standards, policies and procedures in
performing its duties as Servicer that are customary in the
Servicer's industry;
(y) it will use all reasonable efforts, consistent with
its customary servicing procedures, to enforce and maintain
rights in respect of the Transferred Intangible Transition
Property;
(z) it will calculate the Intangible Transition Charges in
compliance with the Competition Act, the QRO and any applicable
tariffs;
(2) it will keep on file, in accordance with customary
procedures, all documents related to Intangible Transition Property
and will maintain accurate and complete accounts, records and
computer systems pertaining to the Intangible Transition Property;
and
(3) it will use all reasonable efforts consistent with its
customary servicing procedures to collect all amounts owed in
respect of Intangible Transition Property as they become due.
The duties of the Servicer set forth in the Servicing Agreement are
qualified by any PUC regulations or orders in effect at the time such duties
are to be performed.
Servicer Representations and Warranties
In the Servicing Agreement, the Servicer will make representations and
warranties as of each date the Seller sells or otherwise transfers any
Intangible Transition Property to the Issuer to the effect, among other
things, that:
(1) the Servicer is a corporation duly organized and in good
standing under the laws of the state of its incorporation, with the
corporate power and authority to own its properties and conduct its
business as such properties are currently owned and such business is
presently conducted and to execute, deliver and carry out the terms
of the Servicing Agreement and has the power, authority and legal
right to service the Transferred Intangible Transition Property;
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(2) the Servicer is duly qualified to do business as a foreign
corporation in good standing in all jurisdictions in which it is
required to do so;
(3) the Servicer's execution, delivery and performance of the
Servicing Agreement have been duly authorized by the Servicer by all
necessary corporate action;
(4) the Servicing Agreement constitutes a legal, valid and
binding obligation of the Servicer, enforceable against the Servicer
in accordance with its terms, subject to customary exceptions
relating to bankruptcy and equitable principles;
(5) the consummation of the transactions contemplated by the
Servicing Agreement does not conflict with or result in any breach
of the terms and provisions of or constitute a default under the
Servicer's articles of incorporation or by-laws or any material
agreement to which the Servicer is a party or bound, result in the
creation or imposition of any lien upon the Servicer's properties
(other than the lien of West Penn's mortgage on its interest in the
Servicing Agreement) or violate any law or any order, rule or
regulation applicable to the Servicer or its properties;
(6) except for filings with the PUC for revised Intangible
Transition Charges and Uniform Commercial Code continuation filings,
no governmental approvals, authorizations, consents, orders, or
other actions or filings are required for the Servicer to execute,
deliver and perform its obligations under the Servicing Agreement,
except those which have previously been obtained or made; and
(7) no proceeding or investigation is pending or, to the
Servicer's best knowledge, threatened before any court, federal or
state regulatory body, administrative agency or other governmental
instrumentality having jurisdiction over the Servicer or its
properties (x) except as disclosed by the Servicer to the Issuer,
seeking any determination or ruling that might materially and
adversely affect the performance by the Servicer of its obligations
under, or the validity or enforceability against the Servicer of,
the Servicing Agreement or (y) relating to the Servicer and which
might adversely affect the federal or state income tax attributes of
the Transition Bonds.
Servicer Indemnification
Under the Servicing Agreement, the Servicer agrees to indemnify the
Issuer, the Bond Trustee, on behalf of the Transition Bondholders, and certain
other related parties, against any costs, expenses, losses, damages, claims
and liabilities that may be imposed upon, incurred by or asserted against such
person as a result of:
(1) the Servicer's willful misfeasance, bad faith or gross
negligence in the performance of its duties or observance of its
covenants under the Servicing Agreement or the Servicer's reckless
disregard of its obligations and duties under the Servicing
Agreement; and
(2) the Servicer's breach of any of its representations or
warranties under the Servicing Agreement.
Statements to Issuer and Bond Trustee
For each Adjustment Date, the Servicer will provide to the Issuer, the
Bond Trustee and each of the Rating Agencies a statement indicating, with
respect to the Transferred Intangible Transition Property:
(1) the outstanding principal balance for each Series and the
amount provided in the Expected Amortization Schedule for each
Series as of the immediately preceding Payment Date;
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(2) the amount on deposit in the Overcollateralization
Subaccount and the Calculated Overcollateralization Level as of the
immediately preceding Payment Date;
(3) the amount on deposit in the Capital Subaccount and the
Required Capital Amount as of the immediately preceding Payment
Date;
(4) the sum of the amounts provided in the Expected
Amortization Schedule for each outstanding Series for each Payment
Date prior to the next Adjustment Date and the Servicer's projection
of the aggregate principal amount of all Series as of each Payment
Date prior to the next Adjustment Date;
(5) the Calculated Overcollateralization Level for each Payment
Date prior to the next Adjustment Date and the Servicer's projection
of the amount on deposit in the Overcollateralization Subaccount as
of each Payment Date prior to the next Adjustment Date;
(6) the Required Capital Amount for each Payment Date prior to
the next Adjustment Date and the Servicer's projections of the
amount on deposit in the Capital Subaccount as of each Payment Date
prior to the next Adjustment Date; and
(7) the projected ITC Collections from the Payment Date
immediately preceding the Adjustment Date through the next
Adjustment Date.
Moreover, on or before each Remittance Date, the Servicer will prepare
and furnish to the Issuer and the Bond Trustee a statement setting forth the
aggregate amount remitted or to be remitted by the Servicer to the Bond
Trustee for deposit on such Remittance Date pursuant to the Indenture.
In addition, at least three Business Days before each Payment Date for
each Series of Transition Bonds, the Servicer will prepare and furnish to the
Issuer and the Bond Trustee a statement setting forth the amounts to be paid
to the holders of Transition Bonds of such Series. On the basis of this
information, the Bond Trustee will furnish to the Transition Bondholders on
each Payment Date the report described under "The Indenture--Reports to
Transition Bondholders" in this Prospectus.
Evidence as to Compliance
The Servicing Agreement will provide that a firm of independent public
accountants will furnish to the Issuer, the Bond Trustee and the Rating
Agencies, on or before March 31 of each year, beginning March 31, 2000, a
statement as to compliance by the Servicer during the preceding calendar year
(or the relevant portion thereof) with certain standards relating to the
servicing of Intangible Transition Property. This report (the "Annual
Accountant's Report") will state that such firm has performed certain
procedures in connection with the Servicer's compliance with the servicing
procedures of the Servicing Agreement, identifying the results of such
procedures and including any exceptions noted. The Annual Accountant's Report
will also indicate that the accounting firm providing such report is
independent of the Servicer within the meaning of the Code of Professional
Ethics of the American Institute of Certified Public Accountants.
The Servicing Agreement will also provide for delivery to the Issuer and
the Bond Trustee on or before March 31 of each year, a certificate signed by
an officer of the Servicer to the effect that the Servicer has fulfilled its
material obligations under the Servicing Agreement for the preceding calendar
year (or the relevant portion thereof) or, if there has been a material
default in the fulfillment of any such obligation, describing each such
material default. The Servicer has agreed to give the Issuer, each Rating
Agency and the Bond Trustee notice of any Servicer Default under the Servicing
Agreement.
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Certain Matters Regarding the Servicer
Pursuant to the QRO, West Penn may assign its obligations under the
Servicing Agreement to any electric distribution company, as such term is
defined in the Competition Act, which succeeds to the major part of West
Penn's electric distribution business. Prior to any such assignment, the
Servicer shall provide written notice thereof to each of the Rating Agencies.
Under the Servicing Agreement, certain persons which succeed to the major part
of the electric distribution business of the Servicer, which persons assume
the obligations of the Servicer, will be the successor of the Servicer under
the Servicing Agreement. The Servicing Agreement further requires that:
(1) immediately after giving effect to such transaction, no
representation or warranty made by the Servicer in the Servicing
Agreement shall have been breached and no Servicer Default, and no
event which, after notice or lapse of time, or both, would become a
Servicer Default shall have occurred and be continuing;
(2) certain officers' certificates and opinions of counsel
shall have been delivered to the Issuer, the Bond Trustee and the
Rating Agencies; and
(3) prior written notice shall have been received by the Rating
Agencies.
The Servicing Agreement provides that, subject to the foregoing
provisions, West Penn shall not resign from the obligations and duties imposed
on it as Servicer except upon a determination, communicated to the Issuer, the
Bond Trustee and each Rating Agency and evidenced by an opinion of counsel,
that the performance of its duties under the Servicing Agreement are no longer
permissible under applicable law. No such resignation shall become effective
until a successor servicer has assumed the servicing obligations and duties of
West Penn under the Servicing Agreement.
In addition, the QRO and the Competition Act require that the Servicer's
responsibility to collect the applicable Intangible Transition Charges and
other obligations under the Servicing Agreement must be undertaken and
performed by any other entity that provides transmission and distribution
service to the customers.
Except as expressly provided in the Servicing Agreement, the Servicer
will not be liable to the Issuer for any action taken or for refraining from
taking any action pursuant to the Servicing Agreement or for errors in
judgment, except to the extent such liability is imposed by reason of the
Servicer's willful misfeasance, bad faith or gross negligence in the
performance of its duties or by reason of reckless disregard of obligations
and duties under the Servicing Agreement.
Servicer Defaults
"Servicer Defaults" under the Servicing Agreement will include, among
other things:
(1) any failure by the Servicer to deliver to the Bond Trustee,
on behalf of the Issuer, any required remittance that shall continue
unremedied for a period of three Business Days after written notice
of such failure is received by the Servicer;
(2) any failure by the Servicer, duly to observe or perform in
any material respect any other covenant or agreement in the
Servicing Agreement or any other Basic Document to which it is a
party, which failure materially and adversely affects Intangible
Transition Property and which continues
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unremedied for 30 days after notice of such failure has been given
to the Servicer, by the Issuer or the Bond Trustee or after
discovery of such failure by an officer of the Seller, as the case
may be;
(3) any representation or warranty made by the Servicer in the
Servicing Agreement shall prove to have been incorrect when made,
which has a material adverse effect on any of the Transition
Bondholders and the Issuer and which continues unremedied for 60
days after notice of such failure has been given to the Servicer by
the Issuer or the Bond Trustee; and
(4) certain events of insolvency, readjustment of debt,
marshaling of assets and liabilities, or similar proceedings with
respect to the Servicer and certain actions by the Servicer
indicating its insolvency, reorganization pursuant to bankruptcy
proceedings or inability to pay its obligations.
The Bond Trustee may waive any default by the Servicer, except a default
in making any required remittances to the Bond Trustee.
