<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 10, 1999
REGISTRATION NO. 333-79619
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2
TO
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)
<TABLE>
<S> <C>
DELAWARE 25-1843349
(STATE OR OTHER JURISDICTION OF INCORPORATION OR (I.R.S. EMPLOYER IDENTIFICATION NUMBER)
ORGANIZATION)
</TABLE>
------------------------
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)
REGIS F. BINDER
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:
<TABLE>
<S> <C> <C>
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 (301) 790-3400 (212) 906-1200
(212) 474-1000
</TABLE>
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. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF SECURITIES AMOUNT TO BE AGGREGATE OFFERING AGGREGATE OFFERING AMOUNT OF
BEING REGISTERED REGISTERED PRICE 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.
** Calculated pursuant to Rule 457(o) of the Securities Act. Fee of $278 paid in
connection with original Registration Statement filed on May 28, 1999.
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> 2
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 SEPTEMBER 10, 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
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Principal Amount........... $ $ $ $
Price...................... $ $ $ $
(%) (%) (%) (%)
Underwriter's Commission... $ $ $ $
(%) (%) (%) (%)
Proceeds to the Issuer..... $ $ $ $
Bond Rate.................. % % % %
Interest Paid..............
Optional Redemption*.......
First Payment Date......... March 25, 2000 March 25, 2000 March 25, 2000 March 25, 2000
Expected Final Payment
Date.....................
Termination Date...........
</TABLE>
* 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 or equal to 5% of the initial principal balance.
------------------------
THESE SECURITIES ARE HIGHLY STRUCTURED. BEFORE YOU PURCHASE THESE SECURITIES,
YOU SHOULD CAREFULLY CONSIDER THE RISK FACTORS BEGINNING ON PAGE 18
IN THE ACCOMPANYING PROSPECTUS.
------------------------
-- These securities are obligations of West Penn Funding LLC only.
-- The issuer is a special purpose entity that has no property other than
the following collateral, which is the sole source of payment for these
securities:
-- 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;
-- collections of intangible transition charges;
-- the issuer's rights under the transfer agreement, the sale agreement
and the servicing agreement; and
-- trust accounts held by the bond trustee.
------------------------
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
GOLDMAN, SACHS & CO. PNC CAPITAL MARKETS, INC.
BANC OF AMERICA SECURITIES LLC PRYOR, McCLENDON, COUNTS & CO., INC.
The date of this Prospectus Supplement is [ ], 1999.
<PAGE> 3
TABLE OF CONTENTS
<TABLE>
<S> <C>
WHERE TO FIND INFORMATION IN THESE DOCUMENTS................ S-1
SUMMARY OF TERMS............................................ S-2
Securities Offered....................................... S-2
Introduction............................................. S-4
The Collateral........................................... S-6
Interest................................................. S-6
Principal................................................ S-6
Credit Enhancement....................................... S-7
Optional Redemption...................................... S-7
ITC Adjustment Process................................... S-7
Tax Status............................................... S-8
ERISA Considerations..................................... S-8
Servicer's and Issuer's Mailing Address and Telephone
Number of Principal Executive Office................... S-8
THE SERIES 1999-A BONDS..................................... S-9
General.................................................. S-9
Distributions from the Collection Account................ S-9
Interest................................................. S-10
Principal................................................ S-10
Optional Redemption...................................... S-11
Overcollateralization.................................... S-11
Other Credit Enhancement................................. S-12
Reports to Holders of Series 1999-A Bonds................ S-13
DESCRIPTION OF INTANGIBLE TRANSITION PROPERTY............... S-13
The Intangible Transition Charges........................ S-13
Rate Schedule Descriptions............................... S-15
Adjustments to the Intangible Transition Charges......... S-16
DESCRIPTION OF WEST PENN'S BUSINESS......................... S-17
SERVICING................................................... S-17
Servicing Fee............................................ S-17
Servicer Advances........................................ S-17
UNDERWRITING THE SERIES 1999-A BONDS........................ S-18
RATINGS..................................................... S-19
GLOSSARY OF DEFINED TERMS................................... S-20
</TABLE>
<PAGE> 4
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 18 of the accompanying
prospectus.
This supplement begins with several sections describing these securities:
-- Summary of Terms provides important amounts, dates and other terms of
your series;
-- The Series 1999-A Bonds describes the key structural features of your
series; and
-- 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.
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 those transactions. Those 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.
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> 5
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.
SECURITIES OFFERED
SERIES 1999-A TRANSITION BONDS
$[ ]
<TABLE>
<CAPTION>
<S> <C>
ISSUER: WEST PENN FUNDING LLC
ORIGINATOR AND SERVICER: WEST PENN POWER COMPANY
SELLER: WEST PENN FUNDING CORPORATION
BOND TRUSTEE: BANKERS TRUST COMPANY
PRICING DATE: [ ], 1999
SERIES ISSUANCE DATE: [ ], 1999
CLEARANCE AND
SETTLEMENT: DTC/CEDEL/EUROCLEAR
</TABLE>
<TABLE>
<CAPTION>
INITIAL CLASS PRINCIPAL BALANCE BOND RATE % OF TOTAL SERIES PRINCIPAL
------------------------------- --------- ---------------------------
<S> <C> <C> <C>
Class A-1
Class A-2
Class A-3
Class A-4
</TABLE>
Servicing Fee: On each payment date, the issuer will pay the
servicer the quarterly servicing fee with respect
to all series of transition bonds, solely to the
extent that the issuer has funds available to pay
this fee. So long as West Penn acts as servicer,
this quarterly fee will be $[ ]. If a
successor servicer is appointed, the quarterly
servicing fee will be based on an amount approved
by the Pennsylvania Public Utility Commission, but
not in excess of a per annum rate equal to 1.5% of
the outstanding principal balance of the transition
bonds. The servicer will be entitled to retain as
additional compensation net investment income it
receives on the intangible transition charges it
collects pending remittance to the bond trustee, as
well as any late fees paid by customers to the
servicer which are associated with the intangible
transition charges.
S-2
<PAGE> 6
Anticipated Ratings: S&P/Fitch IBCA AAA
Moody's Aaa
Credit Enhancement: Intangible transition charge 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: March 25, June 25, September 25 and December 26 of
each year or, if not a business day, the next
business day.
First Payment Date: March 25, 2000.
<TABLE>
<CAPTION>
CLASS A-1 CLASS A-2 CLASS A-3 CLASS A-4
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Expected Final
Payment Date:*
Termination Date:
</TABLE>
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 or equal to 5% of the initial
principal balance.
Record Date: Close of business on the day prior to any payment
date.
<TABLE>
<CAPTION>
CLASS A-1 CLASS A-2 CLASS A-3 CLASS A-4
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
CUSIP Numbers:
</TABLE>
S-3
<PAGE> 7
INTRODUCTION
The Pennsylvania Electricity Generation Customer Choice and 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 Pennsylvania Competition Act, electric utilities, such
as West Penn Power Company, 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 these 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. Accordingly, the utilities may incur a loss in value
of their generation-related assets as a result of the transition from a
regulated environment to competition for electric generation services.
The Competition Act provides for utilities to recover the anticipated loss
in value of their generation-related assets, known as stranded costs, 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 through the issuance of
transition bonds, such as the securities described in this prospectus
supplement. This right is known as intangible transition property. 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 the issuance, credit enhancing and servicing of the transition bonds
through intangible transition charges included in customers' electric bills.
Intangible transition charges will reduce the amount of competitive transition
charges.
Intangible transition property was created by the Pennsylvania 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 August 12, 1999. Intangible transition property represents the
irrevocable right to collect intangible transition charges from customers to
recover:
-- the aggregate principal amount of transition bonds; and
-- 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 Power Company.
S-4
<PAGE> 8
On the series issuance date, West Penn Power Company will contribute
intangible transition property to West Penn Funding Corporation, which will then
sell the intangible transition property to West Penn Funding LLC, which will
then pledge all its property, including the intangible transition property, to
the bond trustee as the collateral for the transition bonds. West Penn Funding
LLC's other property that makes up the collateral for these securities is
described in this Summary under the subcaption "The Collateral."
S-5
<PAGE> 9
For more information on the Pennsylvania Competition Act, intangible
transition property and intangible transition charges, you should review the
material under the captions entitled "Risk Factors," "The Pennsylvania
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
The Series 1999-A Bonds will be secured by the collateral, primarily consisting
of:
-- all the issuer's right, title and interest in and to the intangible
transition property transferred by West Penn Funding Corporation to
the issuer pursuant to the intangible transition property sale
agreement;
-- collections of intangible transition charges that are remitted to the
issuer pursuant to the servicing agreement between the issuer and the
servicer;
-- the issuer's rights, except for certain provisions for indemnification
of West Penn Funding Corporation and the issuer, under the intangible
transition property transfer agreement between West Penn and West Penn
Funding Corporation;
-- the issuer's rights, except for certain provisions for indemnification
of the issuer, under the sale agreement;
-- the issuer's rights, except for certain provisions for indemnification
of the issuer, under the servicing agreement; and
-- specified bank accounts of the issuer and all amounts or investment
property in these accounts, other than cash amounts payable to West
Penn Funding Corporation or the servicer described in the accompanying
prospectus.
For a more detailed description of the collateral for the transition bonds, you
should review the material under the captions "The QRO and the Intangible
Transition Charges" and "The Indenture--Security" in the accompanying
prospectus. For a summary of the terms of the transfer agreement, see "The
Transfer Agreement" in the accompanying prospectus. For a summary of the terms
of the sale agreement, see "The Sale Agreement" in the accompanying prospectus.
For a summary of the terms of the servicing agreement, see "The Servicing
Agreement" in the accompanying prospectus.
INTEREST
Holders of each class of this series are expected to receive interest at the
bond rate for that class as set forth on the cover of this prospectus
supplement.
Interest on the Series 1999-A Bonds will be calculated on the basis of a 360-day
year of four 90-day periods. With respect to the first payment date, interest
will accrue from the issuance date.
You should also review the material under the caption "The Series 1999-A
Bonds--Interest" in this prospectus supplement.
PRINCIPAL
On each payment date, to the extent of available funds, the bond trustee will
make principal payments in accordance with the expected amortization schedule
S-6
<PAGE> 10
set forth under the caption "The Series 1999-A Bonds--Principal" in this
prospectus supplement. The actual amount of principal paid on any payment date
on your Series 1999-A Bond may be less than the amount set forth in the expected
amortization schedule for that payment date.
Other than in the event of a redemption or acceleration upon an event of
default, in no event will the principal paid to any class on any payment date be
greater than the amount necessary to reduce the principal balance of that class
to the amount specified in the expected amortization schedule for that class and
that payment date.
CREDIT ENHANCEMENT
Overcollateralization. Overcollateralization is the pledge by the issuer of
collateral, in this case intangible transition property, in excess of what is
expected to be needed to cover the repayment of your Series 1999-A Bond. The
overcollateralization for these securities will be funded over the life of the
Series 1999-A Bonds and is expected to reach [ ]% of the initial principal
balance of each series of transition bonds.
Additional Credit Enhancement. In addition, capital of the issuer (expected to
be [ ]% of the initial principal balance of each series of transition bonds)
is available to make payments on any series of transition bonds as described in
the accompanying prospectus. In addition, intangible transition charges will be
subject to periodic review and adjustment, as described below under "ITC
Adjustment Process."
You should also review the material under the captions "The Transition
Bonds--Credit Enhancement" and "The Indenture--Allocations and Payment" in the
accompanying prospectus.
OPTIONAL REDEMPTION
The Series 1999-A Bonds may be redeemed in whole once the outstanding principal
balance of the Series 1999-A Bonds has been reduced to less than or equal to 5%
of the initial principal balance.
You should also review the material under the caption "The Series 1999-A
Bonds--Optional Redemption" in this prospectus supplement.
ITC ADJUSTMENT PROCESS
West Penn, as servicer of the intangible transition property on behalf of the
issuer, will make adjustments to the intangible transition charges it bills to
customers, upon approval by the Pennsylvania Public Utility Commission, if West
Penn:
(1) collects insufficient intangible transition charges, or
(2) collects excess amounts of intangible transition charges,
in order:
(1) to make timely payments on the Series 1999-A Bonds,
(2) to pay fees, costs and charges associated with the transition bonds, and
(3) to fund any of the subaccounts to its required level.
The following table summarizes the adjustment frequency of the intangible tran-
S-7
<PAGE> 11
sition charges with respect to the Series 1999-A Bonds:
<TABLE>
<CAPTION>
Adjustment Date
---------------
<S> <C>
Annual Adjustments... 1/1/00-1/1/07
Quarterly
Adjustments........ 1/1/08 and 4/1/08
Monthly
Adjustments........ 7/1/08-12/1/08
</TABLE>
If the last class of the Series 1999-A Bonds is not paid at its termination
date, the intangible transition charges will continue to be charged but not for
electricity delivered after December 31, 2008. In that case, the final
adjustment date will be December 1, 2008.
For a more detailed description of the intangible transition charge adjustment
process, you should review the material under the caption "Description of
Intangible Transition Property--Adjustments to the Intangible Transition
Charges" and the material under the caption "The QRO and the Intangible
Transition Charges--The Intangible Transition Charges--The ITC Adjustment
Process" in the accompanying prospectus.
TAX STATUS
West Penn has received a ruling from the Internal Revenue Service that the
transition bonds will be classified as obligations of West Penn Funding
Corporation. Based on the ruling, for U.S. federal income tax purposes, the
transition bonds will be treated as debt of West Penn Funding Corporation
secured by a pledge of the collateral.
The issuer will be treated as a division of West Penn Funding Corporation and
will not be treated as a separate taxable entity.
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.
For information regarding the application of U.S. federal income tax laws, you
should see the section captioned "United States Taxation" in the accompanying
prospectus.
In addition, in the opinion of Ballard Spahr Andrews & Ingersoll, LLP, special
Pennsylvania tax counsel to the issuer and West Penn, interest from the
transition bonds received by a person who is not otherwise subject to corporate
or personal income tax in Pennsylvania will not be subject to these taxes.
Transition bonds held by deceased Pennsylvania residents may be subject to
inheritance and estate taxes. Neither residents nor nonresidents of Pennsylvania
will be subject at the present time to an intangible personal property tax with
respect to the transition bonds. See "Material Commonwealth of Pennsylvania Tax
Matters" in the accompanying prospectus.
ERISA CONSIDERATIONS
Employee benefit plans are permitted to purchase transition bonds.
You should also review the material under the caption "ERISA Considerations" in
the accompanying prospectus.
SERVICER'S AND ISSUER'S MAILING ADDRESS AND TELEPHONE NUMBER OF PRINCIPAL
EXECUTIVE OFFICE:
The mailing address of West Penn is West Penn Power Company, 800 Cabin Hill
Drive, Greensburg, PA 15601, and its telephone number is (724) 837-3000. The
mailing address of the issuer is West Penn Funding LLC, 800 Cabin Hill Drive,
Room [ ], Greensburg, PA 15601, and its telephone number is (724)
837-[ ].
S-8
<PAGE> 12
RISK FACTORS
For a discussion of the material risks associated with an investment in the
Series 1999-A Bonds, you should review the discussion under "Risk Factors,"
which begins on page 18 of the accompanying prospectus.
THE SERIES 1999-A BONDS
GENERAL
The Series 1999-A Bonds will be issued under and secured pursuant to a base
indenture dated as of [ ], 1999 between the issuer and Bankers
Trust Company, as bond trustee, as supplemented by the Series 1999-A
supplemental indenture to that base indenture (as so supplemented, the
"INDENTURE").
Capitalized terms used but not defined in this prospectus supplement are
defined in the glossary of defined terms, located on page of this prospectus
supplement or in the glossary of defined terms, located on page of the
accompanying prospectus.
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 The Depository Trust Company ("DTC") or, if the Series 1999-A Bonds are
no longer in book-entry form, will be payable at the offices of Bankers Trust
Company 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
that 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 that 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:
(1) with respect to interest, to each class on a pro rata basis based
on the amount of interest payable to that class and
(2) with respect to principal, to each class as described under
"--Principal" in this section.
S-9
<PAGE> 13
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 March
25, 2000, 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 four 90-day periods.
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 that
payment date.
The record date for any payment date shall be the close of business on the
day prior to that payment 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 in a sequential manner,
to the extent funds are available, as follows:
(1) To the holders of the Series 1999-A Bonds, Class A-1, until this
class is retired in full;
(2) To the holders of the Series 1999-A Bonds, Class A-2, until this
class is retired in full;
(3) To the holders of the Series 1999-A Bonds, Class A-3, until this
class is retired in full; and
(4) To the holders of the Series 1999-A Bonds, Class A-4, until this
class is retired in full.
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 that class to
the amount specified in the Expected Amortization Schedule for that class and
payment date unless an acceleration of payments following 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.
S-10
<PAGE> 14
In the event of an acceleration of payments following a default on the
Series 1999-A Bonds, principal payments on each class of Series 1999-A Bonds
will be made on a pro rata basis based on the respective outstanding principal
balance for each class as of the prior payment 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 SERIES 1999-A
- ------------ --------- --------- --------- --------- -------------
<S> <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 or equal to 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 Standard & Poor's Rating Group, Moody's
Investors Service Inc. and Fitch IBCA, Inc. (each, a "RATING AGENCY").
OVERCOLLATERALIZATION
The amount of 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 intangible transition charges 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
S-11
<PAGE> 15
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. If amounts payable
in the General Subaccount and the Reserve Subaccount are not sufficient on any
payment date to make scheduled payments to the holders of the Series 1999-A
Bonds, meet credit enhancement funding requirements and pay expenses of the
issuer, the bond trustee, the independent directors of the issuer, the
administrative agent, the servicer and other specified fees and expenses, the
bond trustee will draw on amounts in the Overcollateralization Subaccount.
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
<TABLE>
<CAPTION>
REQUIRED
OVERCOLLATERALIZATION
PAYMENT DATE LEVEL
- ------------ ---------------------
<S> <C>
</TABLE>
OTHER CREDIT ENHANCEMENT
Reserve Subaccount. Collections of intangible transition charges ("ITC
COLLECTIONS") available on any payment date above that amount necessary to pay
the
(1) amounts payable for expenses of the bond trustee, the independent
directors of the issuer, the administrative agent and the servicer and
other fees and expenses,
(2) amounts distributable to the transition bondholders for principal
and interest on that payment date,
(3) amounts required to replenish the Capital Subaccount,
(4) amounts required to replenish the Overcollateralization
Subaccount and
(5) net investment earnings on amounts in the Capital Subaccount
released to the issuer
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
are insufficient to make scheduled payments to the transition bondholders, meet
credit enhancement funding requirements and pay expenses of the issuer, the bond
trustee, the
S-12
<PAGE> 16
independent directors of the issuer, the administrative agent, the servicer and
other specified fees and expenses. See "The Indenture--Allocations and Payments"
in the accompanying prospectus.
Capital Subaccount. Upon the issuance of the Series 1999-A Bonds, West
Penn Funding Corporation 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 Reserve Subaccount and the
Overcollateralization Subaccount are insufficient to make scheduled payments to
the transition bondholders, meet credit enhancement funding requirements and pay
expenses of the issuer, the bond trustee, the independent directors of the
issuer, the administrative agent 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. These 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 this financial
information.
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
West Penn's 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"). 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
S-13
<PAGE> 17
Charges--The Intangible Transition Charges--The ITC Adjustment Process" in the
accompanying prospectus.
Initially, the intangible transition charges, including gross receipts tax,
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,
including gross receipts tax, for each Customer Category of West Penn customers
during 1998 was $[ ], $[ ] and $[ ], respectively. The following
projected average intangible transition charges will be imposed on customers in
each Customer Category, and the Rate Schedules within each Customer Category,
beginning with the series issuance date for the Series 1999-A Bonds. The rates
in Table 3 below do not include gross receipts tax.
TABLE 3
PROJECTED AVERAGE INTANGIBLE TRANSITION CHARGES
FOR THE PERIOD THROUGH [ ], 1999
RESIDENTIAL CUSTOMERS
<TABLE>
<CAPTION>
AVERAGE ITC RATE
RATE SCHEDULE in cents per kWh
- ------------- ----------------
<S> <C>
Schedule 10...............................................
</TABLE>
COMMERCIAL CUSTOMERS
<TABLE>
<CAPTION>
AVERAGE ITC RATE
RATE SCHEDULE in cents per kWh
- ------------- ----------------
<S> <C>
Schedule 20...............................................
Schedule 22...............................................
Schedule 23...............................................
Schedule 24...............................................
</TABLE>
S-14
<PAGE> 18
INDUSTRIAL CUSTOMERS
<TABLE>
<CAPTION>
AVERAGE ITC RATE
RATE SCHEDULE in cents per kWh
- ------------- ----------------
<S> <C>
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 71...............................................
Schedule 86...............................................
</TABLE>
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, as 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 August 30, 1979.
Schedule 23 -- For athletic field lighting for schools, communities, civic
organizations, and other public institutions. Closed to new
customers as of August 28, 1985.
Schedule 24 -- For fairs, carnivals, and other similar temporary
enterprises.