Rights Upon Servicer Default
As long as a Servicer Default under the Servicing Agreement remains
unremedied, the Bond Trustee may terminate all the rights and obligations of
the Servicer under the Servicing Agreement (other than the Servicer's
indemnification obligation and obligation to continue performing its functions
as Servicer until a successor servicer is appointed), whereupon a Successor
Servicer appointed by the Bond Trustee will succeed to all the
responsibilities, duties and liabilities of the Servicer under the Servicing
Agreement and will be entitled to similar compensation arrangements. Upon a
Servicer Default based upon the commencement of a case by or against the
Servicer under the Bankruptcy Code or similar laws (the "Insolvency Laws"),
the Bond Trustee and the Issuer may be prevented from effecting a transfer of
servicing. See "Risk Factors--Bankruptcy; Creditors' Rights" in this
Prospectus. The Bond Trustee may make arrangements for compensation to be paid
to any Successor Servicer, which in no event may be greater than the servicing
compensation paid to the Servicer under the Servicing Agreement. See "Risk
Factors--Bankruptcy; Creditors' Rights" in this Prospectus. In addition, upon
a Servicer Default because of a failure to make required remittances, the
Issuer or its pledgees or transferees will have the right to apply to the PUC
for sequestration and payment of revenues arising from the Intangible
Transition Property.
Successor Servicer
In accordance with the provisions of the QRO and pursuant to the
provisions of the Servicing Agreement, if for any reason a third party assumes
or succeeds to the role of the Servicer under the Servicing Agreement (in such
role, the "Successor Servicer"), the Servicing Agreement will require the
Servicer to cooperate with the Issuer, the Bond Trustee and the Successor
Servicer in terminating the Servicer's rights and responsibilities under the
Servicing Agreement, including the transfer to the Successor Servicer of all
documentation pertaining to Intangible Transition Property and all cash
amounts then held by the Servicer for remittance or subsequently acquired by
the Servicer. The Servicing Agreement will provide that the Servicer shall be
liable for all reasonable costs and expenses incurred in transferring
servicing responsibilities to the Successor Servicer. A Successor Servicer may
not resign unless it is prohibited from serving by law. The predecessor
Servicer is obligated, on an ongoing basis, to cooperate with the Successor
Servicer and provide whatever information is, and take whatever actions are,
reasonably necessary to assist the Successor Servicer in performing its
obligations under the Servicing Agreement.
Governing Law
The Servicing Agreement will be governed by and construed under the laws
of the State of New York.
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THE INDENTURE
The following summary describes all material terms and provisions of the
Indenture pursuant to which Transition Bonds will be issued. The form of the
Indenture, including the form of the Supplemental Indenture, has been filed as
an exhibit to the Registration Statement of which this Prospectus forms a
part. This summary does not purport to be complete and is subject to, and is
qualified by reference to, the provisions of the Indenture. See "West Penn
Power Company" in this Prospectus.
Security
To secure the payment of principal of and premium, if any, and interest
on, and any other amounts owing in respect of, the Transition Bonds pursuant
to the Indenture, the Issuer will grant to the Bond Trustee for the benefit of
the Transition Bondholders a security interest in all of the Issuer's right,
title and interest in and to the following collateral (the "Collateral"):
(1) the Transferred Intangible Transition Property sold by the
Seller to the Issuer from time to time pursuant to the Sale
Agreement and all proceeds thereof;
(2) the Transfer Agreement (except for certain provisions for
indemnification of the Seller and the Issuer);
(3) all bills of sale delivered by West Penn pursuant to the
Transfer Agreement;
(4) the Sale Agreement (except for certain provisions for
indemnification of the Issuer);
(5) all bills of sale delivered by the Seller pursuant to the
Sale Agreement;
(6) the Servicing Agreement (except for certain provisions for
indemnification of the Issuer);
(7) the Collection Account and all amounts on deposit therein
from time to time;
(8) any hedge or swap agreements to which the Issuer is a
party;
(9) all other property of whatever kind owned from time to time
by the Issuer including all accounts, accounts receivable and
chattel paper;
(10) all present and future claims, demands, causes and choses
in action in respect of any or all of the foregoing; and
(11) all payments on or under, and all proceeds of every kind
and nature whatsoever in respect of, any or all of the foregoing;
provided that cash or other property distributed to the Issuer from the
Collection Account in accordance with the provisions of the Indenture will not
be subject to the lien of the Indenture.
See "--Allocation and Payments" below.
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Issuance in Series or Classes
Transition Bonds may be issued under the Indenture from time to time to
finance the purchase by the Issuer of Intangible Transition Property (a
"Financing Issuance") or to pay the cost of refunding, through redemption or
payment, all or part of the Transition Bonds (a "Refunding Issuance"). Any
Series of Transition Bonds may include one or more Classes which differ, among
other things, as to interest rate and amortization of principal. The terms of
all Transition Bonds of the same Series will be identical, unless such Series
is comprised of more than one Class, in which case the terms of all Transition
Bonds of the same Class will be identical. The particular terms of the
Transition Bonds of any Series and, if applicable, Classes thereof, will be
set forth in the related Prospectus Supplement for that Series. The terms of
such Series and any Classes thereof will not be subject to prior review by, or
consent of, the Transition Bondholders of any previously issued Series. See
"Risk Factors--The Transition Bonds--Issuance of Additional Series May
Adversely Affect Outstanding Transition Bonds," "The Transition Bonds" and
"West Penn Power Company" in this Prospectus.
Under the Indenture, the Bond Trustee will authenticate and deliver an
additional Series of Transition Bonds only upon receipt by the Bond Trustee
of, among other things, a certificate of the Issuer that no Event of Default
has occurred and is continuing, an opinion of counsel to the Issuer and
evidence of satisfaction that the issuance of that additional Series of
Transition Bonds will not result in any Rating Agency reducing or withdrawing
its then-current rating of any outstanding Series or Class of Transition Bonds
(the notification in writing by each Rating Agency to West Penn, the Seller,
the Servicer, the Bond Trustee and the Issuer that any action will not result
in such a reduction or withdrawal is referred to in this Prospectus as the
"Rating Agency Condition").
In addition, in connection with the issuance of the each new Series, the
Bond Trustee will have to provide a certificate or opinion of a firm of
independent certified public accountants of recognized national reputation to
the effect that, based on the assumptions used in calculating the initial
Intangible Transition Charges with respect to the Transferred Intangible
Transition Property or, if applicable, the most recent revised Intangible
Transition Charges with respect to the Transferred Intangible Transition
Property, after giving effect to the issuance of such Series and the
application of the proceeds therefrom, such Intangible Transition Charges will
be sufficient to pay all fees and expenses of servicing the Transition Bonds,
interest on each Series of Transition Bonds when due and principal of each
Series of Transition Bonds in accordance with the Expected Amortization
Schedule therefor and to fund the Calculated Overcollateralization Level as of
each Payment Date.
If the issuance is a Refunding Issuance, the amount of money necessary to
pay premiums, if any, and the outstanding principal balance of and interest on
the Transition Bonds being refunded shall be deposited into a separate account
with the Bond Trustee.
Collection Account
Under the Indenture, the Issuer will establish one or more segregated
trust accounts in the Bond Trustee's name, which collectively comprise the
Collection Account, with the Bond Trustee or at another Eligible Institution.
The Collection Account will be divided into subaccounts, which need not be
separate bank accounts: the General Subaccount, the Overcollateralization
Subaccount, the Capital Subaccount, the Reserve Subaccount and, if required by
the Indenture, one or more Defeasance Subaccounts and a Loss Subaccount. All
amounts in the Collection Account not allocated to any other subaccount will
be allocated to the General Subaccount. Unless the context indicates
otherwise, references in this Prospectus to the Collection Account include all
of the subaccounts contained therein. All monies deposited from time to time
in the Collection Account, all deposits therein pursuant to the Indenture, and
all investments made in Eligible Investments with such monies, shall be held
by the Bond Trustee in the Collection Account as part of the Collateral.
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"Eligible Institution" means
(1) the corporate trust department of the Bond Trustee; or
(2) a depository institution organized under the laws of the
United States of America or any state (or any domestic branch of a
foreign bank), which (x) has (A) a long-term unsecured debt rating
of "AAA" by S&P and "Aa3" by Moody's and (B) a short-term rating of
"A-1+" by S&P and "P-1" by Moody's, or any other long-term,
short-term or certificate of deposit rating acceptable to the Rating
Agencies and (y) whose deposits are insured by the Federal Deposit
Insurance Corporation.
So long as no default or Event of Default has occurred and is continuing,
all funds in the Collection Account may be invested in any of the following:
(1) direct obligations of, or obligations fully and
unconditionally guaranteed as to timely payment by, the United
States of America;
(2) demand deposits, time deposits, certificates of deposit, or
bankers' acceptances of Eligible Institutions which are described in
clause (x) of the preceding paragraph;
(3) commercial paper (other than commercial paper issued by
West Penn or the Servicer or any of their affiliates) having, at the
time of investment or contractual commitment to invest, a rating in
the highest rating category from each Rating Agency;
(4) money market funds which have the highest rating from each
Rating Agency;
(5) repurchase obligations with respect to any security that is
a direct obligation of, or fully guaranteed by, the United States of
America or certain agencies or instrumentalities thereof the
obligations of which are backed by the full faith and credit of the
United States of America, entered into with an Eligible Institution;
or
(6) any other investment permitted by each Rating Agency
(collectively, the "Eligible Investments"), in each case which
mature no later than the Business Day prior to the next Payment Date
for such Series or Class.
The Bond Trustee will have access to the Collection Account for the
purpose of making deposits in and withdrawals from the Collection Account in
accordance with the Indenture.
On each Remittance Date, the Servicer will remit all ITC Collections
(from whatever source) and all proceeds of other Collateral received by the
Servicer to the Bond Trustee under the Indenture for deposit pursuant to the
Indenture. Further, the Bond Trustee will deposit all Indemnity Amounts
remitted to the Bond Trustee by West Penn or the Servicer or otherwise
received by the Bond Trustee, and any Deferred Repurchase Price remitted by
West Penn into the General Subaccount of the Collection Account. "Indemnity
Amounts" means any amounts paid by West Penn or the Servicer to the Bond
Trustee, for itself or on behalf of the Transition Bondholders, in respect of
the indemnification obligations pursuant to the Transfer Agreement and the
Servicing Agreement, but excluding any Deferred Repurchase Price paid pursuant
to the Transfer Agreement. Loss Amounts remitted by West Penn to the Bond
Trustee shall be deposited in the Loss Subaccount. "Loss Amounts" means any
amounts remitted by West Penn to the Bond Trustee pursuant to the Transfer
Agreement for losses as a result of certain willful misconduct, bad faith,
gross negligence, or reckless disregard of its obligations therein or the
breach of certain representations and warranties therein by West Penn. See
"The Transfer Agreement" and the "The Servicing Agreement" in this Prospectus.
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General Subaccount. ITC Collections remitted by the Servicer to the Bond
Trustee, as well as any Deferred Repurchase Price and Indemnity Amounts
remitted by West Penn or the Servicer or otherwise received by the Bond
Trustee or the Issuer, shall be deposited in the General Subaccount. On each
Payment Date, the Bond Trustee will draw on amounts in the General Subaccount
to make the allocations and payments described in "--Allocations and Payments"
below.
Reserve Subaccount. ITC Collections available on any Payment Date above
that necessary to pay (i) amounts payable in respect of fees and expenses of
the Bond Trustee, the Manager and the Servicer and other fees and expenses,
(ii) amounts distributable to the Transition Bondholders in respect of
principal of and interest paid on such Payment Date, (iii) amounts required to
replenish the Capital Subaccount and (iv) amounts required to replenish and
fund the Overcollateralization Subaccount (all as described under
"--Allocations and Payments" below)[, including certain Customer prepayments
of Intangible Transition Charges, if any,] will be allocated to the Reserve
Subaccount. Amounts in the Reserve Subaccount will be invested in Eligible
Investments, and the Issuer will be entitled to earnings thereon, subject to
the limitations described under "--Allocations and Payments" below. On each
Payment Date, the Bond Trustee will draw on amounts in the Reserve Subaccount,
if any, to the extent amounts available in the General Subaccount and the Loss
Subaccount (with respect to payments contemplated by (1) through (8) in
"--Allocations and Payments" below) are insufficient to make scheduled
distributions to the Transition Bondholders and pay expenses of the Issuer,
the Bond Trustee, the Manager, the Servicer and certain other fees and
expenses.
Overcollateralization Subaccount. ITC Collections to the extent
available, as described under "--Allocation and Payments" below, will be
deposited in the Overcollateralization Subaccount on each Payment Date up to
the Calculated Overcollateralization Level for all Series. Amounts in the
Overcollateralization Subaccount will be invested in Eligible Investments and
the Issuer will be entitled to earnings thereon, subject to the limitations
described under "--Allocations and Payments" below. On each Payment Date, the
Bond Trustee will draw on amounts in the Overcollateralization Subaccount to
the extent amounts on deposit in the General Subaccount, the Loss Subaccount
(with respect to payments contemplated by (1) through (8) in "--Allocations
and Payments" below) and the Reserve Subaccount are insufficient to make
scheduled distributions to the Transition Bondholders and to pay expenses of
the Issuer, the Bond Trustee, the Manager and the Servicer and certain other
fees and expenses. If any Series or Class of Transition Bonds is redeemed or
any Series is fully amortized as of any Payment Date, the amount by which
amounts on deposit in the Overcollateralization Subaccount exceed the
Calculated Overcollateralization Level for all Series will be released to the
Issuer, free of the lien of the Indenture.
Capital Subaccount. Upon the issuance of each Series of Transition Bonds,
the Seller will make a capital contribution in the amount of the Required
Capital Amount to the Issuer, and the Issuer will pay such amount to the Bond
Trustee for deposit into the Capital Subaccount which will be invested in
Eligible Investments, and the Issuer will be entitled to earnings thereon
subject to the limitations described under "--Allocations and Payments" below.
The Bond Trustee will draw on amounts in the Capital Subaccount, if any, to
the extent amounts available in the General Subaccount, the Loss Subaccount
(with respect to payments contemplated by (1) through (8) in "--Allocations
and Payments" below), the Reserve Subaccount and the Overcollateralization
Subaccount are insufficient to make scheduled distributions to the Transition
Bondholders and to pay expenses of the Issuer, the Bond Trustee, the Manager
and the Servicer and certain other fees and expenses. If any Series or Class
of Transition Bonds is redeemed or any Series is fully amortized as of any
Payment Date, the amount by which amounts on deposit in the Capital Subaccount
exceed the Required Capital Amount will be released to the Issuer, free of the
lien of the Indenture.
Loss Subaccount. Prior to the deposit of any Loss Amounts in the
Collection Account, the Issuer shall establish the Loss Subaccount, and any
Loss Amounts remitted by West Penn to the Bond Trustee shall be deposited in
such subaccount. The Bond Trustee will draw on amounts in the Loss Subaccount,
if any, as described under "--Allocations and Payments" below.
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Defeasance Subaccount. In the event funds are remitted to the Bond
Trustee in connection with the exercise of the Legal Defeasance Option or the
Covenant Defeasance Option, the Issuer shall establish a Defeasance Subaccount
for each Series to be defeased into which such funds shall be deposited. All
amounts in the Defeasance Subaccount will be applied by the Bond Trustee, in
accordance with the provisions of the Transition Bonds and the Indenture, to
the payment to the holders of the particular Transition Bonds for the payment
or redemption of which such amounts were deposited with the Bond Trustee,
including all sums due for principal, premium, if any, and interest. See
"--Legal Defeasance and Covenant Defeasance" below.
Allocations and Payments
On each Payment Date, the Bond Trustee shall apply all amounts on deposit
in the General Subaccount of the Collection Account and any investment
earnings on each of the subaccounts of the Collection Account in the following
priority:
(1) all amounts owed to the Bond Trustee (including legal fees
and expenses, Indemnity Amounts and Loss Amounts) will be paid to
the Bond Trustee;
(2) the Servicing Fee and all unpaid Servicing Fees from prior
Payment Dates will be paid to the Servicer;
(3) the fees owed to the Administrative Agent under the
Administration Agreements will be paid to the Administrative Agent;
(4) so long as no Event of Default has occurred and is
continuing or would be caused by such payment, all operating
expenses other than those referred to in clauses (1), (2) and (3)
above will be paid to the persons entitled thereto, provided that
the amount paid on any Payment Date pursuant to this clause (4) may
not exceed $[12,500] in the aggregate for all Series;
(5) interest due and payable on the Transition Bonds, together
with any overdue interest at the applicable Bond Rate and, to the
extent permitted by law, interest thereon, will be paid to the
Transition Bondholders;
(6) any principal of any Series or Class of the Transition
Bonds payable as a result of acceleration triggered by an Event of
Default, any principal of any Series or Class of Transition Bonds
payable on a Series Termination Date or Class Termination Date, as
applicable, and any principal of and premium on a Series or Class of
Transition Bonds payable on a Redemption Date will be paid to the
Transition Bondholders;
(7) an amount up to the principal amount of the Transition
Bonds that is scheduled to be paid by such Payment Date in
accordance with the Expected Amortization Schedule will be paid to
the Transition Bondholders in respect of principal on the Transition
Bonds;
(8) all unpaid operating expenses, Indemnity Amounts and Loss
Amounts will be paid to the persons entitled thereto;
(9) an amount, if any, necessary to fund the balance of the
Capital Subaccount up to the Required Capital Amount will be
transferred to the Capital Subaccount;
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(10) Overcollateralization with respect to all Series of
Transition Bonds for such Payment Date will be transferred to the
Overcollateralization Subaccount up to the Calculated
Overcollateralization Level;
(11) the balance, if any, will be allocated to the Reserve
Subaccount; and
(12) following repayment of all outstanding Series of
Transition Bonds, the balance, if any, will be released to the
Issuer free from the lien of the Indenture.
If on any Payment Date funds on deposit in the General Subaccount are
insufficient to make the payments and transfers contemplated by clauses (1)
through (10) above, the Bond Trustee will draw from amounts on deposit in the
following subaccounts up to the amount of such shortfall, in order to make
such payments and transfers: (1) from the Loss Subaccount, with respect to the
payments or transfers contemplated by clauses (1) through (8) above only, and
(2) thereafter from the Reserve Subaccount, then from the
Overcollateralization Subaccount and finally from the Capital Subaccount.
All payments to Transition Bondholders of a Series pursuant to clauses
(5) or (6) of the first paragraph under "--Allocation and Payments" shall be
made pro rata based on the respective outstanding principal amounts of
Transition Bonds of such Series held by such Transition Bondholders, unless,
in the case of a Series comprised of two or more Classes, the applicable
Supplemental Indenture for such Series specifies otherwise. All payments to
Transition Bondholders of a Class pursuant to clause (5) or (6) of the first
paragraph under "Allocation and Payments" shall be made pro rata based on the
respective outstanding principal amounts of Transition Bonds of such Class
held by such Transition Bondholders.
Reports to Transition Bondholders
With respect to each Series of Transition Bonds, on or prior to each
Payment Date, the Bond Trustee will deliver a statement prepared by the Bond
Trustee to each Transition Bondholder of that Series which will include (to
the extent applicable) the following information (and any other information so
specified in the applicable Supplemental Indenture) as to the Transition Bonds
of such Series with respect to such Payment Date or the period since the
previous Payment Date, as applicable:
(1) the amount paid to such Transition Bondholders in respect
of principal;
(2) the amount paid to such Transition Bondholders in respect
of interest;
(3) the outstanding principal balance and the amount provided
in the Expected Amortization Schedule, in each case for such Series
and as of the most recent Payment Date;
(4) the amount on deposit in the Overcollateralization
Subaccount and the Calculated Overcollateralization Level, in each
case for all Series and as of the most recent Payment Date;
(5) the amount on deposit in the Capital Subaccount as of the
most recent Payment Date; and
(6) the amount, if any, on deposit in the Reserve Subaccount as
of the most recent Payment Date.
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Modification of Indenture
Without the consent of any of the holders of the outstanding Transition
Bonds but with prior notice to the Rating Agencies, the Issuer and the Bond
Trustee may execute a Supplemental Indenture for any of the following
purposes:
(1) to correct or amplify the description of the Collateral, or
to better assure, convey and confirm unto the Bond Trustee the
Collateral, or to subject to the lien of the Indenture additional
property;
(2) to evidence the succession, in compliance with the
applicable provisions of the Indenture, of another person to the
Issuer, and the assumption by any such successor of the covenants of
the Issuer contained in the Indenture and in the Transition Bonds;
(3) to add to the covenants of the Issuer, for the benefit of
the Holders of the Transition Bonds, or to surrender any right or
power therein conferred upon the Issuer;
(4) to convey, transfer, assign, mortgage or pledge any
property to or with the Bond Trustee;
(5) to cure any ambiguity, to correct or supplement any
provision of the Indenture or in any Supplemental Indenture which
may be inconsistent with any other provision of the Indenture or in
any Supplemental Indenture or to make any other provisions with
respect to matters or questions arising under the Indenture or in
any Supplemental Indenture; provided, however, that (x) such action
shall not, as evidenced by an officers certificate, adversely affect
in any material respect the interests of any Transition Bondholder
and (y) the Rating Agency Condition shall have been satisfied with
respect thereto by all Rating Agencies other than Moody's (however,
notice of such action shall be provided to Moody's);
(6) to evidence and provide for the acceptance of the
appointment under the Indenture by a successor bond trustee with
respect to the Transition Bonds and to add to or change any of the
provisions of the Indenture as shall be necessary to facilitate the
administration of the trusts under the Indenture by more than one
bond trustee, pursuant to certain requirements of the Indenture;
(7) to modify, eliminate or add to the provisions of the
Indenture to such extent as shall be necessary to effect the
qualification of the Indenture under the Trust Indenture Act of
1939, as amended, or under any similar federal statute hereafter
enacted and to add to the Indenture such other provisions as may be
expressly required by the Trust Indenture Act of 1939, as amended;
(8) to set forth the terms of any Series that has not
theretofore been authorized by a Supplemental Indenture; or
(9) to provide for any hedge or swap transactions with respect
to any floating rate Series or Class of Transition Bonds or any
Series or Class specific credit enhancement; provided, however, that
(x) such action shall not, as evidenced by an officers certificate,
adversely affect in any material respect the interests of any
Transition Bondholder and (y) the Rating Agency Condition shall have
been satisfied with respect thereto by all Rating Agencies other
than Moody's (however, notice of such action shall be provided to
Moody's).