Industrial Rate Schedules:
Schedule 30 -- For customers with demands in excess of 100 kilowatts,
generally large commercial and medium-sized industrial
customers.
S-15
<PAGE> 19
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 December
31, 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 December 31, 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 December 31, 1998.
Schedules 51-56 -- For various types of street and outdoor lighting. Closed
to new customers as of June 6, 1997.
Schedules 57-58 -- For outdoor lighting of various types.
Schedule 71 -- For municipal street and highway lighting. Closed to new
customers as of August 26, 1978.
Schedule 86 -- For alternative generation.
ADJUSTMENTS TO THE INTANGIBLE TRANSITION CHARGES
The actual ITC Collections are intended to be neither more nor less than
the amount necessary to pay the principal of the transition bonds of each series
in accordance with the Expected Amortization Schedule, to pay interest on each
series and to fund the related expenses and reserves. In order to enhance the
likelihood that the appropriate amount of intangible transition charges will be
collected, the Servicing Agreement requires the servicer to seek, and the
Pennsylvania Competition Act and the QRO require the PUC to approve, annual
adjustments to the intangible transition charges on January 1 of each year.
These adjustments will be based on actual ITC Collections and updated
assumptions by the Servicer as to projected future usage of electricity by
customers, expected delinquencies and write-offs and future expenses relating to
the Series 1999-A Bonds. In addition, the QRO provides that, commencing twelve
months prior to the expected final payment date for the last series or class of
transition bonds, adjustments may be made quarterly or monthly. The final
Adjustment Date for the Series 1999-A Bonds will be December 1, 2008. See "The
Servicing Agreement--Servicing Procedures--ITC Adjustment Process" in the
prospectus.
S-16
<PAGE> 20
DESCRIPTION OF WEST PENN'S BUSINESS
For a discussion of West Penn Funding Corporation and the servicer, you
should review the material under the captions "West Penn Power Company", "West
Penn Funding Corporation" and "The Servicer" in the accompanying prospectus.
SERVICING
SERVICING FEE
On each payment date, the issuer will pay the servicer the quarterly
servicing fee (the "Servicing Fee") with respect to all series of transition
bonds. So long as West Penn acts as servicer, the Servicing Fee will be $[ ].
If a successor servicer is appointed, the Servicing Fee will be based on an
amount approved by the PUC, but not in excess of a per annum rate equal to 1.5%
of the outstanding principal balance of the transition bonds. 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-17
<PAGE> 21
UNDERWRITING THE SERIES 1999-A BONDS
Subject to the terms and conditions set forth in the underwriting agreement
(the "UNDERWRITING AGREEMENT") among West Penn, West Penn Funding Corporation,
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
- ---- --------- --------- --------- ---------
<S> <C> <C> <C> <C>
Morgan Stanley & Co. Incorporated........... $ $ $ $
Goldman, Sachs & Co. .......................
Banc of America Securities LLC..............
PNC Capital Markets, Inc. ..................
Pryor, McClendon, Counts & Co., Inc. .......
</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 A-1 Bonds, [ ] percent of the principal amount of the
Series 1999-A Class A-2 Bonds, [ ] percent of the principal amount of the
Series 1999-A Class A-3 Bonds and [ ]% of the principal amount of the Series
1999-A Class A-4 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 A-1 Bonds, [ ] percent of the
principal amount of the Series 1999-A Class A-2 Bonds, [ ] percent of the
principal amount of the Series 1999-A Class A-3 Bonds and [ ]% of the
principal amount of the Series 1999-A Class A-4 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
S-18
<PAGE> 22
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, West Penn Funding Corporation, 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 West Penn Funding Corporation have agreed to
indemnify the several Underwriters against certain liabilities, including
liabilities under the Securities Act.
Under the terms of the Underwriting Agreement, the issuer and West Penn
have agreed to reimburse the Underwriters for some expenses.
RATINGS
It is a condition of any Underwriter's obligation to purchase that the
Series 1999-A Bonds be rated "AAA" by Standard & Poor's Rating Group, "AAA" by
Fitch IBCA, Inc. and "Aaa" by Moody's Investors Service Inc., which, in each
case, is in one of the four highest rating categories of that 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 that 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-19
<PAGE> 23
GLOSSARY OF DEFINED TERMS
Set forth below is a glossary of defined terms used in this prospectus
supplement.
"ADJUSTMENT REQUEST" means each request filed by the servicer with the PUC
for 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 the 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.
"CAPITAL SUBACCOUNT" means a subaccount of the Collection Account in which
the amount of capital required to be held by the issuer for a series of
transition bonds will be deposited by West Penn Funding Corporation on the date
of issuance of that series.
"COLLECTION ACCOUNT" means the single collection account for all series of
transition bonds established by the issuer and held by the bond trustee under
the indenture.
"EXPECTED AMORTIZATION SCHEDULE" means the amortization schedule for the
principal balance of the Series 1999-A Bonds set forth in Table 1 of this
prospectus supplement.
"GENERAL SUBACCOUNT" means a subaccount of the Collection Account into
which funds received from ITC Collections will initially be allocated.
"OVERCOLLATERALIZATION SUBACCOUNT" means a subaccount of the Collection
Account into which the Overcollateralization Amount will be deposited over the
expected life of a series of transition bonds.
"PUC" means the Pennsylvania Public Utility Commission or any successor
thereto.
"QRO" means the qualified rate order issued by the PUC to West Penn on
November 19, 1998, as supplemented by a supplemental qualified rate order issued
by the PUC to West Penn on August 12, 1999.
"QUALIFIED TRANSITION EXPENSES", as set forth in the QRO, means,
collectively, the aggregate principal amount of the transition bonds and 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.
"REQUIRED CAPITAL AMOUNT" means the amount of capital required to be
deposited by the issuer into the Capital Subaccount upon the issuance of a
series of transition bonds, which represents a capital contribution from West
Penn Funding Corporation.
"RESERVE SUBACCOUNT" means a subaccount of the Collection Account into
which will be deposited the excess, if any, of ITC Collections over amounts then
scheduled to be paid or due on a series of transition bonds, plus related
expenses, plus amounts needed to make required deposits to the
Overcollateralization Subaccount and the Capital Subaccount, plus net investment
earnings on amounts in the Capital Subaccount released to the issuer.
S-20
<PAGE> 24
PROSPECTUS
West Penn Funding LLC
Issuer
West Penn Power Company
Originator and Servicer
Up to $[ ] of Transition Bonds Issuable in Series
------------------------
THE ISSUER
-- MAY PERIODICALLY ISSUE TRANSITION BONDS IN ONE OR MORE SERIES WITH ONE
OR MORE CLASSES;
-- WILL OWN:
-- 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;
-- COLLECTIONS OF INTANGIBLE TRANSITION CHARGES;
-- ITS RIGHTS UNDER THE TRANSFER AGREEMENT, THE SALE AGREEMENT AND THE
SERVICING AGREEMENT;
-- TRUST ACCOUNTS HELD BY THE BOND TRUSTEE; AND
-- IF SO STATED IN THE APPLICABLE PROSPECTUS SUPPLEMENT, OTHER CREDIT
ENHANCEMENT.
THE TRANSITION BONDS
-- WILL BE PAYABLE ONLY FROM ASSETS OF THE ISSUER;
-- WILL BE SUPPORTED BY TRUST ACCOUNTS HELD BY THE TRUSTEE FOR THE
TRANSITION BONDS, AND, IF SO STATED IN THE APPLICABLE PROSPECTUS
SUPPLEMENT, OTHER CREDIT ENHANCEMENT; AND
-- 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 18 OF THIS PROSPECTUS.
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.
<PAGE> 25
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROSPECTUS SUMMARY.......................................... 1
RISK FACTORS................................................ 18
Legal, Legislative or Regulatory Actions Could Adversely
Affect Transition Bondholders.......................... 18
Nature of Intangible Transition Property................. 22
Servicing................................................ 26
Bankruptcy; Creditors' Rights............................ 31
The Transition Bonds..................................... 36
AVAILABLE INFORMATION....................................... 40
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE............. 40
WEST PENN POWER COMPANY..................................... 42
THE PENNSYLVANIA COMPETITION ACT............................ 44
The Pennsylvania Competition Act's General Effect on the
Electric Utility Industry in Pennsylvania.............. 44
Recovery of Stranded Costs............................... 44
Securitization of Stranded Costs......................... 45
Jurisdiction Over Disputes; Standing..................... 47
Possible Federal Preemption of the Competition Act....... 47
Possible Commonwealth Amendment or Repeal of the
Competition Act........................................ 48
WEST PENN'S RESTRUCTURING PLAN.............................. 50
The History of West Penn's Restructuring Plan............ 50
Provisions of the Settlement............................. 50
Provider of Last Resort.................................. 54
Prior Litigation......................................... 55
THE QRO AND THE INTANGIBLE TRANSITION CHARGES............... 57
The QRO.................................................. 57
The Intangible Transition Charges........................ 59
Competitive Billing...................................... 62
THE SERVICER................................................ 65
Retail Electric Service Territory........................ 65
Customers and Operating Revenues......................... 65
Forecasting Customers and Usage.......................... 70
Billing Process.......................................... 73
Limited Information on Customers' Creditworthiness....... 73
Electric Generation Suppliers and Other Third-Party
Billers................................................ 79
Year 2000 Compliance..................................... 79
WEST PENN FUNDING CORPORATION............................... 82
THE ISSUER.................................................. 84
USE OF PROCEEDS............................................. 86
</TABLE>
i
<PAGE> 26
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
THE TRANSITION BONDS........................................ 86
General Terms of the Transition Bonds.................... 86
Interest and Principal................................... 88
Floating Rate Transition Bonds........................... 88
Redemption............................................... 89
Credit Enhancement....................................... 89
Book-Entry Registration.................................. 90
Definitive Transition Bonds.............................. 94
CERTAIN WEIGHTED AVERAGE LIFE AND YIELD CONSIDERATIONS...... 96
THE TRANSFER AGREEMENT...................................... 97
Contribution of Intangible Transition Property........... 97
Representations and Warranties of West Penn.............. 99
Certain Matters Regarding West Penn...................... 105
Governing Law............................................ 105
THE SALE AGREEMENT.......................................... 106
Sale and Assignment of Intangible Transition Property.... 106
Representations and Warranties of West Penn Funding
Corporation............................................ 108
Certain Matters Regarding West Penn Funding
Corporation............................................ 111
Governing Law............................................ 111
THE SERVICING AGREEMENT..................................... 112
Servicing Procedures..................................... 112
Servicer Advances........................................ 114
Servicing Compensation; Releases......................... 114
Servicer Duties.......................................... 115
Servicer Representations and Warranties.................. 115
Servicer Indemnification................................. 116
Statements to Issuer and Bond Trustee.................... 117
Evidence as to Compliance................................ 117
Certain Matters Regarding the Servicer................... 118
Servicer Defaults........................................ 119
Rights Upon Servicer Default............................. 119
Successor Servicer....................................... 120
Governing Law............................................ 120
THE INDENTURE............................................... 121
Security................................................. 121
Issuance in Series or Classes............................ 122
Collection Account....................................... 123
Allocations and Payments................................. 126
Reports to Transition Bondholders........................ 127
Modification of Indenture................................ 128
</TABLE>
ii
<PAGE> 27
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Enforcement of the Transfer Agreement, the Sale Agreement
and the Servicing Agreement............................ 131
Modifications to the Transfer Agreement, the Sale
Agreement and the Servicing Agreement.................. 131
Events of Default; Rights Upon Event of Default.......... 132
Certain Covenants........................................ 134
List of Transition Bondholders........................... 136
Annual Compliance Statement.............................. 136
Bond Trustee's Annual Report............................. 136
Satisfaction and Discharge of Indenture.................. 137
Legal Defeasance and Covenant Defeasance................. 137
The Bond Trustee......................................... 139
Governing Law............................................ 139
UNITED STATES TAXATION...................................... 140
General.................................................. 140
Taxation of the Issuer and of the Transition Bonds....... 140
Tax Consequences to U.S. Holders......................... 141
Tax Consequences to Non-U.S. Holders..................... 142
MATERIAL COMMONWEALTH OF PENNSYLVANIA TAX MATTERS........... 144
ERISA CONSIDERATIONS........................................ 145
PLAN OF DISTRIBUTION........................................ 146
RATINGS..................................................... 147
LEGAL MATTERS............................................... 148
GLOSSARY OF PRINCIPAL DEFINITIONS........................... 149
INDEX TO FINANCIAL STATEMENTS............................... F-1
</TABLE>
iii
<PAGE> 28
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. CONSIDER
CAREFULLY THE RISK FACTORS BEGINNING ON PAGE 18 OF THIS PROSPECTUS.
Transaction Overview: The Pennsylvania Electricity Generation
Customer Choice and 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
Pennsylvania Competition Act, electric
utilities, such as West Penn Power Company,
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
these 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. Accordingly, the
utilities may incur a loss in value of these
generation-related assets as a result of the
transition from a regulated environment to
competition for electric generation services.
The Pennsylvania Competition Act provides for
utilities to recover the anticipated loss in
value of their generation-related assets, known
as stranded costs, 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 through the issuance of transition
bonds, such as the securities described in this
prospectus and the related prospectus
supplement. This right is known as intangible
transition property. Once intangible transition
property is securitized, the utility's right to
recover its stranded costs through the
competitive
1
<PAGE> 29
transition charges is replaced by the
intangible transition property holder's right
to recover the costs associated with the
issuance, credit enhancing and servicing of the
transition bonds through intangible transition
charges included in customers' electric bills.
Intangible transition charges will reduce the
amount of competitive transition charges.
Intangible transition property was created by
the Pennsylvania Competition Act and a
qualified rate order issued by the Pennsylvania
Public Utility Commission to West Penn Power
Company on November 19, 1998, as supplemented
by a supplemental qualified rate order issued
by the Pennsylvania Public Utility Commission
to West Penn on August 12, 1999. Intangible
transition property represents the irrevocable
right to collect intangible transition charges
from customers to recover:
-- the aggregate principal amount of
transition bonds; and
-- 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 Power Company.
On the issue date for each series, West Penn
Power Company will contribute intangible
transition property to West Penn Funding
Corporation pursuant to a transfer agreement in
exchange for all of the outstanding capital
stock of West Penn Funding Corporation. West
Penn Funding Corporation will then sell that
transferred intangible transition property to
West Penn Funding LLC pursuant to a sale
agreement. West Penn Funding LLC will then
pledge this property, along with its rights
under the transfer agreement, the sale
agreement, the servicing agreement, the
collection account and related rights, to the
bond trustee as the collateral for the
transition bonds pursuant to an indenture.
2
<PAGE> 30
For a diagram depicting the parties to this
transaction, refer to page 16 of this
prospectus.
For more information on the Pennsylvania
Competition Act, intangible transition property
and intangible transition charges, you should
review the material under the captions entitled
"Risk Factors," "The Pennsylvania 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 issuer was formed on May 26, 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. The collateral
is the sole source of payment for the
transition bonds. See "The Issuer" in this
prospectus.
Issuer's Address: 800 Cabin Hill Drive, Room [ ],
Greensburg, PA 15601
Issuer's Telephone Number: (724) 837-[ ]
Seller of the Transferred
Intangible Transition
Property: West Penn Funding Corporation, a Delaware
corporation.
West Penn Funding Corporation was incorporated
on [ ], 1999. West Penn Funding
Corporation is wholly owned by West Penn Power
Company, which will contribute the transferred
intangible transition property to West Penn
Funding Corporation in exchange for the
outstanding capital stock of West Penn Funding
Corporation pursuant to the transfer agreement.
West Penn Funding Corporation 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--Bank-
3
<PAGE> 31
ruptcy of West Penn or West Penn Funding
Corporation--True Sale or Financing" in this prospectus.
Seller's Address: [ ]
Seller's Telephone Number: [ ]
Bond Trustee: Bankers Trust Company
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 Power Company is referred to as West
Penn throughout this prospectus.
The intangible transition property was created
under the West Penn qualified rate order, as
supplemented, with respect to its stranded
costs and initially will belong to West Penn
before being transferred to the seller pursuant
to the transfer agreement.
Pursuant to the servicing agreement between
West Penn, as "servicer", and the issuer, the
servicer will service the transferred
intangible transition property.
Incorporated in Pennsylvania in 1916, 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
Pennsylvania Competition Act and the settlement
of restructuring issues, West Penn customers
have the opportunity to choose from several
billing source options as of
4
<PAGE> 32
September 1, 2000. One of these options is
consolidated billing from third parties
providing billing and/or metering services,
including electric generation suppliers. Any of
these third parties that provides consolidated
billing is required to pay the servicer amounts
billed by the third party on behalf of the
servicer, including the intangible transition
charges, regardless of the third party's
ability to collect those amounts from its
customers. In that event, the third party
effectively replaces the customer as the
obligor with respect to those intangible
transition charges. The servicer will have no
right to collect those intangible transition
charges from the customers, except following
payment defaults by a third party biller and
the expiration of the applicable grace period.
See "The QRO and the Intangible Transition
Charges--Competitive Billing" and "Risk
Factors--It May Be More Difficult to Collect
Intangible Transition Charges Due to Billing by
Third Parties" in this prospectus.
The Assets of the Issuer: The issuer will own:
-- the intangible transition property
transferred to the issuer (see "The Sale
Agreement--Sale and Assignment of
Intangible Transition Property" in this
prospectus);
-- collections of intangible transition
charges;
-- its rights under the transfer agreement,
the sale agreement and the servicing
agreement;
-- trust accounts held by the bond trustee;
and
-- other credit enhancement acquired or
held to ensure payment of the transition
bonds as specified in the related
prospectus supplement.
The intangible transition property is described
in more detail under "The Transfer
Agreement--Contribution of Intangible
Transition Property" and "The Sale
Agreement--Sale and Assignment of Intangible
Transition Property" in this prospectus. The
trust accounts are described in more detail
under "The Indenture--Collection Account" in
this prospectus.
Customers: West Penn's customers belong to one of three
customer categories. These categories are:
residential, commercial and industrial,
including street lighting.
5
<PAGE> 33
Each customer category is further divided into
rate schedules. These rate schedules total 21.
The customer categories and rate schedules are
described in greater detail in "The Servicer of
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:
-- amounts collected by the servicer--or
any third party electric generation
suppliers or other third party providing
billing and/or metering services--for
the issuer with respect to intangible
transition charges during the prior
quarter; and
-- 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, such as the
transfer agreement, the sale agreement,
the bills of sale or the servicing
agreement, 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 has pledged in
the Pennsylvania 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 Pennsylvania Public
Utility Commission until the transition bonds
are fully repaid or discharged. However, the
Commonwealth of Pennsylvania 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.
The Pennsylvania Competition Act does not
define adequate compensation. Thus, the amount
of this compensation may not be sufficient to
pay the full amount of outstanding principal of
and
6
<PAGE> 34
interest on the transition bonds or compensate
transition bondholders for any reinvestment
risk.
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 investment earnings on amounts in the
collection account, to the extent funds are
available in the collection account, in the
following order of priority:
(1) payment of the bond trustee's fee,
expenses and indemnities, if any;
(2) payment of fees to the independent
directors of the issuer, which will be
fixed in an amount to be agreed upon by
the issuer and the independent
directors;
(3) payment of the servicing fee to the
servicer in the amount specified in the
related prospectus supplement;
(4) payment of the administration fees
payable under the administration
agreements between the issuer, West Penn
Funding Corporation and Allegheny Power
Service Corporation, an affiliate of
West Penn;
(5) so long as no event of default has
occurred and is continuing or would be
caused by that payment, payment of
current operating expenses of the
issuer--up to an aggregate of $100,000
for each payment date for all series;
(6) payment of the interest then due on the
transition bonds;
(7) 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;
(8) payment of the principal then scheduled
to be paid on the transition bonds in
accordance with the expected
amortization schedule;
7
<PAGE> 35
(9) payment of any remaining unpaid
operating expenses then owed by the
issuer;
(10) allocation of any shortfalls in the
capital subaccount, which account is
described in detail under "--Accounts"
in this prospectus summary and "The
Indenture--"Collection Account" in this
prospectus;
(11) allocation of any required amount to the
overcollateralization subaccount, which
account is described in detail under
"--Accounts" in this prospectus summary
and "The Indenture"--"Collection
Account" in this prospectus;
(12) so long as no event of default has
occurred and is continuing, payment of
net investment earnings on amounts in
the capital subaccount will be released
to the issuer;
(13) allocation of the remainder, if any, to
the reserve subaccount, which account is
described in detail under "--Accounts"
in this prospectus summary and "The
Indenture--"Collection Account" in this
prospectus; and
(14) 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 in the subaccounts, are not
sufficient to make the payments contemplated by
clauses (6) or (7) 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 (6) or (7) above shall be
made pro rata based on the respective
outstanding principal amounts of transition
bonds of that class held by those transition
bondholders.
8
<PAGE> 36
For a diagram depicting how the intangible
transition charges and investment earnings will
be allocated, refer to page 17 in this
prospectus.