Additionally, without the consent of any of the Transition Bondholders,
the Issuer and Bond Trustee may execute a Supplemental Indenture to add
provisions to, or change in any manner or eliminate any provisions of, the
Indenture, or to modify in any manner the rights of the Transition Bondholders
under the Indenture; provided, however, that (i) such action shall not, as
evidenced by an opinion of counsel, adversely affect in any material
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respect the interests of any Transition Bondholder and (ii) the Rating Agency
Condition shall have been satisfied with respect thereto.
The Issuer and the Bond Trustee also may, with prior notice to the Rating
Agencies and with the consent of the holders of not less than a majority of
the outstanding amount of the Transition Bonds of each Series or Class to be
affected, execute a Supplemental Indenture for the purpose of adding any
provisions to, or changing in any manner or eliminating any of the provisions
of, the Indenture or modifying in any manner the rights of the Transition
Bondholders under the Indenture; provided, however, that no such Supplemental
Indenture shall, without the consent of the holder of each outstanding
Transition Bond of each Series or Class affected thereby:
(1) change the date of payment of any installment of principal
of or premium, if any, or interest on any Transition Bond, or reduce
the principal amount thereof, the interest rate specified thereon or
the redemption price or the premium, if any, with respect thereto,
change the provisions of the Indenture and the related applicable
Supplemental Indenture relating to the application of collections
on, or the proceeds of the sale of, the Collateral to payment of
principal of or premium, if any, or interest on the Transition
Bonds, or change any place of payment where, or the coin or currency
in which, any Transition Bond or any interest thereon is payable;
(2) impair the right to institute suit for the enforcement of
certain provisions of the Indenture regarding payment;
(3) reduce the percentage of the aggregate amount of the
outstanding Transition Bonds, or of a Series or Class thereof, the
consent of the holders of which is required for any such
Supplemental Indenture, or the consent of the holders of which is
required for any waiver of compliance with certain provisions of the
Indenture or of certain defaults thereunder and their consequences
provided for in the Indenture;
(4) reduce the percentage of the outstanding amount of the
Transition Bonds required to direct the Bond Trustee to direct the
Issuer to sell or liquidate the Collateral;
(5) modify any provision of the section of the Indenture
relating to the consent of Transition Bondholders with respect to
Supplemental Indentures, except to increase any percentage specified
therein or to provide that certain additional provisions of the
Indenture or the Basic Documents cannot be modified or waived
without the consent of the holder of each outstanding Transition
Bond affected thereby;
(6) modify any of the provisions of the Indenture in such a
manner as to affect the amount of any payment of interest, principal
or premium, if any, payable on any Transition Bond on any Payment
Date or to affect the rights of Transition Bondholders to the
benefit of any provisions for the mandatory redemption of the
Transition Bonds contained in the Indenture or change the redemption
dates, Expected Amortization Schedule or Series Termination Dates or
Class Termination Dates of any Transition Bonds;
(7) decrease the Required Capital Amount with respect to any
Series, the Overcollateralization Amount or the Calculated
Overcollateralization Level with respect to any Payment Date;
(8) modify or alter the provisions of the Indenture regarding
the voting of Transition Bonds held by the Issuer, the Seller, an
affiliate of either of them or any obligor on the Transition Bonds;
(9) decrease the percentage of the aggregate principal amount
of the Transition Bonds required to amend the sections of the
Indenture which specify the applicable percentage of the aggregate
principal amount of the Transition Bonds necessary to amend the
Indenture or certain other related agreements; or
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(10) permit the creation of any lien ranking prior to or on a
parity with the lien of the Indenture with respect to any of the
Collateral for the Transition Bonds or, except as otherwise
permitted or contemplated in the Indenture, terminate the lien of
the Indenture on any property at any time subject thereto or deprive
the holder of any Transition Bond of the security provided by the
lien of the Indenture.
Enforcement of the Transfer Agreement, the Sale Agreement and the Servicing
Agreement
The Indenture will provide that the Issuer will take all lawful actions
to enforce its rights under the Transfer Agreement, the Sale Agreement and the
Servicing Agreement in a commercially reasonable manner and to compel or
secure the performance and observance by West Penn, the Seller and the
Servicer of each of their respective material obligations to the Issuer under
or in connection with the Transfer Agreement, the Sale Agreement and the
Servicing Agreement. So long as no Event of Default occurs and is continuing,
the Issuer may exercise any and all rights, remedies, powers and privileges
lawfully available to the Issuer under or in connection with the Transfer
Agreement, the Sale Agreement and the Servicing Agreement. However, if the
Issuer and the Seller or Servicer propose to amend, modify, waive, supplement,
terminate or surrender, or agree to any amendment, modification, supplement,
termination, waiver or surrender of, the process for adjusting Intangible
Transition Charges, the Issuer shall notify the Bond Trustee and the Bond
Trustee shall notify Transition Bondholders of such proposal and the Bond
Trustee shall consent thereto only with the consent of the holder of each
outstanding Transition Bond of each Series or Class affected thereby.
If an Event of Default occurs and is continuing, the Bond Trustee may,
and, at the direction of the holders of a majority of the outstanding
principal amount of the Transition Bonds of all Series shall, exercise all
rights, remedies, powers, privileges and claims of the Issuer against West
Penn, the Seller or the Servicer under or in connection with the Sale
Agreement and the Servicing Agreement, and any right of the Issuer to take
such action shall be suspended.
Modifications to the Transfer Agreement, the Sale Agreement and the Servicing
Agreement
With the consent of the Bond Trustee, the Transfer Agreement, the Sale
Agreement and the Servicing Agreement may be amended at any time and from time
to time, without the consent of the Transition Bondholders, provided that such
amendment shall not, as evidenced by an officer's certificate, adversely
affect the interest of any Transition Bondholder or change the adjustment
process for the Intangible Transition Charges. The Bond Trustee shall not
withhold its consent to such amendment so long as the Rating Agency Condition
is satisfied in connection therewith by each Rating Agency other than Moody's
(and the Issuer shall have furnished Moody's with written notice of such
amendment prior to the effectiveness thereof) and the foregoing officer's
certificate is provided.
No amendment, modification, waiver, supplement, termination or surrender
of the terms of the Transfer Agreement, the Sale Agreement or Servicing
Agreement, or waiver of timely performance or observance by West Penn, the
Seller or the Servicer under the Transfer Agreement, Sale Agreement or
Servicing Agreement, respectively, in each case in such a way as would
adversely affect the interests of Transition Bondholders is permitted nor
shall the Bond Trustee consent thereto. If the Issuer, West Penn, the Seller
or the Servicer shall otherwise propose to amend, modify, waive, supplement,
terminate or surrender, or agree to any amendment, modification, waiver,
supplement, termination or surrender of the terms of the Transfer Agreement,
the Sale Agreement or the Servicing Agreement or waive timely performance or
observance by West Penn, the Seller or the Servicer under the Transfer
Agreement, the Sale Agreement or Servicing Agreement, respectively, the Issuer
shall notify the Bond Trustee and the Bond Trustee shall notify the Transition
Bondholders thereof. The Bond Trustee shall consent thereto only with the
consent of the holders of at least a majority of the outstanding principal
amount of the Transition Bonds of each Series or Class.
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The Issuer shall furnish to each of the Rating Agencies (1) prior to the
execution of any such amendment or consent, written notification of the
substance thereof and (2) promptly after the execution of any such amendment
or consent, a copy thereof.
Events of Default; Rights Upon Event of Default
An "Event of Default" is defined in the Indenture as being:
(1) a default for five days or more in the payment of any
interest on any Transition Bond;
(2) a default in the payment of the then unpaid principal of
any Transition Bond of any Series on the Series Termination Date for
such Series or, if applicable, any Class on the Class Termination
Date for such Class;
(3) a default in the payment of the redemption price for any
Transition Bond on the redemption date therefor;
(4) a default in the observance or performance of any covenant
or agreement of the Issuer made in the Indenture (other than those
specifically dealt with in (1), (2) or (3) above) and the
continuation of any such default for a period of thirty days after
notice thereof is given to the Issuer by the Bond Trustee or to the
Issuer and the Bond Trustee by the holders of at least 25% in
outstanding principal amount of the Transition Bonds of any Series;
and
(5) certain events of bankruptcy, insolvency, receivership or
liquidation of the Issuer.
If an Event of Default occurs and is continuing, the Bond Trustee or
holders of a majority in principal amount of the Transition Bonds of all
Series then outstanding may declare the principal of all Series of the
Transition Bonds to be immediately due and payable. Such declaration may,
under certain circumstances, be rescinded by the holders of a majority in
principal amount of all Series of the Transition Bonds then outstanding.
If the Transition Bonds of all Series have been declared to be due and
payable following an Event of Default, the Bond Trustee may, in its
discretion, either sell the Collateral or elect to have the Issuer maintain
possession of the Collateral and continue to apply distributions on the
Collateral as if there had been no declaration of acceleration. The Bond
Trustee is prohibited from selling the Collateral following an Event of
Default other than a default in the payment of any principal, a default for
five days or more in the payment of any interest on any Transition Bond of any
Series or a default on the payment of the price set for redemption in the
related Supplemental Indenture for any Transition Bond on the date for
redemption therefor set in the related Supplemental Indenture unless:
(1) the holders of 100% of the principal amount of all Series
of Transition Bonds consent thereto;
(2) the proceeds of such sale or liquidation are sufficient to
pay in full the principal of and premium, if any, and accrued
interest on the outstanding Transition Bonds; or
(3) the Bond Trustee determines that funds provided by the
Collateral would not be sufficient on an ongoing basis to make all
payments on the Transition Bonds of all Series as such payments
would have become due if the Transition Bonds had not been declared
due and payable, and the Bond Trustee obtains the consent of the
holders of 662/3% of the aggregate outstanding amount of the
Transition Bonds of each Series.