Credit Enhancement: Credit enhancement for the transition bonds
will be as follows:
-- 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 Public Utility Commission
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 Pennsylvania Public
Utility Commission, once a year. In
addition, 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, the
servicer can make these adjustments as
frequently as monthly. See "The PUC
Order and the Intangible Transition
Charges--The PUC Order" in this
prospectus.
-- The amounts in the overcollateralization
subaccount, the capital subaccount and
the reserve subaccount will also provide
credit enhancement for the transition
bonds.
-- Additional credit enhancement for any
series may include surety bonds, letters
of credit, maturity guarantees, a
financial guaranty insurance policy,
credit or liquidity facility, repurchase
obligation, third party payment or cash
deposit, all 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: The bond trustee will hold the following trust
accounts:
-- Collection Account--Under the indenture,
the issuer will establish a single
collection account for all series of
transition bonds which will be held by
9
<PAGE> 37
the bond trustee. The collection account
will be divided into subaccounts which will
allocate the funds deposited in the
collection account to specific uses.
-- General Subaccount--Funds received from
collections of the intangible transition
charges will initially be allocated to
the general subaccount of the collection
account.
-- Overcollateralization Subaccount--Each
prospectus supplement will set a funding
level for the overcollateralization
subaccount that takes into account the
issuance of any 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
supplement. That amount is intended to
be funded over the expected term of the
transition bonds through the imposition
of intangible transition charges.
-- 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 West Penn Funding Corporation on the
date of issuance of that series.
-- Reserve Subaccount--If the issuer
collects intangible transition charges
in excess of
(1) amounts then scheduled to be paid or
due on a series of transition bonds;
(2) related expenses;
(3) amounts needed to make required
deposits to the overcollateralization
subaccount and the capital
subaccount; and
(4) net investment earnings on amounts in
the capital subaccount released to
the issuer,
the excess will be held in the reserve
subaccount.
-- Other Accounts--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.
10
<PAGE> 38
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 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 that
series only until the outstanding principal
balance thereof has been reduced to the amount
specified for that payment date in the expected
amortization schedule set forth in the
prospectus supplement for that 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.
See "Risk Factors--The Transition
Bonds--Weighted Average Life on Payments of
Transition Bonds May be Affected by Rate of
Intangible Transition Charge Collections or
Optional Redemption" 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--
11
<PAGE> 39
Events of Default; Rights Upon Event of
Default" 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 and 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 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 for a series or, if
applicable, 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 risks associated with an
investment in the transition bonds. These 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.
For a detailed discussion of the material risks
associated with an investment in transition
bonds, prospective investors should review the
discussion under "Risk Factors" which begins on
page 18 of this prospectus.
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.
12
<PAGE> 40
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 that
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 that 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
Internal Revenue Service that the transition
bonds will be classified as obligations of West
Penn Funding Corporation. Based on the ruling,
for U.S. federal income tax purposes, the
transition bonds will be treated as debt of
West Penn Funding Corporation secured by a
pledge of the collateral.
The issuer will be treated as a division of
West Penn Funding Corporation and will not be
treated as a separate taxable entity.
Transition bondholders who are not United
States taxpayers generally will not be subject
to United
13
<PAGE> 41
States federal income or withholding taxes on
interest received on the transition bonds.
See "United States Taxation" in this
prospectus.
In addition, in the opinion of Ballard Spahr
Andrews & Ingersoll, LLP, special Pennsylvania
tax counsel to the issuer and West Penn,
interest from the transition bonds received by
a person who is not otherwise subject to
corporate or personal income tax in
Pennsylvania will not be subject to these
taxes. Transition bonds held by deceased
Pennsylvania residents may be subject to
inheritance and estate taxes. Neither residents
nor nonresidents of Pennsylvania will be
subject at the present time to an intangible
personal property tax with respect to the
transition bonds. See "Material Commonwealth of
Pennsylvania Tax Matters" 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, or Section 4975 of the Internal
Revenue Code of 1986, as amended, 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,
that 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 specified
in that prospectus supplement.
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.
14
<PAGE> 42
If a rating of any series or class of
transition bonds is revised downward or
withdrawn, the liquidity and the price of that
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--
Weighted Average Life of Payments on Transition
Bonds May be Affected by Rate of Intangible
Transition Charge Collections or Optional
Redemption" and "Ratings" in this prospectus.
15
<PAGE> 43
PARTIES TO THE TRANSACTION
[Diagram of Parties to the Transaction]
16
<PAGE> 44
[Diagram of Allocations and Distributions]
17
<PAGE> 45
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 Pennsylvania
Competition Act and the West Penn qualified
rate order, as supplemented. If the
Pennsylvania Competition Act or the West Penn
qualified rate order, as supplemented, 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 indemnify the issuer and the bond trustee
for the losses resulting from that breach. See
"The Transfer Agreement--Representations and
Warranties of West Penn" in this prospectus.
Also, West Penn may not be able to meet its
indemnity obligations. As a result, if the
Pennsylvania Competition Act or the West Penn
qualified rate order, as supplemented, 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 for
a change in law by legislative enactment or
constitutional amendment, including an
enactment or amendment that breaches the
Commonwealth of Pennsylvania'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
Pennsylvania 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.
18
<PAGE> 46
Under the Pennsylvania Competition Act, the
Commonwealth of Pennsylvania 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 be
sufficient to pay the full amount of the
outstanding principal of and interest on the
transition bonds or would compensate transition
bondholders for any reinvestment risk.
Under the United States and Pennsylvania
Constitutions, the Commonwealth of Pennsylvania
could not repeal or amend the Pennsylvania
Competition Act--by way of legislative
process--or take any action that violates its
pledge and agreement described in the first
paragraph of this subheading without paying
just compensation to the transition bondholders
if doing so would:
-- constitute a permanent "taking" 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.
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 or compensate transition
bondholders for any reinvestment risk.
Also, if there were a change in law described
in the first paragraph of this subheading,
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 of this
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
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<PAGE> 47
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 Pennsylvania Competition Act or
the West Penn qualified rate order, as
supplemented, 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 transition 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. Also, in this case, West Penn would
not be required to indemnify the issuer or the
bond trustee. See "--Changes in Law May Result
in Losses to Transition Bondholders" above.
THE PENNSYLVANIA PUBLIC
UTILITY
COMMISSION MAY TAKE ACTIONS
THAT ADVERSELY AFFECT
TRANSITION
BONDHOLDERS The Pennsylvania Public Utility Commission will
continue to regulate some aspects of the
electric industry in Pennsylvania and it may
take actions that adversely affect transition
bondholders. For example, it will
-- regulate all aspects of the business of
electric distribution companies;
-- set financial and other requirements for
electric generation suppliers and other
third parties; and
-- set customer billing guidelines and
collection, metering and disclosure
requirements for electric generation
suppliers and other third parties.
Also, subject to the Commonwealth of
Pennsylvania'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 Pennsylvania
Public Utility Commission could revise or
rescind any of its regulations. West Penn
cannot predict whether the Pennsylvania Public
Utility Commission will make new regulations or
the timing or content of any new Pennsylvania
Public Utility Commission regulations.
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<PAGE> 48
West Penn agrees to take legal or
administrative actions, including bringing
lawsuits, as may be reasonably necessary to
block or overturn:
-- any government attempt to repeal or
change the Pennsylvania Competition Act,
the West Penn qualified rate order, as
supplemented, or the intangible
transition property in a way that is
materially adverse to the holders of
transition bonds, or
-- lawsuits by third parties which, if
successful, would result in a breach of
West Penn's representations concerning
the intangible transition property, the
West Penn qualified rate order, as
supplemented, or the Pennsylvania
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 Pennsylvania Public Utility Commission
regulations may affect the rating of the
transition bonds or their price. Those actions
may also affect the rate of collections of
intangible transition charges 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 Pennsylvania Competition Act
adopted by another state could give rise to a
challenge to the Pennsylvania Competition Act.
That decision would not automatically
invalidate the Pennsylvania Competition Act. It
could, however, set a legal precedent for a
successful challenge to the Pennsylvania
Competition Act that could adversely affect
transition 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
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<PAGE> 49
Pennsylvania 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 Pennsylvania Competition Act,
recovery of stranded costs associated with
existing generating facilities depends on
continued operation of these facilities. There
is an exception if that operation is uneconomic
because of the transition to a competitive
market. Although the parts of the West Penn
qualified rate order, as supplemented,
providing for collection of intangible
transition charges are stated to be
irrevocable, the collection of intangible
transition charges could be challenged if some
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 indemnify
the issuer or the bond trustee.
FAILURE TO MAKE ADEQUATE
ADJUSTMENTS TO THE INTANGIBLE
TRANSITION CHARGES MAY RESULT
IN LOSSES TO TRANSITION
BONDHOLDERS The actual rate of collections of intangible
transition charges 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 Pennsylvania Public Utility
Commission on each calculation date to reflect
shortfalls in or excesses of collections of
intangible transition charges 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 collections
of intangible transition charges in future
periods.
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<PAGE> 50
If those forecasts or projected trends are not
accurate, adjustments to the intangible
transition charges may not 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 Pennsylvania Competition Act and the West
Penn qualified rate order, as supplemented,
require the Pennsylvania Public Utility
Commission to approve annual adjustment
requests within 90 days of the applicable date
on which the servicer calculates the required
adjustment and files that adjustment request
with the Public Utility Commission. Also, the
West Penn qualified rate order, as
supplemented, provides that, during the period
commencing 12 months prior to the last
scheduled payment date for the payment of
principal on the last class of each series of
transition bonds, monthly or quarterly
adjustments will become effective on the first
day of the next calendar month or the first day
of the next quarterly period, respectively. If
the Pennsylvania Public Utility Commission
fails to approve these adjustments on a timely
basis or there is any litigation challenging
the approval of these adjustments or
methodology in calculating these adjustments,
the price and liquidity of the transition bonds
could be adversely affected.
Any of these factors 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.
LIMITED TIME PERIOD FOR
IMPOSITION OR ADJUSTMENT OF
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 collections of intangible
transition charges available to make payments
on the series are expected to be covered
through amounts, if any, on deposit in the
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<PAGE> 51
reserve subaccount, the overcollateralization
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.
LACK OF HISTORICAL INFORMATION
ABOUT, AND INEXPERIENCE
ADMINISTERING, INTANGIBLE
TRANSITION PROPERTY MAY RESULT
IN LOSSES TO TRANSITION
BONDHOLDERS 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 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.
ADJUSTMENTS TO INTANGIBLE
TRANSITION CHARGES BY RATE
SCHEDULE MAY RESULT IN
INSUFFICIENT COLLECTIONS The customers who will be responsible for
paying intangible transition charges are
divided into 21 rate schedules. These rate
schedules are grouped among three customer
categories. Intangible transition charges will
be assessed by rate schedule within each
customer class. Adjustments to the intangible
transition charges will also be made to each
rate schedule within each customer category. A
shortfall in collection in one rate schedule
must be made up by adjustments to that rate
schedule as well as the other rate schedules
within that customer category. However,
shortfalls in a customer category may not be
corrected by making adjustments to rate
schedules in any other customer category. Some
rate schedules in a particular category have a
significantly smaller number of customers than
other rate schedules in that customer category.
If customers in a rate schedule fail to pay
intangible transition charges, the servicer may
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<PAGE> 52
have to substantially increase the intangible
transition charges for the remaining customers
in that rate schedule and the other rate
schedules in that customer category. The
servicer may also have to take this action if
consumers representing a significant percentage
of a rate schedule cease to be customers. These
increases could lead to further failures by the
remaining customers in that customer category
to pay intangible transition charges, thereby
increasing the risk of a shortfall in funds to
pay the transition bonds.
ONE CUSTOMER CATEGORY CANNOT
COMPENSATE FOR THE FAILURE TO
COLLECT INTANGIBLE TRANSITION
CHARGES FROM ANOTHER CATEGORY The Pennsylvania Competition Act and the
qualified rate order, as supplemented, do not
permit costs to be shifted among customer
categories. As a result, a shortfall in
collections of intangible transition charges in
one customer category cannot be made up by
adjustments of intangible transition charges in
the other customer categories. See "The
Pennsylvania Competition Act" in the
prospectus.
THE AMOUNT OF GENERATION
CHARGES INCLUDING INTANGIBLE
TRANSITION CHARGES MAY NOT
EXCEED A STATUTORY CAP The Pennsylvania Competition Act and the
qualified rate order, as supplemented, set a
cap on generation charges including intangible
transition charges through December 31, 2008.
This generation rate cap applies to each rate
schedule within each customer category
separately. If there is a severe or persistent
shortfall in collections of intangible
transition charges in any rate schedule, the
rate cap applicable to that rate schedule may
prevent the servicer from adjusting intangible
transition charges for that rate schedule in
excess of the rate cap. If this occurs, the
servicer would have to adjust intangible
transition charges for the remaining rate
schedules within that customer category. These
adjustments may result in the assessment of
intangible transition charges on the remaining
rate schedules at a level that is limited by
their rate caps. This could reduce the amount
or the rate of collections of intangible
transition charges, which may result in a loss
to transition bondholders or delay expected
payments on the transition bonds. See "The
Pennsylvania Competition Act--The Pennsylvania
Competition Act's General Effect on the
Electric Utility Industry in Pennsylvania" in
this prospectus.
The qualified rate order, as supplemented,
gives West Penn the right to request relief
from the generation
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<PAGE> 53
rate cap if the combined total of the charges
subject to that cap exceeds the generation rate
cap. However, there is no assurance that the
Pennsylvania Public Utility Commission would
grant this request, or that the Pennsylvania
Public Utility Commission would grant the
request in a timely manner. West Penn also may
adjust the shopping credit to comply with the
generation rate cap, if necessary.
SERVICING
WEST PENN CEASING TO ACT AS
SERVICER MAY RESULT IN LOSSES
TO TRANSITION BONDHOLDERS The servicer will be responsible for
calculating adjustments to the intangible
transition charges, submitting adjustment
requests to the Pennsylvania Public Utility
Commission 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
Pennsylvania Public Utility Commission. 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
collections of intangible transition charges
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
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<PAGE> 54
circumstances are beyond the control of the
servicer. Adjustments to the intangible
transition charges are required to be made
under the Pennsylvania 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 Pennsylvania Public Utility
Commission may require changes to these
practices. These changes could delay or reduce
collections of intangible transition charges
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'S LIMITED
INFORMATION ON CUSTOMERS'
CREDITWORTHINESS MAY RESULT IN
INCREASED DELINQUENCIES AND
WRITE-OFFS 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 Intangi-
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<PAGE> 55
ble 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 Pennsylvania Competition Act, after
September 1, 2000, intangible transition
charges may be collected by third parties
providing billing and/or 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 to make these
payments even if the third party fails to
collect those amounts from customers.
Billing by third parties as described in the
paragraph 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:
-- any third party that collects intangible
transition charges may not use the same
customer credit standards as the
servicer;
-- problems may arise from new and untested
systems or any lack of experience on the
part of third parties with customer
billing and collections;
-- 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 those risks
relating to its customers;
-- 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
-- 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 collections of
intangible transition charges. 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
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<PAGE> 56
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 collections of
intangible transition charges to the servicer.
The adjustment mechanism for the intangible
transition charges, as well as the amounts on
deposit in the capital subaccount, the
overcollateralization 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, limitations
on rate adjustments or any lack of funds in the
reserve 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:
-- 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;
-- 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;
-- 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
Pennsylvania Public Utility Commission
to reduce intangible transition charges
might result; and
-- 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.
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<PAGE> 57
Any of these factors could result in delays or
shortfalls in scheduled payments on the
transition bonds.
THE COMMINGLING OF
COLLECTIONS OF INTANGIBLE
TRANSITION CHARGES WITH
SERVICER'S OTHER FUNDS MAY
RESULT IN PAYMENT DELAYS Until collections of intangible transition
charges 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 collections
of intangible transition charges 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
overcollateralization 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.
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 Pennsylvania
Public Utility Commission 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
has determined that as of June 30, 1999, all of
its critical components and systems related to
safety and the production and distribution of
electricity and nearly all of its important
business systems, including accounting and
billing, are Year 2000 ready. West Penn
anticipates that the remediation and testing
work on the remaining
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<PAGE> 58
business and non-critical systems will be
completed by September 30, 1999. West Penn has
defined Year 2000 ready to mean that a
determination has been made by testing or other
means that a component or system will be able
to perform its critical functions, or that
contingency plans are in place to overcome any
inability to do so. 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 collections of
intangible transition charges. In that case,
payments to transition bondholders could be
delayed.
BANKRUPTCY; CREDITORS' RIGHTS
BANKRUPTCY OF WEST PENN OR
WEST PENN FUNDING
CORPORATION MAY RESULT IN
LOSSES TO TRANSITION
BONDHOLDERS GENERAL. The bankruptcy of West Penn or West
Penn Funding Corporation could have several
adverse consequences for transition
bondholders, the most important of which are
briefly described below.
TRANSFER OF INTANGIBLE TRANSITION PROPERTY MAY
BE RECHARACTERIZED AS A FINANCING RATHER THAN A
TRUE SALE. The Pennsylvania 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
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<PAGE> 59
sale, rather than a pledge or other financing,
of the intangible transition property. West
Penn will represent in the transfer agreement
that:
-- the transfer of the transferred
intangible transition property to West
Penn Funding Corporation is a capital
contribution; and
-- the transfer of the transferred
intangible transition property by West
Penn Funding Corporation to the issuer
is a sale.
West Penn and West Penn Funding Corporation
will also represent that they will take the
appropriate actions under the Pennsylvania
Competition Act, including filing an intangible
transition property notice, to perfect these
transfers.
However, 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 West Penn Funding
Corporation was a financing transaction and not
a capital contribution. Similarly, if West Penn
Funding Corporation became a debtor in a
bankruptcy case, the bankruptcy trustee, West
Penn Funding Corporation 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 West Penn Funding Corporation
bankruptcy could result in delays in payments
on the transition bonds. A bankruptcy also
could have an adverse effect on the secondary
market for the transition 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 Pennsylvania
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
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filing with respect to a security interest. The
Pennsylvania 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, West Penn Funding
Corporation would be a secured creditor of West
Penn and the issuer would be a secured creditor
of West Penn Funding Corporation, entitled to
recover against the collateral. If, however,
intangible transition property notices are not
filed for any reason, West Penn Funding
Corporation or the issuer fails to otherwise
perfect its interest in the transferred
intangible transition property and the transfer
is thereafter deemed not to constitute a true
sale or other absolute transfer, West Penn
Funding Corporation would be an unsecured
creditor of West Penn or the issuer would be an
unsecured creditor of West Penn Funding
Corporation.
COURT MAY ORDER CONSOLIDATION OF THE ISSUER,
WEST PENN FUNDING CORPORATION AND WEST
PENN. If West Penn or West Penn Funding
Corporation became a debtor in a bankruptcy
case, the bankruptcy trustee, West Penn or West
Penn Funding Corporation or another party may
attempt to substantively consolidate the assets
of the issuer and West Penn or West Penn
Funding Corporation. West Penn, West Penn
Funding Corporation 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 West Penn Funding
Corporation, delays or reductions in payments
on the transition bonds would result.
COURT MAY MAKE LOW ESTIMATION OF CONTINGENT
CLAIMS; ENFORCEABILITY OF REMEDY PROVISIONS MAY
BE CHALLENGED. 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
indemnity obligation, of the issuer against
West Penn and take
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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 indemnify the issuer and
the bond trustee, the bankruptcy trustee, West
Penn or another party might challenge the
enforceability of the indemnity provisions. If
a court decided that the indemnity 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.
INTANGIBLE TRANSITION PROPERTY MAY NOT BE HELD
TO BE CURRENT PROPERTY, RESULTING IN UNSECURED
DEBT. The Pennsylvania Competition Act provides
that the transferred intangible transition
property constitutes a current property right
on and after the date that the West Penn
qualified rate order, as supplemented, 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 West Penn Funding
Corporation or the issuer, the issuer would be
an unsecured creditor of West Penn Funding
Corporation and West Penn Funding Corporation
would be an unsecured creditor of West Penn
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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 collections of
intangible transition charges 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 delays
in implementation or challenges to those
adjustments may cause a delay in receipt of
payments.
AUTOMATIC STAY MAY PREVENT OR DELAY ENFORCEMENT
OF RIGHTS BY BOND TRUSTEE. If there is an
event of default under the indenture, the
Pennsylvania Competition Act permits the
Pennsylvania Public Utility Commission to order
the segregation and payment of all intangible
transition charges to transition bondholders.
The Pennsylvania Competition Act provides that
the order will be effective notwithstanding
bankruptcy or other insolvency proceedings with
respect to
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the utility or its assignee. The Pennsylvania
Public Utility Commission, however, may not
issue this order because of the automatic stay
provisions of the Bankruptcy Code. Also, a
bankruptcy court may not lift the stay to
permit this action by the Pennsylvania Public
Utility Commission. 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 Pennsylvania Public
Utility Commission 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 collections of
intangible transition charges with its own
funds until they are deposited with the bond
trustee. The Pennsylvania Competition Act
provides that the priority of a lien created
under the Pennsylvania 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 collections
of intangible transition charges 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
Pennsylvania Public Utility Commission 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
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allow holders to resell any of the transition
bonds. See "Plan of Distribution for the
Transition Bonds" in this prospectus.
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, West Penn
Funding Corporation, 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,
West Penn Funding Corporation, the bond trustee
or any affiliates of those entities, 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 those series or
classes of those series. This could result in
voting outcomes adverse to the interests of one
or more series or classes of transition bonds.
SECURITIES RATINGS ARE LIMITED
AND DO NOT ASSESS TIMING OF
PRINCIPAL PAYMENTS 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
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might be paid later than scheduled, resulting
in a weighted average life of those 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.
TRANSITION BONDHOLDERS MAY
RECEIVE PRINCIPAL PAYMENTS
LATER THAN EXPECTED 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 collections of intangible
transition charges. Since the amount of
intangible transition charges collected from
each customer will depend upon the customer's
usage of electricity, the aggregate amount and
timing of collections of intangible transition
charges--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 collections of intangible
transition charges 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 collections of
intangible transition charges 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.
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TRANSITION BONDHOLDERS MAY
HAVE TO REINVEST THE PRINCIPAL
OF THEIR INVESTMENT AT A LOWER
RATE OF RETURN BECAUSE OF
OPTIONAL REDEMPTION OF THE
TRANSITION BONDS 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.
WEST PENN'S OBLIGATION TO
INDEMNIFY THE ISSUER FOR A
BREACH OF A REPRESENTATION OR
WARRANTY MAY NOT BE
SUFFICIENT TO PROTECT YOUR
INVESTMENT The obligations of West Penn under the transfer
agreement to West Penn Funding Corporation have
been assigned by West Penn Funding Corporation
to the issuer pursuant to the sale agreement.
If West Penn breaches a representation or
warranty in the transfer agreement, West Penn
is obligated to indemnify the issuer and the
bond trustee for any liabilities, obligations,
claims, actions, suits or payments resulting
from that breach, as well as any reasonable
costs and expenses incurred. In addition, West
Penn is obligated to indemnify the issuer and
the bond trustee for principal and interest on
the transition bonds not paid when due in
accordance with their terms as a result of a
breach of a representation or warranty. West
Penn will not be obligated to repurchase the
intangible transition property in the event of
a breach of any of its representations and
warranties regarding the intangible transition
property, and neither the bond trustee nor the
transition bondholders will have the right to
accelerate payments on the transition bonds as
a result of the breach. West Penn is also
obligated to indemnify the issuer and the bond
trustee for the amount of any deposits to the
issuer required to have been made which are not
made when so required as a result of a breach
of a representation or warranty. However, the
amount of any indemnification paid by West Penn
may not be sufficient for you to recover your
transition bond investment. If West Penn
becomes obligated to indemnify transition
bondholders, the ratings on the transition
bonds will likely be downgraded since
transition bondholders will be unsecured
creditors of West Penn with respect to any of
these indemnification amounts. See "The
Transfer Agreement--Representations and
Warranties of West Penn" in this prospectus.
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GLOSSARY OF DEFINED TERMS
You can find a glossary of defined terms used in this prospectus beginning
on page 150 in this prospectus.
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 some of
the 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 the document so filed. For further information,
reference is made to the Registration Statement and the exhibits to the
Registration Statement, 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 the 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 under the Exchange Act. 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
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reference in this prospectus modifies or supersedes that statement. Any of these
statements 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 those exhibits are specifically
incorporated by reference in such documents. Written requests for those copies
should be directed to the issuer, c/o West Penn Funding LLC, 800 Cabin Hill
Drive, Room [ ], Greensburg, PA 15601. Telephone requests for those copies
should be directed to the issuer at (724) 837-[ ].
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WEST PENN POWER COMPANY
Incorporated in Pennsylvania in 1916, 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 Pennsylvania 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.
None of Allegheny Energy, Inc., West Penn or West Penn Funding Corporation
is currently involved in any legal proceedings that could have a material impact
on the issuer, the collateral, the transition bonds or the transition
bondholders. For a detailed description of the prior litigation relating to the
approval of West Penn's restructuring plan, see "West Penn's Restructuring
Plan--Prior Litigation."
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 Pennsylvania Public Utility Commission (the "PUC"), is currently the
subject of litigation in the United States District Court for the Western
District of Pennsylvania. As described in "West Penn's Restructuring
Plan--Provisions of the Settlement--Authorization to Securitize up to $670
million", the outcome of the DQE merger litigation will not affect the amount of
West Penn's intangible transition charges ("Intangible Transition Charges") and
is not expected to have any impact on the payment of principal of, and interest
on, the transition bonds.
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 West Penn Funding Corporation
to provide specified administrative services (in this capacity, Allegheny Power
Service Corporation is referred to as the "Administrative Agent" in this
prospectus). See "The Issuer" and "West Penn Funding Corporation" 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.
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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 to those reports
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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THE PENNSYLVANIA COMPETITION ACT
THE PENNSYLVANIA COMPETITION ACT'S GENERAL EFFECT ON THE ELECTRIC UTILITY
INDUSTRY IN PENNSYLVANIA
The Pennsylvania Electricity Generation Customer Choice and Competition Act
(the "Pennsylvania Competition Act") was enacted in December 1996 and provides
for the restructuring of the electric utility industry in Pennsylvania. The
Pennsylvania 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 Pennsylvania
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 Pennsylvania 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 Pennsylvania 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 Pennsylvania Competition
Act also caps transmission and distribution rates from December 31, 1996 through
June 30, 2001, subject to specified exceptions. Under the Pennsylvania
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 Pennsylvania 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 that 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 that customer purchases
electricity from the utility or an independent electric generation supplier. The
Pennsylvania 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
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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 Pennsylvania 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 Pennsylvania
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 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 Pennsylvania Competition Act contains a number of provisions designed
to facilitate the securitization of stranded costs.
Irrevocability of Intangible Transition Property. Under the Pennsylvania
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 Pennsylvania Competition Act to specify that all or
a portion of that qualified rate order will be irrevocable. The Pennsylvania
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 in that order. In addition, under the
Pennsylvania Competition Act, the Commonwealth of Pennsylvania (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
Pennsylvania 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 Pennsylvania
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 Pennsylvania Competition Act requires that these
adjustments be made on at least an annual basis on
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each anniversary of the issuance of the qualified rate order or at additional
intervals as specified in that order. The PUC must approve these annual
adjustments within 90 days of each request for adjustment.
Nonbypassability. The Pennsylvania 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
Pennsylvania 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 that assignee for the utility:
(1) to continue to operate the system to provide electric services to
the utility's customers,
(2) to impose and collect the applicable intangible transition
charges for the benefit and account of the assignee,
(3) to make periodic adjustments of the intangible transition
charges, and
(4) 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 of these contracts:
(1) will be binding upon the utility, its successors and assigns, and
(2) 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 that
customer or the municipal entity providing those services in place of the
utility.
Creation of a Statutory Lien on Intangible Transition Property. The
Pennsylvania 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:
(1) value is given by purchasers of the transition bonds and
(2) a filing is made with the PUC to perfect the security interest
within 10 days from issuance of the transition bonds.
The Pennsylvania 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
Pennsylvania 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
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not accrued. The Pennsylvania Competition Act provides that this 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 Pennsylvania
Competition Act. The Pennsylvania Competition Act provides that priority of
security interests in intangible transition property will not be defeated or
adversely affected by:
(1) commingling of revenues with other funds of the utility or
(2) changes to the qualified rate order or the intangible transition
charges.
Characterization of Transfer of Transferred Intangible Transition Property
as True Sale. The Pennsylvania 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:
(1) the parties expressly state in governing documents that a
transfer is to be a sale or other absolute transfer and
(2) 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 Pennsylvania
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 PENNSYLVANIA COMPETITION ACT
At least one bill was introduced in the 105th Congress, First Session,
prohibiting the recovery of stranded costs such as West Penn's stranded costs
("Stranded Costs") described in this prospectus, which could negate the
existence of West Penn's intangible transition property ("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 this preemption a "taking."
Moreover, even if a preemption of the Pennsylvania 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 this compensation
would be sufficient to pay the full amount of
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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 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 Pennsylvania Competition
Act" below.
POSSIBLE COMMONWEALTH AMENDMENT OR REPEAL OF THE PENNSYLVANIA COMPETITION ACT
Under the Pennsylvania 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 Pennsylvania
Competition Act also provides, however, that subject to the requirements of law,
nothing contained in the Pennsylvania Competition Act precludes this 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 this
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 Pennsylvania Competition Act--by way of legislative
process--or take any other action that substantially impairs the rights of the
transition bondholders, unless that action is a reasonable exercise of the
Commonwealth's sovereign powers and of a character appropriate to the public
purpose justifying that 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 those
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 Pennsylvania Competition Act--by way
of legislative process--or take any action that violates its pledge and
agreement described in the first paragraph of this subheading without paying
just compensation to the
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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
Pennsylvania 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. If this
occurs, costly and time-consuming litigation might ensue. That 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 security for the transition bondholders, the outcome of that
litigation cannot be predicted with certainty, and accordingly, transition
bondholders could incur a loss of their investment.
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WEST PENN'S RESTRUCTURING PLAN
THE HISTORY OF WEST PENN'S RESTRUCTURING PLAN
In accordance with the provisions of the Pennsylvania 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). 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, including the initial
Qualified Rate Order, approving the Joint Petition. The remaining appeals to the
Restructuring Plan were withdrawn. On August 12, 1999, the PUC issued an order
approving West Penn's petition for issuance of a supplemental qualified rate
order (the "Supplemental Order"). On September 16, 1999, the Supplemental Order
became non-appealable. The settlement effected by the Joint Petition, as
supplemented by the settlement entered into in connection with the Supplemental
Order, 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
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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 West Penn's
Competitive Transition Charges for the years 1999 through 2008, based on the
annual sales growth assumed in the Settlement.
TABLE 1
ANNUAL STRANDED COST
AMORTIZATION AND RETURN
<TABLE>
<CAPTION>
REVENUES EXCLUDING
GROSS RECEIPTS TAX(3)
----------------------------------
ANNUAL CTC WITH CTC REVENUE RETURN
YEAR SALES GRT(2) WITH GRT TOTAL @11.0% AMORTIZATION
- ---- ---------- --------- ----------- --------- ------- ------------
MWH(1) cents/kWh $(000) $(000) $(000) $(000)
<S> <C> <C> <C> <C> <C> <C>
1999.................... 20,740,356 0.62 128,547 122,891 71,259 51,632
2000.................... 21,157,130 0.60 126,890 121,307 65,362 55,945
2001.................... 21,490,380 0.56 120,367 115,071 59,212 55,859
2002.................... 21,860,286 0.54 118,054 112,860 52,859 60,001
2003.................... 22,146,130 0.53 117,381 112,216 45,942 66,274
2004.................... 22,693,011 0.48 108,930 104,137 38,694 65,443
2005.................... 23,102,818 0.45 103,950 99,376 31,366 68,010
2006.................... 23,405,954 0.44 102,470 97,961 23,563 74,399
2007.................... 23,697,105 0.43 101,374 96,914 15,000 81,914
2008.................... 23,934,076 0.43 101,959 97,473 5,481 91,992
Total......... 1,129,923 1,080,206 408,736 671,470
</TABLE>
- ------------
(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 on those 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.
(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 that time issued transition bonds in excess of $630
million in accordance with the QRO, the costs of servicing the entire amount of
those 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
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between $630 million and the actual principal amount of the transition bonds
outstanding, including a reduction for all associated costs, fees and expenses
attributable to the transition bonds issued in excess of $630 million. This
credit adjustment will not affect the amount of Intangible Transition Charges
and is not expected to have any impact on the payment of principal of, and
interest on, the transition bonds.
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:
(1) distribution and transmission charges,
(2) Competitive Transition Charges and, if applicable, Intangible
Transition Charges and
(3) a shopping credit for generation.
The sum of the Competitive Transition Charges and the shopping 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 Pennsylvania 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 are shown in Table 2 below.
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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
- -------------- --------------- ------------ ----------- ------- -------- -----------
(a) (b) (c)=(a)+(b) (d) (e) (f)=(d)+(e)
$kWh $kWh $kWh $kWh $kWh $kWh
<S> <C> <C> <C> <C> <C> <C>
January 1, 1999....... $0.0041 $0.0118 $0.0159 $0.0062 $0.0316 $0.0378
January 1, 2000....... 0.0041 0.0132 0.0173 0.0060 0.0318 0.0378
January 1, 2001....... 0.0041 0.0132 0.0173 0.0056 0.0322 0.0378
January 1, 2002....... 0.0041 0.0132 0.0173 0.0054 0.0324 0.0378
January 1, 2003....... 0.0041 0.0132 0.0173 0.0053 0.0325 0.0378
January 1, 2004....... 0.0041 0.0132 0.0173 0.0048 0.0330 0.0378
January 1, 2005....... 0.0041(5) 0.0132(5) 0.0173(5) 0.0045 0.0333 0.0378
January 1, 2006....... (3) (3) N/A 0.0044 0.0362 0.0406
January 1, 2007....... (3) (3) N/A 0.0043 0.0363 0.0406
January 1, 2008....... (3) (3) N/A 0.0043 0.0391 0.0434
</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
Pennsylvania 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 those 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.
The Pennsylvania 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 this 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 Pennsylvania Competition Act.
Competitive Metering and Billing. As provided in the Settlement, on
September 1, 2000, West Penn will unbundle 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. In accordance with the Settlement,
this date was extended to September 1, 2000 for West Penn. 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
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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 those 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 this supplier, "Competitive Default
Service"). This 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 specified 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 this 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
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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
Pennsylvania 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 Pennsylvania Competition Act, alleging that
the Pennsylvania 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 Pennsylvania 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 in this
paragraph. 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 Pennsylvania 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 Pennsylvania Competition Act
did not violate these 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
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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 Pennsylvania
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 West Penn of these and other rights
secured by the Civil Rights Act, 42 U.S.C. sec.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 Pennsylvania 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 and the settlement entered into in connection with the Supplemental
Order. The appeal period of the PUC's Final Order of November 19, 1998, as
supplemented by the Supplemental Order, 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 August 12, 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 that time issued transition
bonds in excess of $630 million in accordance with the QRO, the costs of
servicing the entire amount of those 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, including a reduction for
all associated costs, fees and expenses attributable to the transition bonds
issued in excess of $630 million. This credit adjustment will not affect the
amount of Intangible Transition Charges and is not expected to have any impact
on the payment of principal of, and interest on, the transition bonds.
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 that offering.
Notwithstanding that filing, the final structure of each issuance of transition
bonds is not subject to change or revision by the PUC after the date of that
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
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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
Pennsylvania 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.
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 these 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 those adjustments after the period commencing
12 months prior to the last scheduled payment date for the payment of principal
on the last class of 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 collections of Intangible Transition
Charges ("ITC Collections") so received are sufficient to amortize the
transition bonds, fund any reserves and to pay premiums, if any, on those
transition bonds, 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.
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 that 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
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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 those issuers and perform the obligations of West Penn contemplated in the
QRO. The obligations of West Penn:
(1) shall be binding upon West Penn, its successors and assigns and
(2) 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 that 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 of Intangible Transition Property,
among other things, are irrevocable for purposes of the Pennsylvania 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. If the Competitive Transition Charges have been reduced to
zero, West Penn may adjust
59
<PAGE> 87
the shopping credit, rather than the Intangible Transition Charges approved by
the QRO, to bring the charges into compliance 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 "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, so 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
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 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 on the transition bonds and applicable fees
and expenses and to fund the Overcollateralization Subaccount and Capital
Subaccount, those 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 Pennsylvania
Competition Act and the QRO require the PUC to approve, adjustments to the
Intangible Transition Charges based on actual ITC Collections and
60
<PAGE> 88
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 that
shortfall as described in this section and in "The Servicing
Agreement--Servicing Procedures--ITC Adjustment Process" in this prospectus.
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, that 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 the last class of each series of
transition bonds may be made quarterly or monthly. If at the time of issuance of
a series, the servicer determines that those additional adjustments are
required, the dates for those adjustments will be specified in the prospectus
supplement for that series. These adjustments will cease with respect to a
series on the final Adjustment Date specified in the related prospectus
supplement for that series.
The Schedule for Making Adjustments to Intangible Transition Charges. The
servicer is required to file an Adjustment Request with the PUC on October 1 of
each year and on any other Calculation Date, requesting modifications to the
Intangible Transition Charges. These Adjustment Requests are designed to result
in:
(1) the outstanding principal balance of each series or class
equaling the amount provided for in the Expected Amortization Schedule for
that series or class,
(2) the amount on deposit in the Overcollateralization Subaccount
equaling the Calculated Overcollateralization Level,
(3) the amount in the Capital Subaccount equaling the Required
Capital Amount, and
(4) the amount in the Reserve Subaccount equaling zero.
These Adjustment Requests are designed to achieve each of the above goals
by the payment date immediately preceding the next Adjustment Date or with
respect to the period in which monthly rate adjustments are utilized, generally
the 25th day of the calendar month immediately preceding the next monthly
Adjustment Date, as applicable, taking into account any amounts on deposit in
the Reserve Subaccount. The Pennsylvania Competition Act and the QRO require the
PUC to approve the annual adjustments within 90 days of the Adjustment Request.
The Adjustment Dates on which
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<PAGE> 89
adjustments to the Intangible Transition Charges are to be made will be set
forth in the prospectus supplement for the related series.
In order to obtain approval of each annual adjustment as expeditiously as
possible, on October 1 of each year West Penn, as servicer, will file with the
PUC a schedule of actual ITC Collections for the nine months ended August 31,
together with an estimate of ITC Collections for the three months ending on the
immediately following November 30, and the estimated Intangible Transition
Charges for the following year. On December 15, West Penn will file a schedule
of actual ITC Collections as of November 30, replacing the estimates submitted
on October 1, and the actual Intangible Transition Charges for the following
year. Interim adjustments beginning twelve months before the expected final
payment date of the last series or class of the transition bonds will not
reflect updated assumptions of projected future usage of electricity by
customers, expected delinquencies and write-offs and future expenses relating to
Intangible Transition Property and the transition bonds. Beginning twelve months
before the expected final payment date of the last series or class of the
transition bonds, the PUC will permit each adjustment request to become
effective within 15 days after filing. The adjustment process will continue
until the earlier of the final payment of all series of transition bonds and
December 31, 2008.
COMPETITIVE BILLING
The Restructuring Plan and subsequent orders of the PUC give customers who
purchase electric generation from electric generation suppliers or purchase
billing and metering services from other third parties the opportunity to choose
from several billing source options as of September 1, 2000: consolidated
billing from the utility, consolidated billing from the electric generation
supplier or third party biller or separate billing from the utility and from the
electric generation supplier or third party biller providing billing services.
Any electric generation supplier or third party biller that provides
consolidated billing is required to pay the utility amounts billed by the
utility to the electric generation supplier or third party biller, including the
Intangible Transition Charges, regardless of the electric generation supplier's
or third party biller's ability to collect those amounts from its customers. In
that event, the electric generation supplier or third party biller will replace
the customer as the obligor with respect to those Intangible Transition Charges,
and the servicer, on behalf of the issuer, will generally have no right to
collect those 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 or third party biller's consolidated billing customers following
certain payment defaults by an electric generation supplier or third party
biller 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 and third party billers. The PUC has determined that if an
electric generation supplier or
62
<PAGE> 90
third party biller provides consolidated billing, the electric generation
supplier or third party biller must first establish its creditworthiness by
either:
(1) demonstrating that it has an investment grade rating for its own
long-term debt or
(2) 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 or third party biller that bills customers must comply with
all billing, financial and disclosure requirements applicable to electric
generation suppliers or third party billers, 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, and perhaps Intangible
Transition Charges, in a lump sum, based on a calculation that takes into
account each of those 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. Only one customer has elected to
exercise this option to date, but that prepayment will not have any effect on
West Penn's Intangible Transition Charges.
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 that 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.
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<PAGE> 91
If the ratio between:
(1) the amount of usage difference caused by the onsite generation
and
(2) 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 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 that calculation and the servicer's projection with respect to
future self-generation.
64
<PAGE> 92
THE SERVICER
WEST PENN POWER COMPANY
RETAIL ELECTRIC SERVICE TERRITORY
West Penn serves approximately 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 industrial-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. Those 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 August 30, 1979.
Schedule 23 -- For athletic field lighting for schools, communities, civic
organizations, and other public institutions. Closed to new
customers as of August 28, 1985.
Schedule 24 -- For fairs, carnivals, and other similar temporary
enterprises.
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 December
31, 1998
Schedule 44 -- For customers with interruptible demands in excess of 5000
kilovolt-amperes and service voltages in excess of 25
kilovolts,
65
<PAGE> 93
generally large industrial customers able to withstand interruptions in service.
Closed to new customers as of December 31, 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 December 31, 1998.
Schedules 51-56 -- For various types of street and outdoor lighting. Closed
to new customers as of June 6, 1997.