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Subject to the provisions of the Indenture relating to the duties of the
Bond Trustee, in case an Event of Default occurs and is continuing, the Bond
Trustee will be under no obligation to exercise any of the rights or powers
under the Indenture at the request or direction of any of the holders of
Transition Bonds of any Series if the Bond Trustee reasonably believes it will
not be adequately indemnified against the costs, expenses and liabilities
which might be incurred by it in complying with such request. Subject to such
provisions for indemnification and certain limitations contained in the
Indenture, the holders of a majority in principal amount of the outstanding
Transition Bonds of all Series will have the right to direct the time, method
and place of conducting any proceeding or any remedy available to the Bond
Trustee; provided that, among other things:
(1) such direction shall not conflict with any rule of law or
with the Indenture;
(2) subject to certain provisions in the Indenture, any
direction to the Bond Trustee to sell or liquidate the Collateral
shall be by the holders of 100% of the principal amount of all
Series of Transition Bonds then outstanding; and
(3) the Bond Trustee may take any other action deemed proper by
the Bond Trustee that is not inconsistent with such direction.
The holders of a majority in principal amount of the Transition Bonds of
all Series then outstanding may, in certain cases, waive any default with
respect thereto, except a default in the payment of principal of or premium,
if any, or interest on any of the Transition Bonds or a default in respect of
a covenant or provision of the Indenture that cannot be modified without the
waiver or consent of all of the holders of the outstanding Transition Bonds of
all Series and Classes affected.
No Transition Bondholder of any Series will have the right to institute
any proceeding, judicial or otherwise, or to avail itself of the remedies
provided in Section 2812(d)(3)(v) of the Competition Act, with respect to the
Indenture, unless:
(1) such holder previously has given to the Bond Trustee
written notice of a continuing Event of Default;
(2) the holders of not less than 25% in principal amount of the
outstanding Transition Bonds of each Series have made written
request of the Bond Trustee to institute such proceeding in its own
name as Bond Trustee;
(3) such holder or holders have offered the Bond Trustee
security or indemnity reasonably satisfactory to the Bond Trustee
against the costs, expenses, and liabilities to be incurred in
complying with such request;
(4) the Bond Trustee for 60 days after its receipt of such
notice, request and offer has failed to institute such proceeding;
and
(5) no direction inconsistent with such written request has
been given to the Bond Trustee during such 60-day period by the
holders of a majority in principal amount of the outstanding
Transition Bonds of all Series.
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Certain Covenants
The Issuer will keep in effect its existence, rights and franchises as a
limited liability company under Delaware law, provided that the Issuer may
consolidate with or merge into another entity or sell substantially all of its
assets to another entity and dissolve if:
(1) the entity formed by or surviving such consolidation or
merger or to whom substantially all of such assets are sold is
organized under the laws of the United States or any state thereof
and shall expressly assume by a Supplemental Indenture the due and
punctual payment of the principal of and premium, if any, and
interest on all Transition Bonds and the performance of the Issuer's
obligations under the Indenture;
(2) such entity expressly assumes all obligations and succeeds
to all rights of the Issuer under the Transfer Agreement, the Sale
Agreement and the Servicing Agreement pursuant to an assignment and
assumption agreement executed and delivered to the Bond Trustee;
(3) no default or Event of Default will have occurred and be
continuing immediately after giving effect to such merger,
consolidation or sale;
(4) the Rating Agency Condition will have been satisfied with
respect to such consolidation or merger or sale by each Rating
Agency, except Moody's (and the Issuer shall have furnished Moody's
with prior written notice of such consolidation, merger or sale);
(5) the Issuer has received an opinion of counsel to the effect
that such consolidation or merger or sale of assets would have no
material adverse tax consequence to the Issuer or any Transition
Bondholder, such consolidation or merger or sale complies with the
Indenture and all conditions precedent therein provided relating to
such consolidation or merger or sale and will result in the Bond
Trustee maintaining a continuing valid first priority security
interest in the Collateral;
(6) none of the Intangible Transition Property, the QRO or West
Penn's, the Seller's, the Servicer's or the Issuer's rights under
the Competition Act or the QRO are impaired thereby; and
(7) any action that is necessary to maintain the lien and
security interest created by the Indenture will have been taken.
The Issuer will from time to time execute and deliver such documents,
make all filings and take any other action necessary or advisable to, among
other things, maintain and preserve the lien and security interest (and
priority thereof) of the Indenture and will not permit the validity of the
Indenture to be impaired, the lien to be amended, hypothecated, subordinated
or terminated or discharged, or any person to be released from any covenants
or obligations except as expressly permitted by the Indenture, nor will it
permit any lien, charge, excise, claim, security interest, mortgage or other
encumbrance, other than the lien and security interest created by the
Indenture, to be created on or extend to or otherwise arise upon or burden the
Collateral or any part thereof or any interest therein or the proceeds
thereof, or permit the lien of the Indenture not to constitute a continuing
valid first priority security interest in the Collateral.
The Issuer may not, among other things:
(1) except as expressly permitted by the Indenture, the Sale
Agreement or the Servicing Agreement sell, transfer, exchange or
otherwise dispose of any of the Collateral unless directed to do so
by the Bond Trustee in accordance with the Indenture; or
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(2) claim any credit on, or make any deduction from the
principal or premium, if any, or interest payable in respect of, the
Transition Bonds (other than amounts properly withheld under the
Code), or assert any claim against any present or former Transition
Bondholder because of the payment of taxes levied or assessed upon
the Issuer.
The Issuer may not engage in any business other than purchasing
and owning the Transferred Intangible Transition Property, issuing
Transition Bonds from time to time, pledging its interest in the
Collateral to the Bond Trustee under the Indenture in order to
secure the Transition Bonds, and performing activities that are
necessary, suitable or convenient to accomplish the foregoing or are
incidental thereto.
The Issuer may not issue, incur, assume or guarantee any
indebtedness except for the Transition Bonds or guarantee or
otherwise become contingently liable in connection with the
obligations, stocks or dividends of, or own, purchase, repurchase or
acquire (or agree contingently to do so) any stock, obligations,
assets or securities of, or any other interest in, or make any
capital contribution to, any other person, except that the Issuer
may invest funds in Eligible Investments. The Issuer may not, except
as contemplated by the Indenture, the Sale Agreement, the Servicing
Agreement and certain related documents, including the LLC
Agreement, make any loan or advance or credit to any person. The
Issuer will not make any expenditure (by long-term or operating
lease or otherwise) for capital assets (either realty or personalty)
other than Intangible Transition Property purchased from the Seller
pursuant to, and in accordance with, the Sale Agreement. The Issuer
may not make any payments, distributions or dividends to any holder
of beneficial interests in the Issuer in respect of such beneficial
interest, except in accordance with the Indenture.
The Issuer will cause the Servicer to deliver to the Bond Trustee the
Annual Accountant's Report, compliance certificates and monthly reports
regarding distributions and other statements required by the Servicing
Agreement. See "The Servicing Agreement" in this Prospectus.
List of Transition Bondholders
Any Transition Bondholder or group of Transition Bondholders (each of
whom has owned a Transition Bond for at least six months) may, by written
request to the Bond Trustee, obtain access to the list of all Transition
Bondholders maintained by the Bond Trustee for the purpose of communicating
with other Transition Bondholders with respect to their rights under the
Indenture or the Transition Bonds. The Bond Trustee may elect not to afford
the requesting Transition Bondholders access to the list of Transition
Bondholders if it agrees to mail the desired communication or proxy, on behalf
and at the expense of the requesting Transition Bondholders, to all Transition
Bondholders.
Annual Compliance Statement
The Issuer will be required to file annually with the Bond Trustee a
written statement as to the fulfillment of its obligations under the
Indenture. In addition, the Issuer shall furnish to the Bond Trustee an
opinion of counsel concerning filings made by the Issuer on an annual basis
and before the effectiveness of any amendment to the Transfer Agreement, the
Sale Agreement or the Servicing Agreement.
Bond Trustee's Annual Report
If required by the Trust Indenture Act of 1939, as amended, the Bond
Trustee will be required to mail each year to all Transition Bondholders a
brief report relating to, among other things, its eligibility and
qualification to continue as the Bond Trustee under the Indenture, any amounts
advanced by it under the Indenture, the amount, interest rate and maturity
date of certain indebtedness owing by the Issuer to it in the Bond Trustee's
individual
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capacity, the property and funds physically held by the Bond Trustee as such,
any additional issue of a Series of Transition Bonds not previously reported
and any action taken by it that materially affects the Transition Bonds of any
Series and that has not been previously reported.
Satisfaction and Discharge of Indenture
The Indenture will be discharged with respect to the Transition Bonds of
any Series upon the delivery to the Bond Trustee for cancelation of all the
Transition Bonds of such Series or upon the Expected Final Payment Date or the
date of redemption therefor, provided that the Issuer has deposited funds
sufficient for the payment in full of all of the Transition Bonds of such
Series with the Bond Trustee and the Issuer has delivered to the Bond Trustee
the officer's certificate and opinion of counsel specified in the Indenture.
Such deposited funds will be segregated and held apart solely for paying such
Transition Bonds, and such Transition Bonds shall not be entitled to any
amounts on deposit in the Collection Account other than amounts on deposit in
the Defeasance Subaccount for such Transition Bonds.
Legal Defeasance and Covenant Defeasance
The Issuer may, at any time, terminate (1) all of its obligations under
the Indenture with respect to the Transition Bonds of any Series ("Legal
Defeasance Option") or (2) its obligations to comply with certain covenants,
including certain of the covenants described under "The Indenture-Certain
Covenants" (the "Covenant Defeasance Option"). The Issuer may exercise the
Legal Defeasance Option with respect to any Series of Transition Bonds
notwithstanding its prior exercise of the Covenant Defeasance Option with
respect to such Series.
If the Issuer exercises the Legal Defeasance Option with respect to any
Series, such Series of Transition Bonds shall be entitled to payment only from
the funds or other obligations set aside under the Indenture for payment
thereof on the Expected Final Payment Date or redemption date therefor as
described below. Such Series of Transition Bonds shall not be subject to
payment through redemption or acceleration prior to such Expected Final
Payment Date or redemption date, as applicable. If the Issuer exercises the
Covenant Defeasance Option with respect to any Series, the Transition Bonds of
such Series may not be accelerated because of an Event of Default relating to
a default in the observance or performance of any covenant or agreement of the
Issuer made in the Indenture.
The Issuer may exercise the Legal Defeasance Option or the Covenant
Defeasance Option with respect to any Series of Transition Bonds only if:
(1) the Issuer irrevocably deposits or causes to be deposited
in trust with the Bond Trustee cash or U.S. Government Obligations
for the payment of principal of and premium, if any, and interest on
such Transition Bonds to the Expected Final Payment Date or
redemption date therefor, as applicable, such deposit to be made in
the Defeasance Subaccount for such Series of Transition Bonds;
(2) the Issuer delivers to the Bond Trustee a certificate from
a nationally recognized firm of independent accountants expressing
its opinion that the payments of principal and interest when due and
without reinvestment will provide cash at such times and in such
amounts as will be sufficient to pay in respect of the Transition
Bonds of such Series:
(x) principal in accordance with the Expected Amortization
Schedule therefor, or if such Series is to be redeemed, the
redemption price of such redemption on the redemption date
therefor, and
(y) interest when due;
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(3) in the case of the Legal Defeasance Option, 95 days pass
after the deposit is made and during the 95-day period no default
relating to events of bankruptcy, insolvency, receivership or
liquidation of the Issuer occurs and is continuing at the end of the
period;
(4) no default has occurred and is continuing on the day of
such deposit and after giving effect thereto;
(5) in the case of the Legal Defeasance Option, the Issuer
delivers to the Bond Trustee an opinion of counsel stating that:
(x) the Issuer has received from, or there has been
published by, the Internal Revenue Service a ruling; or
(y) since the date of execution of the Indenture, there
has been a change in the applicable federal income tax law;
in either case to the effect that, and based thereon such opinion
shall confirm that, the holders of the Transition Bonds of such
Series will not recognize income, gain or loss for federal income
tax purposes as a result of the exercise of such Legal Defeasance
Option and will be subject to federal income tax on the same
amounts, in the same manner and at the same times as would have been
the case if such Legal Defeasance had not occurred;
(6) in the case of the Covenant Defeasance Option, the Issuer
delivers to the Bond Trustee an opinion of counsel to the effect
that the holders of the Transition Bonds of such Series will not
recognize income, gain or loss for federal income tax purposes as a
result of the exercise of such Covenant Defeasance Option and will
be subject to federal income tax on the same amounts, in the same
manner and at the same times as would have been the case if such
Covenant Defeasance had not occurred; and
(7) the Issuer delivers to the Bond Trustee a certificate of an
authorized officer of the Issuer and an opinion of counsel, each
stating that all conditions precedent to the satisfaction and
discharge of the Transition Bonds of such Series have been complied
with as required by the Indenture.
There will be no other conditions to the exercise by the Issuer of its
Legal Defeasance Option or its Covenant Defeasance Option.
"U.S. Government Obligations" means direct obligations (or certificates
representing an ownership interest in such obligations) of the United States
of America (including any agency or instrumentality thereof) for the payment
of which the full faith and credit of the United States of America is pledged
and which are not callable at the issuer's option.
The Bond Trustee
[ ] will be the Bond Trustee under the Indenture. The Bond
Trustee may resign at any time by so notifying the Issuer. The holders of a
majority in principal amount of the Transition Bonds of all Series then
outstanding may remove the Bond Trustee by so notifying the Bond Trustee and
may appoint a successor bond trustee. The Issuer will remove the Bond Trustee
if the Bond Trustee ceases to be eligible to continue as such under the
Indenture, the Bond Trustee becomes insolvent, a receiver or other public
officer takes charge of the Bond Trustee or its property or the Bond Trustee
becomes incapable of acting. If the Bond Trustee resigns or is removed or a
vacancy exists in the office of bond trustee for any reason, the Issuer will
be obligated to appoint a successor bond trustee eligible under the Indenture.
Any resignation or removal of the Bond Trustee and appointment of a
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successor bond trustee will not become effective until acceptance of the
appointment by a successor bond trustee. The Issuer is required under the
Indenture to provide the Rating Agencies with written notice of any successor
bond trustee.
The Bond Trustee shall at all times satisfy the requirements of the Trust
Indenture Act and have a combined capital and surplus of at least $50 million
and a long term debt rating of "Baa3" or better by Moody's and "BBB-" by Fitch
IBCA (if currently rated by Fitch IBCA). If the Bond Trustee consolidates
with, merges or converts into, or transfers all or substantially all of its
corporate trust business or assets to, another entity, the resulting,
surviving or transferee entity shall without any further action be the
successor Bond Trustee.
Governing Law
The Indenture will be governed by and construed under the laws of the
State of New York.
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UNITED STATES TAXATION
General
This section summarizes the material U.S. tax consequences to holders of
Transition Bonds. It represents the views of our tax counsel, Cravath, Swaine
& Moore. However, the discussion is limited in the following ways:
o The discussion only covers you if you buy your Transition Bonds in the
initial offering.
o The discussion only covers you if you hold your Transition Bonds as a
capital asset (that is, for investment purposes), and if you do not have
a special tax status.
o The discussion does not cover tax consequences that depend upon your
particular tax circumstances. You should consult your tax advisor about
the consequences of holding Transition Bonds in your particular
situation.
o The discussion is based on current law. Changes in the law may change the
tax treatment of the Transition Bonds.
o The discussion generally does not cover state, local or foreign law.
o The discussion does not apply to you if you are a non-U.S. holder of
Transition Bonds and if you (a) own 10% or more of the voting stock of
Allegheny Energy, (b) are a "controlled foreign corporation" with respect
to Allegheny Energy, or (c) are a bank making a loan in the ordinary
course of its business.
Taxation of the Issuer and of the Transition Bonds
The Issuer is a wholly owned subsidiary of the Seller which has not
elected to be taxed as a corporation for federal income tax purposes. As such,
the Issuer will be treated as a division of the Seller and will not be treated
as a separate taxable entity.
West Penn has received a ruling from the IRS that (1) the issuance of the
QRO by the PUC will not result in the recognition of gross income by West Penn
or the Seller, (2) the issuance of the Transition Bonds will not result in the
recognition of gross income by [West Penn] or the Seller and (3) the
Transition Bonds will be classified as obligations of the Seller. Based on the
ruling, for U.S. federal income tax purposes, the Transition Bonds will be
treated as debt of the Seller secured by a pledge of the Collateral. Tax
counsel has relied on the ruling in preparing this Section.
If you are considering buying Transition Bonds, you should consult your tax
advisors about the tax consequences of holding the Transition Bonds in your
particular situation.
Tax Consequences to U.S. Holders
This section applies to you if you are a "U.S. Holder". A "U.S. Holder" is:
o an individual U.S. citizen or resident alien;
o a corporation, or entity taxable as a corporation, that was created under
U.S. law (federal or state); or
o an estate or trust whose worldwide income is subject to U.S. federal
income tax.
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If a partnership holds Transition Bonds, the tax treatment of a partner will
generally depend upon the status of the partner and upon the activities of the
partnership. Partners of partnerships holding Transition Bonds should consult
their tax advisors.
Interest
o If you are a cash method taxpayer (including most individual holders),
you must report that interest in your income when you receive it.
o If you are an accrual method taxpayer, you must report that interest in
your income as it accrues.
Sale or Retirement of Transition Bonds
On a sale or retirement of a Transition Bond:
o You will have taxable gain or loss equal to the difference between the
amount received by you and your tax basis in the Transition Bond. Your
tax basis in the Transition Bond is your cost, subject to certain
adjustments.
o Your gain or loss will generally be capital gain or loss, and will be
long term capital gain or loss if you held the Transition Bond for more
than one year.
o If you sell the Transition Bond between interest payment dates, a portion
of the amount you receive reflects interest that has accrued on the
Transition Bond but has not yet been paid by the sale date. That amount
is treated as ordinary interest income and not as sale proceeds.
Information Reporting and Backup Withholding
Under the tax rules concerning information reporting to the IRS:
o Assuming you hold your Transition Bonds through a broker or other
securities intermediary, the intermediary is required to provide
information to the IRS concerning interest and retirement proceeds we pay
on Transition Bonds you own, unless an exemption applies.
o Similarly, unless an exemption applies, you must provide the intermediary
with your Taxpayer Identification Number for its use in reporting
information to the IRS. If you are an individual, this is your social
security number. You are also required to comply with other IRS
requirements concerning information reporting.
o If you are subject to these requirements but do not comply, the
intermediary is required to withhold 31% of all amounts payable to you on
the Transition Bonds (including principal payments). If the intermediary
withholds payments, you may use the withheld amount as a credit against
your federal income tax liability.
o All U.S. Holders that are individuals are subject to these requirements.
Some U.S. Holders, including all corporations, tax-exempt organizations
and individual retirement accounts, are exempt from these requirements.
Tax Consequences to Non-U.S. Holders
This section applies to you if you are a "Non-U.S. Holder." A "Non-U.S.
Holder" is:
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o an individual that is a nonresident alien;
o a corporation organized or created under non-U.S. law; or
o an estate or trust that is not taxable in the U.S. on its worldwide
income.
Withholding Taxes
Generally, payments of principal and interest on the Transition Bonds will not
be subject to U.S. withholding taxes.
However, in order for the exemption from withholding taxes to apply to you,
you must meet one of the following requirements:
o You provide your name, address, and a signed statement that you are the
beneficial owner of the Transition Bond and are not a U.S. Holder. This
statement is generally made on Form W-8 or Form W-8BEN.
o You or your agent claim an exemption from withholding tax under an
applicable tax treaty. This claim is generally made on Form 1001 or Form
W-8BEN.
o You or your agent claim an exemption from withholding tax on the ground
that the income is effectively connected with the conduct of a trade or
business in the U.S. This claim is generally made on Form 4224 or Form
W-8ECI.
You should consult your tax advisor about the specific methods to satisfy
these requirements. These procedures will change on January 1, 2001. In
addition, a claim for exemption will not be valid if the person receiving the
claim has actual knowledge that the statements on the applicable form are
false.
Sale or Retirement of Transition Bonds
If you sell a Transition Bond or it is redeemed, you will not be subject to
federal income tax on any gain unless one of the following applies:
o The gain is connected with a trade or business that you conduct in the
U.S.
o You are an individual, you are present in the U.S. for at least 183 days
during the year in which you dispose of the Transition Bond, and certain
other conditions are satisfied.
o The gain represents accrued interest, in which case the rules for
interest would apply.
U.S. Trade or Business
If you hold a Transition Bond in connection with a trade or business that you
are conducting in the U.S.:
o Any interest on the Transition Bond, and any gain from disposing of the
Transition Bond, generally will be subject to income tax as if you were a
U.S. Holder.
o If you are a corporation, you may be subject to the "branch profits tax"
on your earnings that are connected with your U.S. trade or business,
including earnings from the Transition Bond. This tax is 30%, but may be
reduced or eliminated by an applicable income tax treaty.
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Estate Taxes
If you are an individual, the Transition Bonds will not be subject to U.S.
estate tax when you die. However, this rule only applies if, at the time of
your death, payments on the Transition Bond would not have been connected to a
trade or business that you were conducting in the U.S.
Information Reporting and Backup Withholding
U.S. rules concerning information reporting and backup withholding are
described above. Under these rules:
o Principal and interest payments received by you will be automatically
exempt from the usual rules if you provide the tax certifications needed
to avoid withholding tax on interest, as described above. The exemption
does not apply if the recipient of the applicable form knows that the
form is false. However, interest payments made to you will be reported to
the IRS on Form 1042-S.
o Sale proceeds you receive on a sale of your Transition Bonds through a
broker may be subject to information reporting and/or backup withholding
if you are not eligible for an exemption. In particular, information
reporting and backup reporting may apply if you use the U.S. office of a
broker, and information reporting (but not backup withholding) may apply
if you use the foreign office of a broker if the broker has certain
connections to the U.S. You should consult your tax advisor concerning
information reporting and backup withholding on a sale.