Schedules 57-58 -- For outdoor lighting of various types.
Schedule 71 -- For municipal street and highway lighting. Closed to new
customers as of August 26, 1978.
Schedule 86 -- For 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.
Rate Adjustment Among Rate Schedules Within the Three Customer Categories.
In general, each Customer Category is responsible for a fixed percentage of the
Intangible Transition Charges. The PUC has approved this allocation of
Intangible Transition Charges among Customer Categories. The Intangible
Transition Charges will be determined for each Rate Schedule within the three
Customer Categories. The Intangible Transition Charges will be adjusted by Rate
Schedule within each Customer Category, but not among Customer Categories. The
Pennsylvania Competition Act prohibits allocating Intangible Transition Charges
to Customer Categories in a manner that results in the interclass or intraclass
shifting of costs. In prior decisions, the PUC has concluded that performing
rate adjustments by Customer Categories does not constitute interclass or
intraclass shifting of costs.
Rate Schedules and Customer Categories. The Rate Schedules in the
commercial and industrial Customer Categories do not necessarily consist solely
of commercial Customers or industrial Customers, as the case may be. Instead, a
Rate Schedule placed in the commercial Customer Category indicates that this
Rate Schedule consists primarily of commercial Customers. Similarly, a Rate
Schedule placed in the industrial Customer Category indicates that this Rate
Schedule consists primarily of industrial Customers. Therefore, statistics
provided in this prospectus for the commercial Customer Category may include
statistics for some industrial Customers, and statistics provided in
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<PAGE> 94
this prospectus for the industrial Customer Category may include statistics for
some commercial Customers. In contrast, statistics in this prospectus relating
to commercial Customers relate solely to commercial Customers, and statistics in
this prospectus relating to industrial Customers relate solely to industrial
Customers.
TABLE 3
RETAIL ELECTRIC CUSTOMERS
<TABLE>
<CAPTION>
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% 571,928 86.89% 575,526 86.61% 579,194 86.54%
------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Sub-Total 564,940 86.98% 569,897 86.83% 571,928 86.89% 575,526 86.61% 579,194 86.54%
COMMERCIAL
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%
------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Sub-Total 74,159 11.42% 75,744 11.54% 77,006 11.67% 78,252 11.78% 79,677 11.90%
INDUSTRIAL
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%
Street
Lighting 8,049 1.24% 8,354 1.27% 8,444 1.28% 8,343 1.26% 8,017 1.20%
------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Sub-Total 10,421 1.60% 10,708 1.63% 10,791 1.64% 10,740 1.62% 10,446 1.56%
Total 649,520 100.00% 656,349 100.00% 659,725 100.00% 664,518 100.00% 669,317 100.00%
======= ====== ======= ====== ======= ====== ======= ====== ======= ======
<CAPTION>
FOR THE
SIX MONTHS
ENDED
----------------------
6/30/99
----------------------
AVERAGE
NUMBER OF % OF
CUSTOMERS TOTAL
--------- ----------
<S> <C> <C>
RESIDENTIAL
Schedule 10 584,964 86.41%
------- --------
Sub-Total 584,964 86.41%
COMMERCIAL
Schedule 20 80,025 11.82%
Schedule 22 1,596 0.24%
Schedule 23 34 0.01%
Schedule 24 7 0.00%
------- --------
Sub-Total 81,662 12.06%
INDUSTRIAL
Schedule 30 2,369 0.35%
Schedule 40 113 0.02%
Schedule 41 2 0.00%
Schedule 44 1 0.00%
Schedule 46 2 0.00%
Schedule 86 4 0.00%
Street
Lighting 7,882 1.16%
------- --------
Sub-Total 10,373 1.53%
Total 676,999 100.00%
======= ========
</TABLE>
TABLE 4
ACTUAL RETAIL ELECTRIC USAGE (PER MEGAWATT-HOUR "MWh")
<TABLE>
<CAPTION>
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 34.44% 5,767,542 33.48% 5,948,711 33.68% 5,766,850 32.61% 5,809,350 32.50%
---------- ------ ---------- ------ ---------- ------ ---------- ------ ---------- ------
Sub-Total 5,748,127 34.44% 5,767,542 33.48% 5,948,711 33.68% 5,766,850 32.61% 5,809,350 32.50%
COMMERCIAL
Schedule 20 2,018,381 12.09% 2,090,358 12.13% 2,153,748 12.19% 2,168,078 12.26% 2,216,039 12.40%
Schedule 22 98,538 0.59% 89,102 0.52% 81,534 0.46% 64,818 0.37% 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%
---------- ------ ---------- ------ ---------- ------ ---------- ------ ---------- ------
Sub-Total 2,117,463 12.69% 2,179,957 12.65% 2,235,774 12.66% 2,233,394 12.63% 2,269,066 12.70%
<CAPTION>
FOR THE
SIX MONTHS
ENDED
----------------------
6/30/99
----------------------
% OF
MWH TOTAL
--------- ----------
<S> <C> <C>
RESIDENTIAL
Schedule 10 3,055,975 33.56%
--------- ------
Sub-Total 3,055,975 33.56%
COMMERCIAL
Schedule 20 1,138,248 12.50%
Schedule 22 32,693 0.36%
Schedule 23 150 0.00%
Schedule 24 3 0.00%
--------- ------
Sub-Total 1,171,094 12.86%
</TABLE>
67
<PAGE> 95
<TABLE>
<CAPTION>
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>
INDUSTRIAL
Schedule 30 3,857,797 23.12% 3,927,383 22.80% 3,971,239 22.48% 4,047,248 22.89% 4,071,011 22.78%
Schedule 40 3,077,059 18.44% 3,355,885 19.48% 3,540,235 20.04% 3,978,829 22.50% 3,820,137 21.37%
Schedule 41 106,216 0.64% 46,904 0.27% 46,300 0.26% 46,786 0.26% 19,068 0.11%
Schedule 44 118,103 0.71% 117,590 0.68% 72,775 0.41% 69,027 0.39% 78,958 0.44%
Schedule 46 1,583,201 9.49% 1,751,510 10.17% 1,766,040 10.00% 1,460,804 8.26% 1,723,975 9.65%
Schedule 86 9 0.00% 31 0.00% 182 0.00% 3 0.00% 15 0.00%
Street
Lighting 80,639 0.48% 80,951 0.47% 81,182 0.46% 81,181 0.46% 81,271 0.45%
---------- ------ ---------- ------ ---------- ------ ---------- ------ ---------- ------
Sub-Total 8,823,024 52.87% 9,280,264 53.87% 9,477,953 53.66% 9,683,878 54.76% 9,794,435 54.80%
Total 16,888,614 100.00% 17,227,763 100.00% 17,662,438 100.00% 17,684,122 100.00% 17,872,851 100.00%
========== ====== ========== ====== ========== ====== ========== ====== ========== ======
<CAPTION>
FOR THE
SIX MONTHS
ENDED
----------------------
6/30/99
----------------------
% OF
MWH TOTAL
--------- ----------
<S> <C> <C>
INDUSTRIAL
Schedule 30 2,039,918 22.40%
Schedule 40 1,837,720 20.18%
Schedule 41 26,080 0.29%
Schedule 44 34,908 0.38%
Schedule 46 899,018 9.87%
Schedule 86 33 0.00%
Street
Lighting 40,730 0.45%
--------- ------
Sub-Total 4,878,407 53.58%
Total 9,105,476 100.00%
========= ======
</TABLE>
TABLE 5
RETAIL ELECTRIC REVENUES (DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
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
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
RESIDENTIAL
Schedule 10 $376,023 41.12% $395,209 40.56% $403,243 40.92% $389,460 40.13% $381,918 40.26%
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Sub-Total 376,023 41.12% 395,209 40.56% 403,243 40.92% 389,460 40.13% 381,918 40.26%
COMMERCIAL
Schedule 20 $130,657 14.29% $140,314 14.40% $143,273 14.54% $143,473 14.78% $140,749 14.84%
Schedule 22 6,597 0.72% 6,518 0.67% 5,969 0.61% 4,810 0.50% 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%
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Sub-Total 137,333 15.02% 146,912 15.08% 149,317 15.15% 148,357 15.29% 144,357 15.22%
INDUSTRIAL
Schedule 30 $194,859 21.31% $206,145 21.16% 205,646 20.87% $208,172 21.45% $203,325 21.43%
Schedule 40 121,857 13.32% 136,249 13.98% 140,287 14.23% 152,368 15.70% 142,684 15.04%
Schedule 41 4,713 0.52% 2,142 0.22% 2,204 0.22% 2,090 0.22% 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 7.05% 71,817 7.37% 70,653 7.17% 56,485 5.82% 61,748 6.51%
Schedule 86 33 0.00% 37 0.00% 42 0.00% 39 0.00% 38 0.00%
Street
Lighting 10,944 1.20% 11,494 1.18% 11,537 1.17% 11,554 1.19% 11,620 1.22%
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Sub-Total 401,189 43.87% 432,180 44.36% 432,951 43.93% 432,652 44.58% 422,378 44.52%
Total $914,545 100.00% $974,301 100.00% $985,511 100.00% $970,469 100.00% $948,653 100.00%
======== ====== ======== ====== ======== ====== ======== ====== ======== ======
<CAPTION>
FOR THE SIX
MONTHS ENDED
-----------------
6/30/99
-----------------
% OF
$(000S) TOTAL
-------- ------
<S> <C> <C>
RESIDENTIAL
Schedule 10 $198,715 43.70%
-------- ------
Sub-Total 198,715 43.70%
COMMERCIAL
Schedule 20 $ 70,785 15.57%
Schedule 22 2,067 0.45%
Schedule 23 14 0.00%
Schedule 24 1 0.00%
-------- ------
Sub-Total 72,867 16.03%
INDUSTRIAL
Schedule 30 $ 88,991 19.57%
Schedule 40 58,905 12.96%
Schedule 41 573 0.13%
Schedule 44 976 0.21%
Schedule 46 28,019 6.16%
Schedule 86 21 0.00%
Street
Lighting 5,622 1.24%
-------- ------
Sub-Total 183,107 40.27%
Total $454,689 100.00%
======== ======
</TABLE>
CONCENTRATIONS. For the six-month period ended June 30, 1999, the largest
ten residential customers represented less than 1% of West Penn's total retail
electric revenues. For the six-month period ended June 30, 1999, 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 six-month period ended June 30,
1999, the largest industrial customer and the largest ten industrial customers
represented approximately 9.17% and 29.31%, respec-
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<PAGE> 96
tively, of West Penn's retail electric revenues from industrial customers. For
the six-month period ended June 30, 1999, the largest ten residential customers
represented less than 1% of West Penn's total retail electric sales. For the
six-month period ended June 30, 1999, 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 six-month period ended June 30, 1999, 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. 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
<TABLE>
<CAPTION>
FOR THE
FOR THE YEAR ENDED SIX MONTHS
---------------------------------------------------- ENDED
12/31/94 12/31/95 12/31/96 12/31/97 12/31/98 6/30/99
-------- -------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
RESIDENTIAL
30-59 days............ 1.33% 1.23% 1.29% 1.23% 1.23% 1.07%
60-89 days............ 0.54 0.49 0.58 0.42 0.42 0.35%
90-119 days........... 0.17 0.15 0.26 0.15 0.15 0.14%
120+ days............. 0.10 0.10 0.26 0.17 0.16 0.26%
COMMERCIAL
30-59 days............ 0.21% 0.26% 0.38% 0.33% 0.41% 0.40%
60-89 days............ 0.04 0.04 0.11 0.07 0.05 0.07%
90-119 days........... 0.01 0.02 0.04 0.03 0.03 0.03%
120+ days............. 0.03 0.02 0.06 0.07 0.04 0.07%
INDUSTRIAL
30-59 days............ 0.07% 0.14% 0.19% 0.09% 0.14% 0.19%
60-89 days............ 0.02 0.08 0.03 0.04 0.02 0.02%
90-119 days........... 0.01 0.01 0.01 0.04 0.02 0.01%
120+ days............. 0.02 0.01 0.01 0.01 0.00 0.01%
</TABLE>
- ------------
For purposes of calculating the numbers in Table 6 for the six-month period
ended June 30, 1999, the billed revenues for that six-month period were doubled.
69
<PAGE> 97
TABLE 7
NET WRITE-OFFS AS A PERCENTAGE OF BILLED RETAIL ELECTRIC REVENUES
<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE SIX
-------------------------------------------------------- MONTHS ENDED
12/31/94 12/31/95 12/31/96 12/31/97 12/31/98 6/30/99
-------- -------- -------- -------- -------- ------------
<S> <C> <C> <C> <C> <C> <C>
RESIDENTIAL.......... 0.84% 0.92% 1.36% 1.57% 1.37% 0.69%
COMMERCIAL........... 0.07 0.06 0.09 0.21 0.19 0.14
INDUSTRIAL........... 0.05 0.05 0.28 0.18 0.12 0.09
TOTAL................ 0.38 0.41 0.68 0.74 0.64 0.36
</TABLE>
- ------------
Unless West Penn is unable to complete all of its follow-up procedures in a
timely manner, unpaid residential account balances are charged-off 141 days
after the initial bill is mailed. Unless West Penn is unable to complete all of
its follow-up procedures in a timely manner, unpaid commercial and industrial
account balances are charged-off 101 days after the initial bill is mailed. If
West Penn is delayed in completing its follow-up procedures, the 141-day and
101-day charge-off periods may increase by a few days. For a description of West
Penn's collection and write-off policy, see "--Limited Information on Customers'
Creditworthiness--Collection Process for Residential Customers", "--Limited
Information on Customers' Creditworthiness--Collection Process for Commercial
and Industrial Customers" and "--Limited Information on Customers'
Creditworthiness-- Collection Process for Governmental Customers" in this
prospectus.
During the last five years, an increased number of bankruptcy filings have
resulted in an increase in delinquencies and net write-offs in the residential
and industrial Customer Categories. In addition, all Customer Categories were
affected by Allegheny Energy's internal reorganization that occurred in 1996. As
part of that reorganization, credit and collection responsibilities, which had
been performed by field locations, were transferred to a centralized customer
call center. In the later part of 1996 and most of 1997, Allegheny Energy
focused primarily on answering customer calls on a timely basis with other
functions including credit and collection being a secondary concern. Beginning
in 1998, Allegheny Energy once again began to emphasize credit and collection
practices, which contributed to a 14% reduction in losses in 1998.
West Penn does not expect the delinquency or write-off experience with
respect to ITC Collections to differ substantially from the experience that it
will have with its other receivables.
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 fund the Calculated Overcollateralization
Level, to maintain the Required Capital Amount and to pay the bond trustee's
fee, the administrative agent's fee, the
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<PAGE> 98
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 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
71
<PAGE> 99
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, particularly for the
residential and commercial Customer Categories. The forecast variance for the
industrial Customer Category in 1998 was due in large part to an unanticipated
decline in steel load and one large customer which began to self-generate. 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.
TABLE 8
VARIANCE FROM YEAR-AHEAD FORECAST: NUMBER OF CUSTOMERS
FOR THE YEAR ENDED DECEMBER 31
<TABLE>
<CAPTION>
1994 1995 1996 1997 1998
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
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
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
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%
</TABLE>
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<PAGE> 100
TABLE 9
VARIANCE FROM YEAR-AHEAD FORECAST: ENERGY SALES (GWH)
FOR THE YEAR ENDED DECEMBER 31
<TABLE>
<CAPTION>
1994 1995 1996 1997 1998
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
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
Forecasted....................................... 3,640 3,741 3,856 3,986 4,080
Actual........................................... 3,632 3,769 3,854 3,872 3,993
Variance......................................... -0.2% 0.7% -0.1% -2.9% -2.1%
INDUSTRIAL
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%
</TABLE>
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 approximately 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 of these 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
73
<PAGE> 101
the customer and its customer information system audits to indicate whether the
customer has been previously served by West Penn.
PAYMENT PLANS
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 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. As of March 31, 1999, there were
approximately 300 customers enrolled in the LIPURP. By 2002, West Penn estimates
that approximately 3% of its customers will be enrolled in LIPURP. Pursuant to
the provisions of the Pennsylvania 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.
As of March 31, 1999, approximately 31,000 of West Penn's customers have
entered into payment plans with West Penn, including those customers enrolled in
LIPURP. The total amount of billings under these payment plans is approximately
$14 million. Under these payment plans, West Penn customers agree to pay
delinquent bills over a period of time negotiated between West Penn and each
customer. Once a payment plan is entered into, the amount covered under that
plan is no longer considered delinquent unless that customer subsequently fails
to make any payment required to be paid on the date specified under that
customer's payment plan.
Customer Assistance and Referral Evaluation Service Program Guidelines and
Procedures (CARES) is a special plan for West Penn customers who are
experiencing some type of special hardship with the ability to rectify the
situation. This program is for short-term problems only. Customers are not in
the CARES program for more than two years. For customers enrolled in CARES, West
Penn will:
(1) provide a West Penn advocate for special payment-troubled
customers confronted with severe hardships;
(2) provide information and guidance regarding energy usage;
(3) provide supportive budget counseling including a review of the
customer's income and expenses and a formulation of a workable budget; and
74
<PAGE> 102
(4) provide feedback to West Penn on the needs and circumstances of
low-income customers.
Less than 1% of West Penn customers are enrolled in the CARES Program.
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 RESIDENTIAL CUSTOMERS
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.
However, termination is not permitted if the customer has filed a medical
certificate, a dispute or a complaint.
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.
75
<PAGE> 103
Delinquencies which accumulate during the Winter Moratorium continue to
contribute to the credit scoring, which can lead to termination after the Winter
Moratorium.
Collection efforts continue after service is terminated. A field service
representative is again sent to collect payment and to check the status of the
situation. A final bill and two reminders are sent before the account is
charged-off. Once an account is charged-off, West Penn mails a charge-off
notification to the customer. If West Penn is able to complete all of its
follow-up procedures in a timely manner, unpaid residential account balances are
charged-off 141 days after the initial bill is mailed and then referred to a
collection agency at 169 days after the initial bill is mailed. 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 COMMERCIAL AND INDUSTRIAL CUSTOMERS
Customer bills are due approximately 15 days after mailing. If the customer
does not pay the bill by the due date, collection action generally begins on the
19th day with a ten-day service termination notice delivered by mail. 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
76
<PAGE> 104
service termination by a designated West Penn employee. Service is terminated
with or without field contact if sufficient payment has not been made. However,
termination is not permitted if the customer has filed a medical certificate, a
dispute or a complaint.
Collection efforts continue after service is terminated. Ten days following
the termination of service, a field service representative is again sent to
collect payment and to check the status of the situation. Assuming no collection
is made, a final bill and two reminders are sent before the account is
charged-off. Once an account is charged-off, West Penn mails a charge-off
notification to the customer. If West Penn is able to complete all of its
follow-up procedures in a timely manner, unpaid commercial and industrial
account balances are charged-off 101 days after the initial bill is mailed and
then referred to a collection agency at 128 days after the initial bill is
mailed. 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 GOVERNMENTAL CUSTOMERS
Federal, state or local government customers or accounts are billed
according to the same standards as commercial and industrial accounts with the
exception that the due date for governmental accounts is 30 days. Service
termination is generally not used as a means of collection for governmental
accounts. Telephone contact is made before any reminder or service termination
notices are mailed.
RECONNECTION POLICY
For residential customers, service restoration generally requires either
payment of the full overdue balance or a payment agreement if the customer has
not previously defaulted on two payment agreements, a $30 reconnection fee
during business hours-$45 after business hours and $90 on weekends-and a
security deposit equal to two months of the average bill. A security deposit is
not required for low-income customers.
For non-residential customers, service restoration generally requires
payment of the full overdue balance, a reconnection fee and a security deposit
equal to the highest two consecutive month bills over the past 12-month period.
Payment arrangements are generally not available for non-residential customers.
APPLICATION OF CUSTOMER PAYMENTS
The Pennsylvania 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
77
<PAGE> 105
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, 2000.
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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<PAGE> 106
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
The servicer, on behalf of the issuer, will pursue any electric generation
supplier or other third party providing billing and/or metering services 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 providing billing and/or
metering services 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 commercial and
industrial Customer Categories after the charges are communicated to the
electric generation supplier or other third party providing billing and/or
metering services, then the servicer may provide notice of breach to the
electric generation supplier or other third party providing billing and/or
metering services at any time thereafter, at the servicer's discretion. Upon
notice of a breach, the electric generation supplier or other third party
providing billing and/or metering services will have 20 calendar days to cure
that breach. If the electric generation supplier or other third party providing
billing and/or metering services has not cured that breach within 20 calendar
days, the servicer may terminate consolidated billing by the electric generation
supplier or other third party providing billing and/or metering services 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
West Penn nor the servicer will pay any shortfalls resulting from the failure of
any electric generation suppliers or other third parties providing billing
and/or metering services 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.
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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 of West Penn, in its capacity
as servicer, or of any successor servicer, electric generation suppliers or
other third parties, 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 on those 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:
-- Computer hardware and software;
-- Embedded chips in various equipment; and
-- 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. Contingency plans include
alternate methods of certain operations to help avoid electric service or
business interruptions, and the review and update of restoration of service
plans to mitigate the severity and length of interruptions in the unlikely event
that any should occur.