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ERISA CONSIDERATIONS
Employee benefit plans are permitted to purchase Transition Bonds.
ERISA and/or Section 4975 of the Code impose certain requirements on
employee benefit plans and certain other plans and arrangements, including
individual retirement accounts and annuities, Keogh plans and certain
collective investment funds or insurance company general or separate accounts
in which such plans, accounts or arrangements are invested (collectively,
"Plans"), and on persons who are fiduciaries with respect to Plans. ERISA
imposes on Plan fiduciaries certain general fiduciary requirements. In
addition, Section 406 of ERISA and Section 4975 of the Code prohibit a broad
range of "prohibited transactions" involving assets of a Plan ("Plan Assets")
and persons who have certain specified relationships to the Plan ("parties in
interest" under ERISA and "disqualified persons" under the Code), unless a
statutory or administrative exemption is available.
Additional prohibited transactions could arise if assets of the Issuer
were considered to be Plan Assets with respect to any Plan that acquired
Transition Bonds. However, the Transition Bonds are debt for state law
purposes and should not be considered to have "substantial equity features".
As a result, a Plan's acquisition of Transition Bonds should not cause assets
of the Issuer to be considered to be Plan Assets.
Any fiduciary or other Plan investor considering whether to purchase the
Transition Bonds of any Class or Series on behalf of or with Plan Assets of
any Plan should consult with its legal advisors and refer to the related
Prospectus Supplement for guidance regarding the ERISA Considerations
applicable to the Transition Bonds offered thereby.
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PLAN OF DISTRIBUTION
The Transition Bonds of each Series may be sold to or through
underwriters named in the related Prospectus Supplement (the "Underwriters")
by a negotiated firm commitment underwriting and public reoffering by the
Underwriters or any other underwriting arrangement as may be specified in the
related Prospectus Supplement or may be offered or placed either directly or
through agents. The Issuer and the Bond Trustee intend that Transition Bonds
will be offered through various methods from time to time and that offerings
may be made concurrently through more than one of these methods or that an
offering of a particular Series of Transition Bonds may be made through a
combination of these methods.
The distribution of Transition Bonds may be effected from time to time in
one or more transactions at a fixed price or prices, which may be changed, or
at market prices prevailing at the time of sale, at prices related to such
prevailing market prices or in negotiated transactions or otherwise at varying
prices to be determined at the time of sale.
The Transition Bonds may be offered through one or more different
methods, including offerings through underwriters. It is not anticipated that
any of the Transition Bonds will be listed on any securities exchange.
In connection with the sale of the Transition Bonds, Underwriters or
agents may receive compensation in the form of discounts, concessions or
commissions. Underwriters may sell Transition Bonds to particular dealers at
prices less a concession. Underwriters may allow, and these dealers may
reallow, a concession to other dealers. Underwriters, dealers and agents that
participate in the distribution of the Transition Bonds of a Series may be
deemed to be underwriters, and any discounts or commissions received by them
from the Issuer and any profit on the resale of the Transition Bonds by them
may be deemed to be underwriting discounts and commissions under the
Securities Act. These Underwriters or agents will be identified, and any
compensation received from the Issuer will be described, in the related
Prospectus Supplement.
Under agreements which may be entered into by West Penn, the Seller, the
Issuer and the Bond Trustee, Underwriters and agents who participate in the
distribution of the Transition Bonds may be entitled to indemnification by
West Penn, the Seller and the Issuer against liabilities specified therein,
including under the Securities Act.
The Underwriters may, from time to time, buy and sell Transition Bonds,
but there can be no assurance that an active secondary market will develop and
there is no assurance that any such market, if established, will continue.
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RATINGS
It is a condition of any Underwriter's obligation to purchase the
Transition Bonds that each Class receive the rating indicated in the related
Prospectus Supplement, which will be in one of the four highest categories,
from at least one Rating Agency.
A security rating is not a recommendation to buy, sell or hold securities
and may be subject to revision or withdrawal at any time by the assigning
Rating Agency. No person is obligated to maintain the rating on any Transition
Bonds, and, accordingly, there can be no assurance that the ratings assigned
to any Class of Transition Bonds upon initial issuance will not be lowered or
withdrawn by a Rating Agency at any time thereafter. If a rating of any Class
of Transition Bonds is revised or withdrawn, the liquidity of such Class of
Transition Bonds may be adversely affected. In general, ratings address credit
risk and do not represent any assessment of any particular rate of principal
payments on the Transition Bonds other than the payment in full of each Series
or Class of Transaction Bonds by the applicable Series Termination Date or
Class Termination Date.
LEGAL MATTERS
Certain legal matters relating to the issuance of the Transition Bonds
will be passed upon for the Issuer by Cravath, Swaine & Moore, New York, New
York and for the Underwriters by Latham & Watkins, New York, New York. Certain
legal matters relating to the Issuer and issuance of the Transition Bonds
under the laws of the State of Delaware will be passed upon for the Issuer by
Richards, Layton & Finger, P.A., Wilmington, Delaware. Certain legal matters
relating to the federal tax consequences of the issuance of the Transition
Bonds will be passed upon for the Issuer by Cravath, Swaine & Moore. [Certain
legal matters relating to the state tax consequences of the issuance of the
Transition Bonds will be passed upon for the Issuer by [ ]].
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INDEX OF PRINCIPAL DEFINITIONS
Set forth below is a list of defined terms used in this Prospectus and
defined herein and the pages on which the definitions may be found.
Term Page
Adjustment Date............................................ 97
Adjustment Request......................................... 96
Administration Agreement................................... 72
Administrative Agent....................................... 37
Annual Accountant's Report................................. 100
Basic Documents ........................................... 87
Bond Rate ................................................. 12
Bond Trustee............................................... 7
Book-Entry Transition Bonds ............................... 77
Business Day .............................................. 88
Calculated Overcollateralization Level .................... 75
Calculation Date .......................................... 97
Capital Subaccount ........................................ 12
Cede ...................................................... 77
CEDEL ..................................................... 78
CEDEL Participants ........................................ 79
Class ..................................................... 74
Class Termination Date .................................... 13
Code ...................................................... 17
Collateral ................................................ 103
Collection Account ........................................ 11
Collection Period ......................................... 97
Commonwealth .............................................. 9
Competition Act............................................ 5
Competitive Default Service ............................... 46
Competitive Default Supplier............................... 46
competitive transition charges............................. 5
Competitive Transition Charges............................. 5, 43
Cooperative ............................................... 80
Covenant Defeasance Option ................................ 116
Customer .................................................. 8
Customer Category ......................................... 8, 55
De Minimis Loss Amount .................................... 88
Defeasance Subaccount ..................................... 12
Deferred Repurchase Price ................................. 88
Depositaries .............................................. 78
DTC ....................................................... 77
Eligible Institution ...................................... 105
Eligible Investments ...................................... 105
ERISA ..................................................... 17
Euroclear ................................................. 78
Euroclear Operator ........................................ 80
Euroclear Participants .................................... 80
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Term Page
Event of Default........................................... 112
Exchange Act .............................................. 36
Expected Amortization Schedule ............................ 12
Expected Final Payment Date ............................... 13
Financing Issuance ........................................ 104
Fitch IBCA ................................................ 97
General Subaccount ........................................ 11
H.R. 1230 ................................................. 40
Indemnity Amounts ......................................... 105
Indenture ................................................. 6, 74
Initial Contribution Date.................................. 83
Initial Intangible Transition Property .................... 83
Initial Loss Calculation Date ............................. 88
Initial Transfer Date ..................................... 91
Insolvency Laws ........................................... 102
intangible transition charges.............................. 5
Intangible Transition Charges.............................. 5
intangible transition property............................. 5
Intangible Transition Property............................. 5
IP&L ...................................................... 47
Issuer .................................................... 6
Issuer Administrative Agreement............................ 63
ITC Collections ........................................... 7
Joint Petition ............................................ 43
Legal Defeasance Option ................................... 116
LLC Agreement.............................................. 72
Loss Amounts .............................................. 105
Loss Subaccount ........................................... 12
Manager.................................................... 7
Moody's ................................................... ?
Non-U.S. Holder............................................ 120
Overcollateralization Amount .............................. 75
Overcollateralization Subaccount........................... 11
Participants .............................................. 78
Parties in Interest ....................................... ?
Payment Date .............................................. 13
PECO Energy................................................ 47
Plan Assets ............................................... ?
Plans ..................................................... 123
Prospectus Supplement ..................................... 1
PUC ....................................................... 5
PUC Reconsideration Order.................................. 43
PUC Restructuring Order.................................... 43
QRO ....................................................... 6
Qualified Transition Expenses.............................. 6
Rate Schedule ............................................. 8, 52
Rating Agency ............................................. 17
Rating Agency Condition ................................... 104
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Term Page
Record Date ............................................... 13
Refunding Issuance ........................................ 104
Registration Statement..................................... 36
Remittance Date ........................................... 97
Required Capital Amount ................................... 75
Reserve Subaccount ........................................ 12
Restructuring Plan ........................................ 43
Rules ..................................................... 79
S&P ....................................................... ?
Sale Agreement ............................................ 6
SEC ....................................................... 36
Securities Act ............................................ 36
Seller .................................................... 7
Seller Administration Agreement............................ 61
Series .................................................... 74
Series Issuance Date ...................................... 74
Series Termination Date.................................... 13
Servicer .................................................. 8
Servicer Defaults.......................................... 101
Servicing Agreement ....................................... 8
Servicing Fee ............................................. 9
Settlement ................................................ 43
stranded costs ............................................ 5
Stranded Costs............................................. 5
Subsequent Contribution.................................... 83
Subsequent Contribution Date............................... 83
Subsequent Intangible Transition Property ................. 83
Subsequent Sale ........................................... 91
Subsequent Transfer Date .................................. 91
Successor Servicer ........................................ 102
Supplemental Indenture .................................... 74
Terms and Conditions ...................................... 80
Transfer Agreement......................................... 6
Transferred Intangible Transition Property................. 6
Transition Bondholder ..................................... 9
Transition Bonds .......................................... 1
U.S. Government Obligations ............................... 117
Underwriters............................................... 124
West Penn.................................................. 7
Winter Moratorium ......................................... 64
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WEST PENN FUNDING LLC
INDEX TO FINANCIAL STATEMENTS
Page
Report of Independent Accountants .................................... F-2
Financial Statements:
[ ] .................................... F-
[ ] .................................... F-
Notes to Financial Statements ........................................ F-
F-1
<PAGE>
West Penn Funding LLC
Issuer
West Penn Power Company
Originator and Servicer
SERIES 1999-A
$[ ]
Transition Bonds
$[ ] Class A-1
$[ ] Class A-2
$[ ] Class A-3
$[ ] Class A-4
[$[ ] Class A-5]
PROSPECTUS SUPPLEMENT
Underwriters
Morgan Stanley Dean Witter
[ ]
You should rely only on the information contained or incorporated by reference
in this prospectus supplement and the prospectus. We have not authorized
anyone to provide you with different information.
We are not offering the Transition Bonds in any state where the offer is not
permitted.
We do not claim the accuracy of the information in this prospectus supplement
and the prospectus as of any date other than the dates stated on their
respective covers.
Dealers will deliver a prospectus supplement and prospectus when acting as
underwriters of these securities and with respect to their unsold allotments
or subscriptions. In addition, all dealers selling these securities will
deliver a prospectus supplement and prospectus until [ ], 1999.
<PAGE>
PART II
Item 14. Other Expenses of Issuance and Distribution
The following is an itemized list of the estimated expenses to be incurred
in connection with the offering of the securities being offered hereunder other
than underwriting discounts and commissions.
Registration Fee.................................... $278
Printing and Engraving Expenses..................... *
Trustees' Fees and Expenses......................... *
Legal Fees and Expenses............................. *
Blue Sky Fees and Expenses.......................... *
Accountants' Fees and Expenses...................... *
Rating Agency Fees.................................. *
Miscellaneous Fees and Expenses..................... *
---
Total ....................................... $ *
===
- ------------------
* To be provided by amendment.
Item 15. Indemnification of Members and Managers
Section 18-108 of the Delaware Limited Liability Company Act
provides that, subject to specified standards and restrictions, if any, as
are set forth in the limited liability company agreement, a limited
liability company shall have the power to indemnify and hold harmless any
member or manager or other person from and against any and all claims and
demands whatsoever.
The Amended and Restated Limited Liability Company Agreement (the
"LLC Agreement") of West Penn Funding LLC (the "Issuer") provides that, to
the fullest extent permitted by law, the Issuer shall indemnify its members
and managers against any liability incurred in connection with any
proceeding in which any member or manager may be involved as a party or
otherwise by reason of the fact that the member or manager is or was
serving in its capacity as a member or manager, unless this liability is
based on or arises in connection with the member's or manager's own willful
misconduct or gross negligence, the failure to perform the obligations set
forth in the LLC Agreement, or taxes, fees or other charges on, based on or
measured by any fees, commissions or compensation received by the managers
in connection with any of the transactions contemplated by the LLC
Agreement and related agreements.
II-1
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Item 16. Exhibits
Exhibit No. Description
1.1 Form of Underwriting Agreement.*
4.1.1 Limited Liability Company Agreement of West
Penn Funding LLC.*
4.1.2 Form of Amended and Restated Limited
Liability Company Agreement of West Penn
Funding LLC.*
4.2 Certificate of Formation for West Penn
Funding LLC.*
4.3 Form of Indenture.*
4.4 Form of Transition Bonds.*
5.1 Opinion of [Richards, Layton & Finger, P.A.]
relating to legality of the Transition
Bonds.*
5.2 Opinion of Cravath, Swaine & Moore, relating
to legality of the Transition Bonds.*
8.1.1 Opinion of Cravath, Swaine & Moore with
respect to material federal tax matters.*
8.1.2 Opinion of [ ] with respect to material
state tax matters.*
10.1 Form of Transfer Agreement.*
10.2 Form of Sale Agreement.*
10.3 Form of Servicing Agreement.*
10.4 Joint Petition for Full Settlement of West
Penn Power Company's Restructuring Plan and
Related Appeals and Application for a
Qualified Rate Order and Application for
Transfer of Generation Assets dated
November 3, 1998.*
23.1 Consent of Cravath, Swaine & Moore (included
in its opinion filed as Exhibits 5.2 and
8.1.1).*
23.2 Consent of [Richards, Layton & Finger, P.A.]
(included in its opinion filed as
Exhibit 5.1).*
23.3 Consent of [Accountants].*
24.1 Power of Attorney.*
25.1 Statement of Eligibility under the Trust
Indenture Act of 1939, as amended, of [ ],
as Bond Trustee under the Indenture.*
27.1 Financial Data Schedule.*
II-2
<PAGE>
99.1 Qualified Rate Order issued November 19,
1998.*
99.2 Supplemental Qualified Rate Order issued
[ ], 1999.*
99.3 Internal Revenue Service Private Letter
Ruling pertaining to Transition Bonds.*
- -----------------
* To be filed by amendment
Item 17. Undertakings
The undersigned Registrant on behalf of West Penn Funding LLC
(the "Issuer") hereby undertakes as follows:
(a) (1) to file, during any period in which offers or sales are
being made, a post-effective amendment to this Registration Statement; (i)
to include any prospectus required by Section 10(a)(3) of the Securities
Act of 1933, as amended; (ii) to reflect in the prospectus any facts or
events arising after the effective date of the Registration Statement (or
the most recent post-effective amendment thereof) which, individually or in
the aggregate, represent a fundamental change in the information set forth
in the Registration Statement. Notwithstanding the foregoing, any increase
or decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) of the Securities Act of 1933, as amended, if, in
the aggregate, the changes in volume and price represent no more than a
twenty percent change in the maximum aggregate offering price set forth in
the "Calculation of Registration Fee" table in the effective Registration
Statement; and (iii) to include any material information with respect to
the plan of distribution not previously disclosed in the Registration
Statement or any material change in such information in the Registration
Statement; provided, however, that (a)(1)(i) and (a)(1)(ii) will not apply
if the information required to be included in a post-effective amendment by
those paragraphs is contained in periodic reports filed pursuant to Section
13 or Section 15(d) of the Securities Exchange Act of 1934, as amended,
that are incorporated by reference in this Registration Statement.
(2) That, for the purpose of determining any liability under
the Securities Act of 1933, as amended, each such post-effective amendment
shall be deemed to be a new
II-3
<PAGE>
Registration Statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering hereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
(b) That, for purposes of determining any liability under the
Securities Act of 1933, as amended, each filing of the Registrant's annual
report pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of
1934, as amended (and, where applicable, each filing of any employee
benefit plan's annual report pursuant to Section 15(d) of the Securities
Exchange Act of 1934, as amended), with respect to the Issuer that is
incorporated by reference in the Registration Statement shall be deemed to
be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(c) That insofar as indemnification for liabilities arising under
the Securities Act of 1933, as amended, may be permitted to members,
managers, directors, officers and controlling persons of the registrant
pursuant to the provisions described under Item 15 above, or otherwise, the
Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as
expressed in the Securities Act of 1933, as amended, and is, theretofore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred
or paid by a member, manager, director, officer or controlling person of
the registrant in the successful defense of any action, suit or proceeding)
is asserted by such member, manager, director, officer or controlling
person in connection with the securities being registered, the Registrant
will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Securities Act of 1933, as amended, and will be governed
by the final adjudication of such issue.
(d) That, for purposes of determining any liability under the
Securities Act of 1933, as amended, the information omitted from the form
of prospectus filed as part of this Registration Statement in reliance upon
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Rule 430A and contained in a form of prospectus filed by the registrant
pursuant to Rule 424(b)(i) or (4) or 497(h) under the Securities Act of
1933, as amended, shall be deemed to be part of this Registration Statement
as of the time it was declared effective.
(e) That, for the purpose of determining any liability under the
Securities Act of 1933, as amended, each post-effective amendment that
contains a form of prospectus shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of
such securities at that time shall be deemed to be the initial bona fide
offering thereof.
(f) The undersigned registrant hereby undertakes to file an
application for the purpose of determining the eligibility of the trustee
to act under subsection (a) of Section 310 of the Trust Indenture Act of
1939, as amended, in accordance with the rules and regulations prescribed
by the Commission under Section 305(b)(2) of the Trust Indenture Act of
1939, as amended.
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as
amended, the Registrant certifies that it has reasonable grounds to believe
that it meets all of the requirements for filing on Form S-3 and that the
security rating requirement of Form S-3 will be met by the time of sale,
and has duly caused this Registration Statement to be signed on its behalf
by the undersigned, thereunto duly authorized, in the City of Greensburg,
Commonwealth of Pennsylvania, on May 28, 1999.
WEST PENN FUNDING LLC,
by
/s/ Carol G. Russ
---------------------------
Name: Carol G. Russ
Title: Sole Member
Pursuant to the requirements of the Securities Act of 1933, as
amended, this Registration Statement has been signed on behalf of West Penn
Funding LLC on May 28, 1999 by the following persons in the capacities
indicated.
Signature Title
/s/ Carol G.Russ Principal and Chief
- ------------------------ Executive Officer
Carol G. Russ (Principal Executive
Officer)
/s/ Carol G. Russ Chief Financial Officer
- ------------------------ and Chief Accounting Officer
Carol G. Russ (Principal Financial
Officer and Principal
Accounting Officer)
/s/ Carol G. Russ Sole Member
- ------------------------
Carol G. Russ
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INDEX TO EXHIBITS
Exhibit No. Description
1.1 Form of Underwriting Agreement.*
4.1.1 Limited Liability Company Agreement of
West Penn Funding LLC.*
4.1.2 Form of Amended and Restated Limited
Liability Agreement of West Penn Funding
LLC.*
4.2 Certificate of Formation for West Penn
Funding LLC.*
4.3 Form of Indenture.*
4.4 Form of Transition Bonds.*
5.1 Opinion of [Richards, Layton & Finger,
P.A.] relating to legality of the
Transition Bonds.*
5.2 Opinion of Cravath, Swaine & Moore,
relating to legality of the Transition
Bonds.*
8.1.1 Opinion of Cravath, Swaine & Moore with
respect to material federal tax
matters.*
8.1.2 Opinion of [ ] with respect to
material state tax matters.*
10.1 Form of Transfer Agreement.*
10.2 Form of Sale Agreement.*
10.3 Form of Servicing Agreement.*
10.4 Joint Petition for Full Settlement of
West Penn Power Company's Restructuring
Plan and Related Appeals and Application
for a Qualified Rate Order and
Application for Transfer of Generation
Assets dated November 3, 1998.*
23.1 Consent of Cravath, Swaine & Moore
(included in its opinion filed as
Exhibits 5.2 and 8.1.1).*
23.2 Consent of [Richards, Layton & Finger,
P.A.] (included in its opinion filed as
Exhibit 5.1).*
23.3 Consent of [Accountants].*
24.1 Power of Attorney.*
25.1 Statement of Eligibility under the Trust
Indenture Act of 1939, as amended, of
[ ], as Bond Trustee under the
Indenture.*
27.1 Financial Data Schedule.*
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99.1 Qualified Rate Order issued November 19,
1998.*
99.2 Supplemental Qualified Rate Order issued
[ ], 1999.*
99.3 Internal Revenue Service Private Letter
Ruling pertaining to Transition Bonds.*
- -----------------
* To be filed by amendment
II-8