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, West Penn reported to the PUC that, except for a few
items, its critical electricity production and delivery systems
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were Year 2000 ready pending final confirmation system testing of its power
stations in April and May. West Penn has determined that as of June 30, 1999,
all of its critical components and systems related to safety and the production
and distribution of electricity and nearly all of its important business
systems, including accounting and billing, are Year 2000 ready. West Penn
anticipates that the remediation and testing work on the remaining business and
non-critical systems will be completed by September 30, 1999. West Penn has
defined Year 2000 ready to mean that a determination has been made by testing or
other means that a component or system will be able to perform its critical
functions, or that contingency plans are in place to overcome any inability to
do so.
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.
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 of these events. West Penn intends to review and
update these plans to minimize any Year 2000 problems.
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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WEST PENN FUNDING CORPORATION
West Penn Funding Corporation, a 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 West Penn Funding Corporation in exchange for
[ ] shares of the outstanding capital stock of West Penn Funding
Corporation, representing 100% of the outstanding capital stock of West Penn
Funding Corporation. Accordingly, West Penn Funding Corporation will be a wholly
owned subsidiary of West Penn. West Penn Funding Corporation is a recently
formed corporation and, as of the date of this prospectus, has not carried on
any business activities and has no operating history.
West Penn Funding Corporation 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, West Penn Funding Corporation 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 West Penn Funding Corporation pursuant to an administrative
agreement between West Penn Funding Corporation and the Administrative Agent
(the "Seller Administration Agreement"). West Penn Funding Corporation 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 West
Penn Funding Corporation. All of these 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 that time as is necessary to the affairs of
West Penn Funding Corporation. West Penn Funding Corporation will have
sufficient officers, directors and employees to carry on its business.
<TABLE>
<CAPTION>
NAME AGE TITLE
- ------- ---- -------
<S> <C> <C>
[ ] [ ] [ ]
[ ] [ ] [ ]
[ ] [ ] [ ]
</TABLE>
[Brief bio]
[Brief bio]
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[Brief bio]
No compensation has been paid by West Penn Funding Corporation to any
officer or director of West Penn Funding Corporation since West Penn Funding
Corporation was formed. The officers and directors of West Penn Funding
Corporation will not be compensated by West Penn Funding Corporation for their
services on behalf of West Penn Funding Corporation. Each officer serves at the
discretion of West Penn Funding Corporation's board of directors. West Penn
Funding Corporation's organizational documents limit, to the extent permitted by
Delaware law, the personal liability of each officer and director of West Penn
Funding Corporation to West Penn Funding Corporation for monetary damages
resulting from breaches of that officer's or director's duty of care. West Penn
Funding Corporation's organizational documents provide that officers and
directors of West Penn Funding Corporation shall be indemnified against
liabilities incurred in connection with their services on behalf of West Penn
Funding Corporation, including liabilities under applicable securities laws.
West Penn Funding Corporation has no intent to file, and West Penn has
advised West Penn Funding Corporation that it has no intent to cause the filing
of, a voluntary petition for relief under the Bankruptcy Code with respect to
West Penn Funding Corporation so long as West Penn Funding Corporation is
solvent and does not reasonably foresee becoming insolvent.
The principal place of business of West Penn Funding Corporation 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 May 26,
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 integral part of 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 LLC Agreement requires that the issuer have at least two independent
directors. These independent directors must be natural persons who, for the
five-year period prior to his or her appointment as an independent director has
not been and during the continuation of his or her service as independent
director is not:
(1) an employee, director, stockholder, partner or officer of the
issuer or any of its affiliates--other than his or her service as
independent director;
(2) a customer or supplier of the issuer or any of its affiliates; or
(3) any member of the immediate family of a person described in (1)
or (2) above.
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The following is a list of the principal officers and directors of the
issuer. All of these 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 that time as is necessary to the affairs of the issuer.
The issuer will have sufficient officers, directors and employees to carry on
its business.
<TABLE>
<CAPTION>
NAME AGE TITLE
- ------- ---- -------
<S> <C> <C>
[ ] [ ] [ ]
[ ] [ ] [ ]
[ ] [ ] [ ]
</TABLE>
[Brief bio]
[Brief bio]
[Brief bio]
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 directors, will not be compensated by the
issuer for their services on behalf of the issuer. The aggregate initial
compensation for the two independent directors will be $1,200 per year. Each
officer serves at the discretion of the issuer's board of directors. West Penn
is an affiliate of the issuer. The issuer's organizational documents limit the
personal liability of each officer and director of the issuer to the issuer for
monetary damages incurred by reason of any act or omission of the officers and
directors, except for damages incurred by reason of an officer's or director's
gross negligence or willful misconduct. 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,
unless the liabilities were incurred by reason of an officer's or director's
gross negligence or willful misconduct.
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 West Penn Funding LLC,
800 Cabin Hill Drive, Room [ ], Greensburg, PA 15601, and its telephone
number is (724) 837-[ ].
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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, those net proceeds to
West Penn or its affiliates in exchange for interest-bearing notes. West Penn or
that 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. A form of this supplement is filed as an
exhibit to the Registration Statement of which this prospectus forms a part. The
following summary describes all material 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 that prospectus supplement. Please
see the form of indenture and transition bonds and the related prospectus
supplement for a complete description of all terms and provisions of the
transition bonds, portions of which are summarized in this section.
GENERAL TERMS OF THE TRANSITION BONDS
The transition bonds may be issued in one or more series, each comprised of
one or more classes. The terms of all transition bonds of the same series will
be identical in all respects, unless that 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;
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(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;
(8) the place or places for payments with respect to the series;
(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 West Penn Funding Corporation;
(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 & Co., 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 & Co., 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.
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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 that 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.
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 that transaction;
(2) the identity of the counterparty or counterparties;
(3) any payments under that 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 that class or classes of floating rate transition
bonds and that transaction;
(5) the formula for calculating the floating rate of interest of that
class or classes prior to termination of that transaction; and
(6) the rights of transition bondholders with respect to the
termination of or specified other events related to that transaction.
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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 on those transition bonds,
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 that notice shall be of no effect unless
those 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 those
transition bonds will 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 cash deposit, 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 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 that credit enhancement;
(2) any conditions to payment thereunder not otherwise described in
this prospectus;
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(3) the conditions, if any, under which the amount payable under that
credit enhancement may be reduced and under which that credit enhancement
may be terminated or replaced; and
(4) any material provisions of any applicable agreement relating to
that 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 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 those 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 these 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,
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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
that 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. These credits or any transactions in such Transition Bonds
settled during that processing will be reported to the relevant Euroclear or
CEDEL Participant on that 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 are
required to be forwarded to Cede, as nominee for DTC, on each of those dates,
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
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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 those 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 facilitates 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,
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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.
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 in the fifth paragraph of this subheading. 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. These payments will be subject to tax
reporting in accordance with relevant United States tax laws and regulations.
See "United States Taxation" in this prospectus.
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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 those 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 these procedures and these procedures may be discontinued at any time.
DEFINITIVE TRANSITION BONDS
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:
(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 that 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 these 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. These 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 that transition
bond at the office or agency specified in the notice of final payment to
transition bondholders.
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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 generally 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 or acceleration 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--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 West Penn
Funding Corporation Intangible Transition Property. The Transfer Agreement may
be amended by the parties to that agreement, with the consent of the bond
trustee, provided that notice of the substance of that amendment is provided by
West Penn Funding Corporation 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. Please see that form of Transfer Agreement for a
complete description of all terms and provisions of the Transfer Agreement,
portions of which are summarized in this section.
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 West Penn Funding Corporation, without recourse, except as
provided in that agreement, Initial Intangible Transition Property representing
the irrevocable right to receive through Intangible Transition Charges amounts
sufficient to recover Qualified Transition Expenses with respect to that series
of transition bonds. In consideration of that initial contribution, West Penn
Funding Corporation shall issue [ ] shares of its outstanding capital
stock, representing 100% of West Penn Funding Corporation's outstanding capital
stock. In addition, West Penn may from time to time offer to contribute
additional Intangible Transition Property to West Penn Funding Corporation,
subject to the satisfaction of certain conditions (each, a "Subsequent
Contribution"). Each Subsequent Contribution may be made in consideration of the
issuance by West Penn Funding Corporation to West Penn of additional shares of
West Penn Funding Corporation's capital stock. If any of these offers is
accepted by West Penn Funding Corporation, the Subsequent Contribution will be
effective on a date (a "Subsequent Contribution Date") specified in a written
notice provided by West Penn to West Penn Funding Corporation.
In accordance with the Pennsylvania 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 West Penn
Funding Corporation 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 West Penn
Funding Corporation on any Subsequent Contribution Date pursuant to the Transfer
Agreement in connection with the subsequent issuance of a series of transition
bonds.
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West Penn's accounting records and computer systems will reflect the
contribution and sale of Intangible Transition Property to West Penn Funding
Corporation.
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 West
Penn Funding Corporation 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 that sale, and West Penn is not aware of any
pending insolvency with respect to itself;
(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 that date pursuant to the Sale
Agreement, and all conditions to the issuance of one or more series of
transition bonds intended to provide those 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 West Penn Funding Corporation ownership of the
Transferred Intangible Transition Property to be conveyed on that date,
free and clear of all liens other than liens created by the issuer pursuant
to the indenture, and West Penn Funding Corporation shall have taken any
action required for West Penn Funding Corporation to transfer to the issuer
ownership of the Transferred Intangible Transition Property to be conveyed
on that 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 West Penn Funding Corporation,
the issuer and the Rating Agencies with a timely addition notice specifying
the Subsequent Contribution Date for that Subsequent Intangible Transition
Property, on or prior to that Subsequent Contribution Date;
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(7) West Penn shall have delivered to the Rating Agencies, West Penn
Funding Corporation 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 West Penn Funding Corporation,
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 West Penn Funding Corporation--and acknowledge that such
representations and warranties are also for the benefit of the issuer, as
assignee of West Penn Funding Corporation, 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 West Penn Funding
Corporation 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 West Penn Funding Corporation, 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 West Penn Funding Corporation on the Initial
Contribution Date or Subsequent Contribution Date, as applicable, the
Transferred Intangible Transition Property has been validly transferred to
West Penn Funding Corporation 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 Pennsylvania Competition Act, necessary in
any jurisdiction to give West Penn Funding Corporation 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
West Penn Funding Corporation 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 Pennsylvania
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 West Penn Funding Corporation with respect to the
Transferred Intangible Transition Property;
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(4) the QRO has been issued by the PUC in accordance with the
Pennsylvania 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
Pennsylvania 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 Pennsylvania 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 Pennsylvania 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;
(9) except as disclosed by West Penn to West Penn Funding Corporation
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
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West Penn or its properties challenging the QRO or the Pennsylvania
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 Pennsylvania 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 West Penn Funding Corporation and the issuer, as
assignee of West Penn Funding Corporation, 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 Pennsylvania 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 that transfer to West Penn
Funding Corporation 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;
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(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 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 any 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 West Penn 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 indenture, the
certificate of formation filed with the State of Delaware to form the
Issuer or the Certificate of Incorporation of West Penn Funding
Corporation (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 West Penn Funding
Corporation, 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;
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(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;
(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 those 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.
West Penn shall indemnify West Penn Funding Corporation, 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
West Penn Funding Corporation or the issuer or the issuance and sale by the
issuer of transition bonds;
(2) any and all amounts of principal of and interest on the
transition bonds not paid when due or when scheduled to be paid in
accordance with their terms and the amount of any deposits to the issuer
required to have been made in accordance with the terms of the Basic
Documents which are not made when so required, in either case as a result
of West Penn's breach of any of its representations, warranties or
covenants contained in the Transfer Agreement; and
(3) 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
under the Transfer Agreement.
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These indemnification obligations will rank pari passu with other general
unsecured obligations of West Penn. The indemnities described above will survive
the termination of the Transfer Agreement and include reasonable fees and
expenses of investigation and litigation, including reasonable attorneys' fees
and expenses.
If an event like that occurs, upon receipt of written notice of the breach
by West Penn from West Penn Funding Corporation, the issuer or bond trustee,
West Penn will notify the servicer of the occurrence of that 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, the Overcollateralization 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 West Penn Funding Corporation, 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 Pennsylvania
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 Pennsylvania 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 those 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:
(1) to protect West Penn Funding Corporation, 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
(2) to block or overturn any attempts to cause a repeal of,
modification of or supplement to the Pennsylvania 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.
In addition, West Penn is required to execute and file those filings,
including filings with the PUC pursuant to the Pennsylvania Competition Act, as
may be required to fully preserve, maintain and protect the interests of West
Penn Funding Corporation in
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the Transferred Intangible Transition Property. Other than as described in the
previous paragraph, 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:
(1) immediately after giving effect to that 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;
(2) the Rating Agencies shall have received prior written notice of
that transaction; and
(3) certain officers' certificates and opinions of counsel shall have
been delivered to West Penn Funding Corporation, 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 West Penn Funding Corporation is selling and
the issuer is purchasing Intangible Transition Property. The Sale Agreement may
be amended by the parties to that agreement, with the consent of the bond
trustee, provided notice of the substance of that 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.
Please see that form of Sale Agreement for a complete description of all terms
and provisions of the Sale Agreement, portions of which are summarized in this
section.
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, West Penn Funding
Corporation will sell and assign to the issuer, without recourse, except as
provided in that agreement, the Initial Intangible Transition Property
contributed by West Penn to West Penn Funding Corporation pursuant to the
Transfer Agreement and all rights of West Penn Funding Corporation 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
that Transferred Intangible Transition Property. In addition, West Penn Funding
Corporation may from time to time offer to sell any additional Intangible
Transition Property which may be contributed to West Penn Funding Corporation 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 of these offers 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 West Penn Funding Corporation to the issuer.
In accordance with the Pennsylvania 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.
West Penn Funding Corporation's accounting records and computer systems
will reflect the sale and assignment of Intangible Transition Property to the
issuer, and West Penn Funding Corporation shall treat the transition bonds as
debt of West Penn Funding Corporation for federal income tax purposes so long as
any of the transition bonds are outstanding.
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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, West Penn Funding Corporation 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, West Penn Funding Corporation was not insolvent and will not
have been made insolvent by that sale, and West Penn Funding Corporation 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 West Penn Funding Corporation 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;
(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 that date, and all conditions to the issuance of one or more
series of transition bonds intended to provide those 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, West Penn Funding Corporation shall have taken all
action required to transfer to the issuer ownership of the Transferred
Intangible Transition Property to be conveyed on that 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 that security interest as of that date;
(6) in the case of a sale of Subsequent Intangible Transition
Property only, West Penn Funding Corporation shall have provided the issuer
and the Rating Agencies with a timely addition notice specifying the
Subsequent Transfer Date for that Subsequent Intangible Transition
Property, on or prior to that Subsequent Transfer Date;
(7) West Penn Funding Corporation 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) West Penn Funding Corporation shall have delivered to the bond
trustee and the issuer an officers' certificate confirming the satisfaction
of each condition precedent specified above.
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REPRESENTATIONS AND WARRANTIES OF WEST PENN FUNDING CORPORATION
In the Sale Agreement, West Penn Funding Corporation 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 West Penn Funding Corporation 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 West
Penn Funding Corporation 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 West Penn Funding Corporation under any bankruptcy law;
(3) West Penn Funding Corporation 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
Pennsylvania 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 West Penn Funding Corporation or
anyone claiming through West Penn Funding Corporation and to give the bond
trustee a first priority perfected security interest in Transferred
Intangible Transition Property have been made, other than any
filings--except for filings with the PUC under the Pennsylvania 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 issuer or the bond trustee with respect
to the Transferred Intangible Transition Property;
(4) West Penn Funding Corporation 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) West Penn Funding Corporation has the corporate power and
authority to execute and deliver the Sale Agreement and to carry out its
terms, West Penn Funding Corporation 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
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Property, in the case of each Subsequent Transfer Date, as applicable, and
West Penn Funding Corporation has duly authorized that 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 West
Penn Funding Corporation by all necessary corporate action;
(6) the Sale Agreement constitutes a legal, valid and binding
obligation of West Penn Funding Corporation, enforceable against West Penn
Funding Corporation 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 West Penn Funding Corporation, or any
indenture, agreement or other instrument to which West Penn Funding
Corporation 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 West Penn Funding
Corporation of any court or of any federal or state regulatory body,
administrative agency or other governmental instrumentality having
jurisdiction over West Penn Funding Corporation 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 West Penn Funding Corporation of the Sale
Agreement, the performance by West Penn Funding Corporation of the
transactions contemplated by the Sale Agreement or the fulfillment by West
Penn Funding Corporation 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 West
Penn Funding Corporation's best knowledge, threatened, before any court,
federal or state regulatory body, administrative agency or other
governmental instrumentality having jurisdiction over West Penn Funding
Corporation 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 West Penn Funding Corporation to the
issuer, seeking any determination or ruling that could be reasonably
expected to materially and adversely affect the performance by West
Penn Funding
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Corporation of its obligations under, or the validity or enforceability
of, the Basic Documents or the transition bonds;
(10) after giving effect to the sale of any Transferred Intangible
Transition Property under the Sale Agreement, West Penn Funding
Corporation:
(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) West Penn Funding Corporation 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 Funding Corporation's business, operations, assets, revenues,
properties or prospects.
West Penn Funding Corporation 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) West Penn Funding Corporation's willful misconduct, bad
faith or gross negligence in the performance of its duties under the
Sale Agreement,
(y) West Penn Funding Corporation's reckless disregard of its
obligations and duties under the Sale Agreement, or
(z) West Penn Funding Corporation's breach of any
representations or warranties.
If an event like that occurs, upon receipt of written notice of the breach
by West Penn Funding Corporation from the issuer or bond trustee, West Penn
Funding Corporation will notify the servicer of the occurrence of that event so
that the servicer may calculate the amount of indemnification in accordance with
the provisions of the
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Servicing Agreement. Amounts on deposit in the Reserve Subaccount, the
Overcollateralization Subaccount and the Capital Subaccount shall not be
available to satisfy any indemnification amounts owed by West Penn Funding
Corporation under the Sale Agreement.
In addition to the foregoing representations and warranties, West Penn
Funding Corporation 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 Funding Corporation, 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.
West Penn Funding Corporation shall also be obligated to take those 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:
(1) to protect 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 Funding
Corporation's representations and warranties in the Sale Agreement; or
(2) to block or overturn any attempts to cause a repeal of,
modification of or supplement to the Pennsylvania 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.
West Penn Funding Corporation is required to execute and file such filings,
including filings with the PUC pursuant to the Pennsylvania 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 in the previous paragraph, West Penn Funding Corporation 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 Sale Agreement and that in
its opinion may involve it in any expense or liability.
CERTAIN MATTERS REGARDING WEST PENN FUNDING CORPORATION
The Sale Agreement requires West Penn Funding Corporation 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. Please see that form of Servicing Agreement for a complete description
of all terms and provisions of the Servicing Agreement, portions of which are
summarized in this section.
The Servicing Agreement may be amended by the parties to that agreement
with the consent of the bond trustee under the indenture.
SERVICING PROCEDURES
General. The servicer 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 under "--ITC Adjustment Process."
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 Pennsylvania Competition Act or the QRO with respect to the Intangible
Transition Property. The cost of any action like that shall be payable from ITC
Collections as an operating expense at the time those costs are incurred.
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ITC Adjustment Process. Among other things, the Servicing Agreement
requires the servicer to seek, and the Pennsylvania 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 those adjustments (each, an "Adjustment Request") on
October 1 of each year and on the additional date or dates specified in the
prospectus supplement for any series of transition bonds (each, a "Calculation
Date"). In accordance with the Pennsylvania 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 the last class of each series of
transition bonds may be implemented quarterly or monthly.
The servicer agrees to calculate these adjustments to result in:
(1) the outstanding principal balance of each series or class
equaling the amount provided for in the Expected Amortization Schedule for
that series or class,
(2) the amount on deposit in the Overcollateralization Subaccount
equaling the Calculated Overcollateralization Level,
(3) the amount in the Capital Subaccount equaling the Required
Capital Amount, and
(4) the amount in the Reserve Subaccount equaling zero.
These Adjustment Requests are designed to achieve each of the above goals
by the payment date immediately preceding the next Adjustment Date or with
respect to the period in which monthly rate adjustments are utilized, generally
the 25th day of the calendar month immediately preceding the next monthly
Adjustment Date, as applicable, taking into account any amounts on deposit in
the Reserve Subaccount. The Pennsylvania Competition Act and the QRO require the
PUC to approve the annual adjustments within 90 days of the Adjustment Request.
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 the last class of
each series of transition bonds on the date or dates specified in the related
prospectus supplement (each, an "Adjustment Date"). Those 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
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Date. As long as West Penn or any successor to West Penn's electric distribution
business is the servicer, the "Remittance Date" is the 22nd day of each
month--or if the 22nd is not a Business Day, the immediately succeeding Business
Day--provided that, among other things:
(1) 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
(2) 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 monthly period represented by each of West Penn's 12 billing
cycles each year 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 on these collections 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.
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.
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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 Pennsylvania 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 those duties
are to be performed.
SERVICER REPRESENTATIONS AND WARRANTIES
In the Servicing Agreement, the servicer will make representations and
warranties as of each date that West Penn Funding Corporation 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 those
properties are currently owned and that 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 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 that
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.
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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;
(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 that 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 that 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
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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 the 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 that
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.
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 Pennsylvania 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 that 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.
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In addition, the QRO and the Pennsylvania 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 that 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 unremedied for 30 days after notice of that failure has been
given to the servicer, by the issuer or the bond trustee or after discovery
of that failure by an officer of the servicer, 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
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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, 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.
Please see that form of indenture, including that form of supplemental
indenture, for a complete description of all terms and provisions of the
indenture and supplemental indenture, portions of which are summarized in this
section. 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:
(1) the Transferred Intangible Transition Property sold by West Penn
Funding Corporation 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 West Penn Funding Corporation 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 West Penn Funding Corporation
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 in that account
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;
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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.
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 that
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, West Penn Funding Corporation,
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 that series and the application
of the proceeds therefrom, that 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 and to replenish the Capital
Subaccount as of each payment date.
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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. 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 in the Collection
Account. 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 those monies, shall be held by the bond trustee in the
Collection Account as part of the collateral.
"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;
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(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 that 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 and investment
earnings remitted to the bond trustee by West Penn, West Penn Funding
Corporation or the servicer or otherwise received by the bond trustee into the
General Subaccount of the Collection Account. "Indemnity Amounts" means any
amounts paid by West Penn, West Penn Funding Corporation 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, the Sale
Agreement and the Servicing Agreement. See "The Transfer Agreement", "The Sale
Agreement" and "The Servicing Agreement" in this prospectus.
General Subaccount. ITC Collections remitted by the servicer to the bond
trustee, as well as any Indemnity Amounts and investment earnings 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:
(1) amounts payable in respect of fees and expenses of the bond
trustee, the independent directors of the issuer, the Administrative Agent
and the servicer and other fees and expenses,
(2) amounts distributable to the transition bondholders in respect of
principal of and interest paid on that payment date,
(3) amounts required to replenish the Capital Subaccount,
(4) amounts required to replenish and fund the Overcollateralization
Subaccount and
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(5) net investment earnings on amounts in the Capital Subaccount
released to the issuer,
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 on those amounts, 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 are insufficient to
make scheduled distributions to the transition bondholders and pay expenses of
the issuer, the bond trustee, the independent directors of the issuer, the
Administrative Agent, the servicer and certain other fees and expenses and to
fund the Overcollateralization Subaccount and replenish the Capital Subaccount.
See "--Allocations and Payments" below.
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 on those amounts, 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 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
independent directors of the issuer, the Administrative Agent 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,
West Penn Funding Corporation will make a capital contribution in the amount of
the Required Capital Amount to the issuer, and the issuer will pay that 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 on
those amounts 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 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 independent directors of the
issuer, the Administrative Agent 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.
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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 those 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 those 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) all amounts owed to the independent directors will be paid to the
independent directors;
(3) the Servicing Fee and all unpaid Servicing Fees from prior
payment dates will be paid to the servicer;
(4) the fees owed to the Administrative Agent under the
Administration Agreements will be paid to the Administrative Agent;
(5) so long as no Event of Default has occurred and is continuing or
would be caused by that payment, all operating expenses other than those
referred to in clauses (1), (2), (3) and (4) above will be paid to the
persons entitled thereto, provided that the amount paid on any payment date
pursuant to this clause (5) may not exceed $100,000 in the aggregate for
all series;
(6) 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 on that overdue interest, will be paid to the
transition bondholders;
(7) 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;
(8) an amount up to the principal amount of the transition bonds that
is scheduled to be paid by that payment date in accordance with the
Expected Amortization Schedule will be paid to the transition bondholders
in respect of principal on the transition bonds;
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(9) all unpaid operating expenses and Indemnity Amounts will be paid
to the persons entitled thereto;
(10) 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;
(11) an amount necessary to cause the amount in the
Overcollateralization Subaccount to equal the Calculated
Overcollateralization Level for that payment date will be allocated to the
Overcollateralization Subaccount;
(12) provided that no event of default has occurred and is
continuing, an amount equal to the net investment earnings on amounts in
the Capital Subaccount will be released to the issuer, free from the lien
of the indenture;
(13) the balance, if any, will be allocated to the Reserve
Subaccount; and
(14) 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 (12) 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: 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 (6)
or (7) of the first paragraph under "--Allocation and Payments" shall be made
pro rata based on the respective outstanding principal amounts of transition
bonds of that series held by those transition bondholders, unless, in the case
of a series comprised of two or more classes, the applicable supplemental
indenture for that series specifies otherwise. All payments to transition
bondholders of a class pursuant to clause (6) or (7) of the first paragraph
under "Allocation and Payments" shall be made pro rata based on the respective
outstanding principal amounts of transition bonds of that class held by those
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 that series with respect to that payment date or the period since the
previous payment date, as applicable:
(1) the amount paid to those transition bondholders in respect of
principal;
(2) the amount paid to those transition bondholders in respect of
interest;
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(3) the outstanding principal balance and the amount provided in the
Expected Amortization Schedule, in each case for that 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 the Required Capital Amount; and
(6) the amount, if any, on deposit in the Reserve Subaccount as of
the most recent payment date.
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) that 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 that 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
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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
the 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 the
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 previously 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:
(1) that action shall not, as evidenced by an opinion of counsel,
adversely affect in any material respect the interests of any transition
bondholder and
(2) that the Rating Agency Condition shall have been satisfied with
respect to that action.
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 of any transition bond, the interest rate specified on any
transition bond or the redemption price or the premium, if any, with
respect to any transition bond, 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
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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 on a transition bond
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 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, West Penn Funding
Corporation, 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
(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 to the lien of the indenture or
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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, West Penn Funding Corporation 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 West Penn Funding Corporation 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 that
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, West
Penn Funding Corporation or the servicer under or in connection with the Sale
Agreement and the Servicing Agreement, and any right of the issuer to take that
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 the
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 that 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 that 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, West Penn Funding
Corporation or
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the servicer under the Transfer Agreement, Sale Agreement or Servicing
Agreement, respectively, in each case in 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, West Penn Funding Corporation 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, West Penn Funding Corporation 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.
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 of that amendment or consent and
(2) promptly after the execution of any such amendment or consent, a
copy of that amendment or consent.
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 that
series or, if applicable, any class on the class termination date for that
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. That 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.
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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 to that sale;
(2) the proceeds of that 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 those 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 66 2/3% of the aggregate
outstanding amount of the transition bonds of each series.
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 that request. Subject to those
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) that 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 that 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
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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 Pennsylvania Competition Act, with respect to
the indenture, unless:
(1) that 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) that 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 that request;
(4) the bond trustee for 60 days after its receipt of such notice,
request and offer has failed to institute that proceeding; and
(5) no direction inconsistent with that written request has been
given to the bond trustee during that 60-day period by the holders of a
majority in principal amount of the outstanding transition bonds of all
series.
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 that consolidation or merger or
to whom substantially all of those 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) that 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 that merger, consolidation or
sale;
(4) the Rating Agency Condition will have been satisfied with respect
to that 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 that consolidation, merger or sale;
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(5) the issuer has received an opinion of counsel to the effect that
that consolidation or merger or sale of assets would have no material
adverse tax consequence to the issuer or any transition bondholder, that
consolidation or merger or sale complies with the indenture and all
conditions precedent therein provided relating to that 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, West Penn Funding Corporation's, the servicer's or the issuer's
rights under the Pennsylvania 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 those 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
(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
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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 West Penn Funding
Corporation 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 that 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
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.
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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 that 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 that 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. Those
deposited funds will be segregated and held apart solely for paying those
transition bonds, and those 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 those 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 that series.
If the issuer exercises the Legal Defeasance Option with respect to any
series, that 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. That series of transition bonds shall not be subject to payment through
redemption or acceleration prior to that 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 that 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 those
transition bonds to the expected final payment date or redemption date
therefor, as applicable, that 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
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of principal and interest when due and without reinvestment will provide
cash at the times and in the amounts as will be sufficient to pay in
respect of the transition bonds of that series:
(x) principal in accordance with the Expected Amortization
Schedule therefor, or if that series is to be redeemed, the redemption
price of that redemption on the redemption date therefor, and
(y) interest when due;
(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 that
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 that opinion shall
confirm that, the holders of the transition bonds of that 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 that 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 that 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 that 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
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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
Bankers Trust Company 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 so 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 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. However, the discussion is limited in the following ways:
-- The discussion only covers you if you buy your transition bonds in
the initial offering.
-- 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.
-- The discussion does not cover tax consequences that depend upon your
particular situation in addition to your ownership of transition
bonds. We suggest that you consult your tax advisor about the
consequences of holding transition bonds in your particular
situation.
-- The discussion is based on current law. Changes in the law may
change the tax treatment of the transition bonds.
-- The discussion generally does not cover state, local or foreign law.
-- 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 West Penn Funding Corporation
and 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 West Penn Funding
Corporation 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 West Penn Funding Corporation,
(2) the issuance of the transition bonds will not result in the
recognition of gross income by West Penn or West Penn Funding Corporation
and
(3) the transition bonds will be classified as obligations of West
Penn Funding Corporation.
In the opinion of our tax counsel, Cravath, Swaine & Moore, based on the
ruling, for U.S. federal income tax purposes the transition bonds will be
treated as debt of West Penn Funding Corporation secured by a pledge of the
collateral. We have relied on the ruling and the opinion in preparing this
section.
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IF YOU ARE CONSIDERING BUYING TRANSITION BONDS, WE SUGGEST THAT YOU 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:
-- an individual U.S. citizen or resident alien;
-- a corporation, or entity taxable as a corporation, that was created
under U.S. law (federal or state); or
-- an estate or trust whose worldwide income is subject to U.S. federal
income tax.
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. We suggest that partners of partnerships holding transition bonds
consult their tax advisors.
INTEREST
-- If you are a cash method taxpayer, including most individual
holders, you must report that interest in your income when you
receive it.
-- 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:
-- 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.
-- 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.
-- 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:
-- 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.
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<PAGE> 169
-- 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.
-- 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.
-- 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:
-- an individual that is a nonresident alien;
-- a corporation organized or created under non-U.S. law; or
-- 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:
-- 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.
-- 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.
-- 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.
We suggest that you 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.
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<PAGE> 170
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:
-- The gain is connected with a trade or business that you conduct in
the U.S.
-- 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.
-- 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.:
-- 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.
-- 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.
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 "Tax Consequences to U.S. Holders--Information Reporting
and Backup Withholding". Under these rules:
-- 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 under "Tax Consequences to U.S. Holders--Information
Reporting and Backup Withholding". 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.
-- 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
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<PAGE> 171
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. We suggest that
you consult your tax advisor concerning information reporting and backup
withholding on a sale.
MATERIAL COMMONWEALTH OF PENNSYLVANIA TAX MATTERS
In the opinion of Ballard Spahr Andrews & Ingersoll, LLP, special
Pennsylvania tax counsel to the issuer and West Penn, interest from the
transition bonds received by a person who is not otherwise subject to corporate
or personal income tax in Pennsylvania will not be subject to these taxes.
Transition bonds held by deceased Pennsylvania residents may be subject to
Pennsylvania inheritance and estate taxes.
Due to the pendency of litigation involving the constitutionality of
personal property taxes heretofore in effect, none are currently imposed in
Pennsylvania. In the event enforcement of the personal property tax is resumed,
residents of Pennsylvania, other than corporations and certain other exempt
persons, would be subject to these taxes. Nonresidents would be exempt. The
taxes referred to include the County Personal Property Tax and the additional
property taxes imposed on Pittsburgh residents by the School District of
Pittsburgh and the City of Pittsburgh.
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<PAGE> 172
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
those 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.
If you are considering whether to purchase transition bonds with Plan
Assets, we suggest that you consult with your legal advisor and refer to the
related prospectus supplement for further guidance.
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<PAGE> 173
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 the
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, West Penn Funding
Corporation, 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, West Penn Funding Corporation 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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<PAGE> 174
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 that 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.
147
<PAGE> 175
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 Ballard Spahr Andrews & Ingersoll, LLP,
Philadelphia, Pennsylvania.
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<PAGE> 176
GLOSSARY OF DEFINED TERMS
Set forth below is a glossary of defined terms used in this prospectus.
"ADJUSTMENT DATE" means, with respect to any series of transition bonds,
each date on which adjustments to the Intangible Transition Charges are
implemented, all as specified in the related prospectus supplement.
"ADJUSTMENT REQUEST" means each request filed by the servicer with the PUC
for 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 the 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.
"ADMINISTRATIVE AGENT" means Allegheny Power Service Corporation, as
administrative agent under the Administration Agreements, and its permitted
successors and assigns under that agreement.
"BANKRUPTCY CODE" means Title 11 of the United States Code, as the same may
be amended, modified or supplemented from time to time.
"BASIC DOCUMENTS" means, collectively, the Transfer Agreement, the Sale
Agreement, the Servicing Agreement, the Administrative Agreements, any bills of
sale for Intangible Transition Property, the indenture, the LLC Agreement, the
certificate of formation filed with the State of Delaware to form the issuer and
the certificate of incorporation of West Penn Funding Corporation.
"BUSINESS DAY" means any day other than a Saturday, Sunday or a day on
which banking institutions in the City of New York, the City of Greensburg,
Pennsylvania or the State of Delaware are required by law or executive order to
remain closed.
"CALCULATED OVERCOLLATERALIZATION LEVEL" means the amount anticipated to be
on deposit in the Overcollateralization Subaccount for all series of transition
bonds as of each payment date, as specified in each prospectus supplement.
"CALCULATION DATE" means, with respect to any series of transition bonds,
each date on which the servicer is required to file an Adjustment Request, as
specified in the related prospectus supplement.
"CAPITAL SUBACCOUNT" means a subaccount of the Collection Account in which
the amount of capital required to be held by the issuer for a series of
transition bonds will be deposited by West Penn Funding Corporation on the date
of issuance of that series.
"COLLECTION ACCOUNT" means the single collection account for all series of
transition bonds established by the issuer and held by the bond trustee under
the indenture.
"CUSTOMER CATEGORY" means each of the following three categories of West
Penn customers: residential, commercial and industrial, which includes street
lighting.
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<PAGE> 177
"EVENT OF DEFAULT" means an event of default under the indenture, including
the defaults described under "The Indenture--Events of Default; Rights Upon
Event of Default."
"EXPECTED AMORTIZATION SCHEDULE" means, with respect to any series or class
of transition bonds, the expected amortization schedule for the principal
balance of that series or class, as set forth in the related prospectus
supplement.
"GENERAL SUBACCOUNT" means a subaccount of the Collection Account into
which funds received from ITC Collections will initially be allocated.
"INDEMNITY AMOUNTS" means any amounts paid by West Penn, West Penn Funding
Corporation 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, the Sale Agreement and the Servicing Agreement.
"ITC COLLECTIONS" means collections of Intangible Transition Charges.
"LLC AGREEMENT" means the Amended and Restated Limited Liability Company
Agreement of the issuer, as amended and supplemented from time to time.
"OVERCOLLATERALIZATION SUBACCOUNT" means a subaccount of the Collection
Account into which the Overcollateralization Amount will be deposited over the
expected life of a series of transition bonds.
"PUC" means the Pennsylvania Public Utility Commission or any successor
thereto.
"QRO" means the qualified rate order issued by the PUC to West Penn on
November 19, 1998, as supplemented by a supplemental qualified rate order issued
by the PUC to West Penn on August 12, 1999.
"QUALIFIED TRANSITION EXPENSES", as set forth in the QRO, means,
collectively, the aggregate principal amount of the transition bonds and 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.
"RATE SCHEDULES" means any of the 21 rate schedules into which the Customer
Categories are divided.
"RATING AGENCY" means any rating agency rating the transition bonds of any
class or series at the time of issuance of that class or series at the request
of the issuer.
"RATING AGENCY CONDITION" means, with respect to any action, the
notification in writing by each Rating Agency to West Penn, West Penn Funding
Corporation, the servicer, the bond trustee and the issuer that any such action
will not result in a reduction or withdrawal of the then current rating by that
Rating Agency of any outstanding series or class of transition bonds.
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<PAGE> 178
"REQUIRED CAPITAL AMOUNT" means the amount of capital required to be
deposited by the issuer into the Capital Subaccount upon the issuance of a
series of transition bonds, which represents a capital contribution from West
Penn Funding Corporation.
"RESERVE SUBACCOUNT" means a subaccount of the Collection Account into
which will be deposited the excess, if any, of ITC Collections over amounts then
scheduled to be paid or due on a series of transition bonds, plus related
expenses, plus amounts needed to make required deposits to the
Overcollateralization Subaccount and the Capital Subaccount, plus net investment
earnings on amounts in the Capital Subaccount released to the issuer.
"SALE AGREEMENT" means the Intangible Transition Property Sale Agreement
between the issuer and West Penn Funding Corporation, as amended and
supplemented from time to time.
"SERVICER DEFAULT" means a default of the servicer under the Servicing
Agreement, including the defaults described under the "The Servicing
Agreement--Servicer Defaults."
"SERVICING AGREEMENT" means the Servicing Agreement between West Penn, as
servicer, and the issuer, as amended and supplemented from time to time.
"TRANSFER AGREEMENT" means the Intangible Transition Property Transfer
Agreement between West Penn and West Penn Funding Corporation, as amended and
supplemented from time to time.
"TRANSFERRED INTANGIBLE TRANSITION PROPERTY" means Intangible Transition
Property which is transferred from West Penn to West Penn Funding Corporation
pursuant to the Transfer Agreement and the related bill of sale and then sold by
West Penn Funding Corporation to the issuer pursuant to the Sale Agreement and
the related bill of sale.
"WEST PENN" means West Penn Power Company, a Pennsylvania corporation.
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<PAGE> 179
WEST PENN FUNDING LLC
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants........................... F-2
Financial Statements:
[ ]... F-
[ ]... F-
Notes to Financial Statements............................... F-
</TABLE>
F-1
<PAGE> 180
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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
------------------------
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.
THE DATE OF THIS PROSPECTUS SUPPLEMENT IS , 1999.
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> 181
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.
<TABLE>
<S> <C>
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.................................................. $*
====
</TABLE>
- ------------
* 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.
ITEM 16. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<C> <S>
1.1 Form of Underwriting Agreement.
4.1.1 Limited Liability Company Agreement of West Penn Funding
LLC.**
4.1.2 Form of Assignment of Limited Liability Company Interest and
Amendment to Limited Liability Company Agreement.
</TABLE>
II-1
<PAGE> 182
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<C> <S>
4.1.3 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 Ballard Spahr Andrews & Ingersoll, LLP 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 opinions
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 Ballard Spahr Andrews & Ingersoll, LLP (included
in its opinion filed as Exhibit 8.1.2).
23.4 Consent of [Accountants].*
25.1 Statement of Eligibility under the Trust Indenture Act of
1939, as amended, of Bankers Trust Company, as Bond Trustee
under the Indenture.*
27.1 Financial Data Schedule.*
99.1 Qualified Rate Order issued November 19, 1998.
99.2 Supplemental Qualified Rate Order issued August 12, 1999.
99.3 Internal Revenue Service Private Letter Ruling pertaining to
Transition Bonds.
</TABLE>
- ------------
* To be filed by amendment
** Previously filed
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
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<PAGE> 183
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 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.
II-3
<PAGE> 184
(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 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.
II-4
<PAGE> 185
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 Amendment No. 2 to the Registration Statement to be signed on its behalf by
the undersigned, thereunto duly authorized, in the City of Greensburg,
Commonwealth of Pennsylvania, on September 10, 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 Amendment No. 2 to the Registration Statement has been signed on behalf of
West Penn Funding LLC on September 10, 1999 by the following persons in the
capacities indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
/s/ CAROL G. RUSS Principal and Chief Executive Officer
- ----------------------------------------------------- (Principal Executive Officer)
Carol G. Russ
/s/ CAROL G. RUSS Chief Financial Officer and Chief
- ----------------------------------------------------- Accounting Officer (Principal
Carol G. Russ Financial Officer and Principal
Accounting Officer)
/s/ CAROL G. RUSS Sole Member
- -----------------------------------------------------
Carol G. Russ
</TABLE>
II-5
<PAGE> 186
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<C> <S>
1.1 Form of Underwriting Agreement.
4.1.1 Limited Liability Company Agreement of West Penn Funding
LLC.**
4.1.2 Form of Assignment of Limited Liability Company Interest and
Amendment to Limited Liability Company Agreement.
4.1.3 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 Ballard Spahr Andrews & Ingersoll, LLP 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 Ballard Spahr Andrews & Ingersoll, LLP (included
in its opinion filed as Exhibit 8.1.2).
23.4 Consent of [Accountants].*
25.1 Statement of Eligibility under the Trust Indenture Act of
1939, as amended, of Bankers Trust Company, as Bond Trustee
under the Indenture.*
27.1 Financial Data Schedule.*
99.1 Qualified Rate Order issued November 19, 1998.
99.2 Supplemental Qualified Rate Order issued August 12, 1999.
99.3 Internal Revenue Service Private Letter Ruling pertaining to
Transition Bonds.
</TABLE>
- ------------
* To be filed by amendment
** Previously filed
<PAGE> 1
EXHIBIT 1.1
WEST PENN FUNDING LLC
TRANSITION BONDS SERIES 1999-A
WEST PENN POWER COMPANY
WEST PENN FUNDING CORPORATION
UNDERWRITING AGREEMENT
New York, New York
_________ ___, 1999
To the Representative named in Schedule I
hereto of the Underwriters named in Schedule
II hereto
Ladies and Gentlemen:
1. Introduction. West Penn Funding LLC, a Delaware limited liability
company (the "Issuer"), proposes to sell to the underwriters named in Schedule
II hereto (the "Underwriters"), for whom you (the "Representative") are acting
as representative, the principal amount of the securities identified in Schedule
I hereto (the "Transition Bonds"). If the firm or firms listed in Schedule II
hereto include only the firm or firms listed in Schedule I hereto, then the
terms "Underwriters" and 'Representative', as used herein, shall each be deemed
to refer to such firm or firms.
The Issuer was formed on May 26, 1999, for the purpose of purchasing
and owning the Initial Intangible Transition Property, issuing the Transition
Bonds, and pledging its interest in the Collateral to ___________ (the "Bond
Trustee") under an indenture, dated as of ________ __, 1999 (as amended and
supplemented from time to time, including any Series Supplement, the
"Indenture"), between the Issuer and the Bond Trustee, to secure the Transition
Bonds. The Transition Bonds will be secured primarily by the Initial Intangible
Transition Property. The Initial Intangible Transition Property will be
transferred by West Penn Power Company (the "Company") to West Penn Funding
Corporation, a Delaware corporation (the "Seller"), pursuant to an intangible
transition property transfer agreement, dated as of ____ ___, 1999 (the
"Transfer Agreement"), between the Company and the Seller. Such Initial
Intangible Transition Property will then be sold to the Issuer by the Seller
pursuant to an intangible transition property sale agreement, dated as of
________ __, 1999 (the "Sale Agreement"), between the Seller and the Issuer.
Subsequent Intangible Transition Property may be sold to the Issuer by the
Seller pursuant to an agreement substantially similar to the Sale Agreement. The
Initial Intangible Transition Property will be serviced pursuant to a servicing
agreement, dated as of ________ __, 1999 (as amended and supplemented from time
to time, the "Servicing Agreement"), between the Company, as servicer, and the
Issuer.
Capitalized terms used and not otherwise defined herein shall have the
meanings given to them in the Indenture.
<PAGE> 2
2
2. Representations and Warranties. Each of the Company, the Issuer and
the Seller represents and warrants to, and agrees with, each Underwriter as set
forth below in this Section 2. Certain terms used in this Section 2 are defined
in paragraph (c) hereof.
(a) If the offering of the Transition Bonds is a Delayed
Offering (as specified in Schedule I hereto), paragraph (i) below is
applicable and, if the offering of the Transition Bonds is a
Non-Delayed Offering (as so specified), paragraph (ii) below is
applicable.
(i) The Issuer and the Transition Bonds meet the
requirements for the use of Form S-3 under the Securities Act
of 1933 (the "Act"), and the Issuer has filed with the
Securities and Exchange Commission (the "SEC") a registration
statement (the file number of which is set forth in Schedule I
hereto) on such Form, including a basic prospectus, for
registration under the Act of the offering and sale of the
Transition Bonds. The Issuer may have filed one or more
amendments thereto, and may have used a Preliminary Final
Prospectus, each of which has previously been furnished to
you. Such registration statement, as so amended, has become
effective. The offering of the Transition Bonds is a Delayed
Offering and, although the Basic Prospectus may not include
all the information with respect to the Transition Bonds and
the offering thereof required by the Act and the rules
thereunder to be included in the Final Prospectus, the Basic
Prospectus includes all such information required by the Act
and the rules thereunder to be included therein as of the
Effective Date. The Issuer will next file with the SEC
pursuant to Rules 415 and 424(b) (2) or (5) a final supplement
to the form of prospectus included in such registration
statement relating to the Transition Bonds and the offering
thereof. As filed, such final prospectus supplement shall
include all required information with respect to the
Transition Bonds and the offering thereof and, except to the
extent the Representative shall agree in writing to a
modification, shall be in all substantive respects in the form
furnished to you prior to the Execution Time or, to the extent
not completed at the Execution Time, shall contain only such
specific additional information and other changes (beyond that
contained in the Basic Prospectus and any Preliminary Final
Prospectus) as the Issuer has advised you, prior to the
Execution Time, will be included or made therein.
(ii) The Issuer and the Transition Bonds meet the
requirements for the use of Form S-3 under the Act and the
Issuer has filed with the SEC a registration statement (the
file number of which is set forth in Schedule I hereto) on
such Form, including a basic prospectus, for registration
under the Act of the offering and sale of the Transition
Bonds. The Issuer may have filed one or more amendments
thereto, including a Preliminary Final Prospectus, each of
which has previously been furnished to you. The Issuer will
next file with the SEC either (x) a final prospectus
supplement relating to the Transition Bonds in accordance with
Rules 430A and 424(b)(l) or (4), or (y) prior to the
effectiveness of such registration statement, an amendment to
such registration statement, including the form of final
prospectus supplement. In the case of clause (x), the Issuer
has included in such registration statement, as amended at
<PAGE> 3
3
the Effective Date, all information (other than Rule 430A
Information) required by the Act and the rules thereunder to
be included in the Final Prospectus with respect to the
Transition Bonds and the offering thereof. As filed, such
final prospectus supplement or such amendment and form of
final prospectus supplement shall contain all Rule 430A
Information, together with all other such required
information, with respect to the Transition Bonds and the
offering thereof and, except to the extent the Representative,
shall agree in writing to a modification, shall be in all
substantive respects in the form furnished to you prior to the
Execution Time or, to the extent not completed at the
Execution Time, shall contain only such specific additional
information and other changes (beyond that contained in the
Basic Prospectus and any Preliminary Final Prospectus) as the
Issuer has advised you, prior to the Execution Time, will be
included or made therein.
(b) On the Effective Date, the Registration Statement did or
will, and when the Final Prospectus is first filed (if required) in
accordance with Rule 424(b) and on the Closing Date, the Final
Prospectus (and any supplement thereto) will, comply in all material
respects with the applicable requirements of the Act, the Securities
Exchange Act of 1934 (the "Exchange Act") and the Trust Indenture Act
of 1939 (the "Trust Indenture Act") and the respective rules
thereunder; on the Effective Date, the Registration Statement did not
or will not contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary in
order to make the statements therein not misleading; on the Effective
Date and on the Closing Date the Indenture did or will comply in all
material respects with the requirements of the Trust Indenture Act and
the rules thereunder, and, on the Effective Date, the Final Prospectus,
if not filed pursuant to Rule 424(b), did not or will not, and on the
date of any filing pursuant to Rule 424(b) and on the Closing Date, the
Final Prospectus (together with any supplement thereto) will not,
include any untrue statement of a material fact or omit to state a
material fact necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading;
provided, however, that neither the Issuer, the Seller nor the Company
makes any representations or warranties as to (i) that part of the
Registration Statement which shall constitute the Statements of
Eligibility and Qualification (Forms T-l) under the Trust Indenture Act
of the Bond Trustee or (ii) the information contained in or omitted
from the Registration Statement or the Final Prospectus (or any
supplement thereto) in reliance upon and in conformity with information
furnished in writing to the Issuer by or on behalf of any Underwriter
through the Representative specifically for inclusion in the
Registration Statement or the Final Prospectus (or any supplement
thereto).
(c) The terms which follow, when used in this Agreement, shall
have the meanings indicated. The term "Effective Date" shall mean each
date that the Registration Statement and any post-effective amendment
or amendments thereto became or become effective and each date after
the date hereof on which a document incorporated by reference in the
Registration Statement is filed. "Execution Time" shall mean the date
and time that this Agreement is executed and delivered by the parties
hereto. "Basic Prospectus" shall mean the prospectus referred to in
paragraph (a) above contained in the Registration Statement at the
Effective Date including, in the case of a Non-Delayed Offering, any
Preliminary
<PAGE> 4
4
Final Prospectus. "Preliminary Final Prospectus" shall mean any
preliminary prospectus supplement to the Basic Prospectus which
describes the Transition Bonds and the offering thereof and is used
prior to filing of the Final Prospectus. "Final Prospectus" shall mean
the prospectus supplement relating to the Transition Bonds that is
first filed pursuant to Rule 424(b) after the Execution Time, together
with the Basic Prospectus or, if, in the case of a Non-Delayed
Offering, no filing pursuant to Rule 424(b) is required, shall mean the
form of final prospectus relating to the Transition Bonds, including
the Basic Prospectus, included in the Registration Statement at the
Effective Date. "Registration Statement" shall mean the registration
statement referred to in paragraph (a) above, including incorporated
documents, exhibits and financial statements, as amended at the
Execution Time (or, if not effective at the Execution Time, in the form
in which it shall become effective) and, in the event any
post-effective amendment thereto becomes effective prior to the Closing
Date (as hereinafter defined), shall also mean such registration
statement as so amended. Such term shall include any Rule 430A
Information deemed to be included therein at the Effective Date as
provided by Rule 430A. "Rule 415", "Rule 424", "Rule 430A" and
"Regulation S-K" refer to such rules or regulation under the Act. "Rule
430A Information" means information with respect to the Transition
Bonds and the offering thereof permitted to be omitted from the
Registration Statement when it becomes effective pursuant to Rule 430A.
Any reference herein to the Registration Statement, the Basic
Prospectus, any Preliminary Final Prospectus or the Final Prospectus
shall be deemed to refer to and include the documents incorporated by
reference therein pursuant to Item 12 of Form S-3 which were filed
under the Exchange Act on or before the Effective Date of the
Registration Statement or the issue date of the Basic Prospectus, any
Preliminary Final Prospectus or the Final Prospectus, as the case may
be; and any reference herein to the terms "amend", "amendment" or
"supplement" with respect to the Registration Statement, the Basic
Prospectus, any Preliminary Final Prospectus or the Final Prospectus
shall be deemed to refer to and include the filing of any document
under the Exchange Act after the Effective Date of the Registration
Statement or the issue date of the Basic Prospectus, any Preliminary
Final Prospectus or the Final Prospectus, as the case may be, deemed to
be incorporated therein by reference. A "Non-Delayed Offering" shall
mean an offering of securities which is intended to commence promptly
after the effective date of a registration statement, with the result
that, pursuant to Rules 415 and 430A, all information (other than Rule
430A Information) with respect to the securities so offered must be
included in such registration statement at the effective date thereof.
A "Delayed Offering" shall mean an offering of securities pursuant to
Rule 415 which does not commence promptly after the effective date of a
registration statement, with the result that only information required
pursuant to Rule 415 need be included in such registration statement at
the effective date thereof with respect to the securities so offered.
Whether the offering of the Transition Bonds is a Non-Delayed Offering
or a Delayed Offering shall be set forth in Schedule I hereto.
3. Purchase and Sale. Subject to the terms and conditions and in
reliance upon the representations and warranties herein set forth, the Issuer
agrees to sell to each Underwriter, and each Underwriter agrees, severally and
not jointly, to purchase from the Issuer, at the purchase price set forth in
Schedule I hereto the principal amount
<PAGE> 5
5
of the Transition Bonds set forth opposite such Underwriter's name in Schedule
II hereto.
4. Delivery and Payment. Delivery of and payment for the Transition
Bonds shall be made on the date and at the time specified in Schedule I hereto
(or such later date not later than five business days after such specified date
as the Representative shall designate), which date and time may be postponed by
agreement between the Representative and the Issuer or as provided in Section 9
hereof (such date and time of delivery and payment for the Transition Bonds
being herein called the "Closing Date"). Delivery of the Transition Bonds shall
be made to the Representative for the respective accounts of the several
Underwriters against payment by the several Underwriters through the
Representative of the purchase price thereof to the Issuer by wire transfer of
immediately available funds. Delivery of the Transition Bonds shall be made at
such location as the Representative shall reasonably designate at least one
business day in advance of the Closing Date. The Transition Bonds to be so
delivered shall be initially represented by Bonds registered in the name of Cede
& Co., as nominee of The Depository Trust Company ("DTC"). The interests of
beneficial owners of the Transition Bonds will be represented by book entries on
the records of DTC and participating members thereof. Definitive Transition
Bonds will be available only under limited circumstances.
The Issuer agrees to have the Transition Bonds available for
inspection, checking and packaging by the Representative in New York, New York,
not later than 1:00 PM on the business day prior to the Closing Date.
5. Covenants.
(a) Covenants of the Issuer. The Issuer covenants and agrees
with the several Underwriters that:
(i) The Issuer will use its best efforts to cause the
Registration Statement, if not effective at the Execution
Time, and any amendment thereto, to become effective. Prior to
the termination of the offering of the Transition Bonds, the
Issuer will not file any amendment of the Registration
Statement or supplement (including the Final Prospectus or any
Preliminary Final Prospectus) to the Basic Prospectus unless
the Issuer has furnished you a copy for your review prior to
filing and will not file any such proposed amendment or
supplement to which you reasonably object. Subject to the
foregoing sentence, the Issuer will cause the Final
Prospectus, properly completed, and any supplement thereto to
be filed with the SEC pursuant to the applicable paragraph of
Rule 424 (b) within the time period prescribed and will
provide evidence satisfactory to the Representative of such
timely filing. The Issuer will promptly advise the
Representative (i) when the Registration Statement, if not
effective at the Execution Time, and any amendment thereto,
shall have become effective, (ii) when the Final Prospectus,
and any supplement thereto, shall have been filed with the SEC
pursuant to Rule 424(b), (iii) when, prior to termination of
the offering of the Transition Bonds, any amendment to the
Registration Statement shall have been filed or become
effective, (iv) of any request by the SEC for any amendment of
the Registration Statement or supplement to the Final
Prospectus or for any additional information,
<PAGE> 6
6
(v) of the issuance by the SEC of any stop order suspending
the effectiveness of the Registration Statement or the
institution or threatening of any proceeding for that purpose
and (vi) of the receipt by the Issuer of any notification with
respect to the suspension of the qualification of the
Transition Bonds for sale in any jurisdiction or the
initiation or threatening of any proceeding for such purpose.
The Issuer will use its best efforts to prevent the issuance
of any such stop order and, if issued, to obtain as soon as
possible the withdrawal thereof.
(ii) If, at any time when a prospectus relating to
the Transition Bonds is required to be delivered under the
Act, any event occurs as a result of which the Final
Prospectus as then supplemented would include any untrue
statement of a material fact or omit to state any material
fact necessary to make the statements therein in the light of
the circumstances under which they were made not misleading,
or if it shall be necessary to amend the Registration
Statement or supplement the Final Prospectus to comply with
the Act or the Exchange Act or the respective rules
thereunder, the Issuer promptly will (i) prepare and file with
the SEC, subject to the second sentence of paragraph (a)(i) of
this Section 5, an amendment or supplement which will correct
such statement or omission or effect such compliance and (ii)
supply any supplemented Prospectus to you in such quantities
as you may reasonably request.
(iii) As soon as practicable, the Issuer will make
generally available to the Bondholders and to the
Representative an earnings statement or statements of the
Issuer which will satisfy the provisions of Section 11(a) of
the Act and Rule 158 under the Act.
(iv) The Issuer will furnish to the Representative
and counsel for the Underwriters, without charge, copies of
the Registration Statement (including exhibits thereto) and,
so long as delivery of a prospectus by an Underwriter or
dealer may be required by the Act, as many copies of any
Preliminary Final Prospectus and the Final Prospectus and any
supplement thereto as the Representative may reasonably
request. The Issuer shall furnish or cause to be furnished to
the Representative copies of all reports on Form SR required
by Rule 463 under the Act. The Issuer will pay the expenses of
printing or other production of all documents relating to the
offering.
(v) The Issuer will arrange for the qualification of
the Transition Bonds for sale under the laws of such
jurisdictions as the Representative may designate, will
maintain such qualifications in effect so long as required for
the distribution of the Transition Bonds and will arrange for
the determination of the legality of the Transition Bonds for
purchase by institutional investors; provided that in no event
shall the Issuer be obligated to qualify to do business in any
jurisdiction where it is not now so qualified or to take any
action that would subject it to service of process in suits,
other than those arising out of the offering or sale of the
Transition Bonds, in any jurisdiction where it is not now so
subject.
<PAGE> 7
7
(vi) Until the business date set forth on Schedule I
hereto, the Issuer will not, without the consent of the
Representative, offer, sell or contract to sell, or otherwise
dispose of, directly or indirectly, or announce the offering
of, any asset-backed securities of a special purpose vehicle
(other than the Transition Bonds).
(vii) For a period from the date of this Agreement
until the retirement of the Transition Bonds, or until such
time as the Underwriters shall cease to maintain a secondary
market in the Transition Bonds, whichever occurs first, the
Issuer will deliver to the Representative the annual
statements of compliance and the annual independent auditor's
servicing reports furnished to the Issuer or the Trustee
pursuant to the Servicing Agreement or the Indenture, as
applicable, as soon as such statements and reports are
furnished to the Issuer or the Trustee.
(viii) So long as any of the Transition Bonds are
outstanding, the Issuer will furnish to the Representative (i)
as soon as available, a copy of each report filed with the SEC
under the Exchange Act, or mailed to Bondholders, (ii) a copy
of any filings with the Pennsylvania Public Utility Commission
(the "PUC") or any other governmental agency or
instrumentality relating to the Transition Bonds, and (iii)
from time to time, any information concerning the Company, the
Seller or the Issuer, as the Representative may reasonably
request.
(ix) To the extent, if any, that any rating necessary
to satisfy the condition set forth in Section 6(o) of this
Agreement is conditioned upon the furnishing of documents or
the taking of other actions by the Issuer on or after the
Closing Date, the Issuer shall furnish such documents and take
such other actions.
(b) Covenants of the Company and the Seller . The Company and
the Seller each covenants and agrees with the several Underwriters
that, to the extent that the Issuer has not already performed such act
pursuant to Section 5 (a):
(i) Each of the Company and the Seller will use its
best efforts to cause the Registration Statement, if not
effective at the Execution Time, and any amendment thereto, to
become effective. Each of the Company and the Seller will use
its best efforts to prevent the issuance by the SEC of any
stop order suspending the effectiveness of the Registration
Statement and, if issued, to obtain as soon as possible the
withdrawal thereof.
(ii) Until the business date set forth on Schedule I
hereto, each of the Company and the Seller will not, without
the consent of the Representative, offer, sell or contract to
sell, or otherwise dispose of, directly or indirectly, or
announce the offering of, any asset-backed securities of a
special purpose vehicle (other than the Transition Bonds).
(iii) So long as any of the Transition Bonds are
outstanding and the Company is the Servicer, the Company will
furnish to the Representative (i) as soon as available, a copy
of each report filed with the
<PAGE> 8
8
SEC under the Exchange Act, or mailed to Bondholders, (ii) a
copy of any filings with the PUC or any other governmental
agency or instrumentality relating to the Transition Bonds,
and (iii) from time to time, any information concerning the
Company and, to the extent readily available, the Issuer and
the Seller, as the Representative may reasonably request.
(iv) To the extent, if any, that any rating necessary
to satisfy the condition set forth in Section 6(o) of this
Agreement is conditioned upon the furnishing of documents or
the taking of other actions by the Company or the Seller on or
after the Closing Date, the Company and the Seller shall
furnish such documents and take such other actions.
6. Conditions to the Obligations of the Underwriters. The obligations
of the Underwriters to purchase the Transition Bonds shall be subject to the
accuracy of the representations and warranties on the part of the Issuer, the
Seller and the Company contained herein as of the Execution Time and the Closing
Date, on the part of the Company contained in Article III of the Transfer
Agreement, on the part of the Seller contained in Article III of the Sale
Agreement and on the part of the Company contained in Section 5.01 of the
Servicing Agreement as of the Closing Date, to the performance by the Issuer,
the Seller and the Company of their obligations hereunder and to the following
additional conditions:
(a) If the Registration Statement has not become effective
prior to the Execution Time, unless the Representative agree in writing
to a later time, the Registration Statement will become effective not
later than (i) 6:00 PM New York City time, on the date of determination
of the public offering price, if such determination occurred at or
prior to 3:00 PM New York City time on such date, or (ii) 12:00 Noon on
the business day following the day on which the public offering price
was determined, if such determination occurred after 3:00 PM New York
City time on such date; if filing of the Final Prospectus, or any
supplement thereto, is required pursuant to Rule 424(b), the Final
Prospectus, and any such supplement, shall have been filed in the
manner and within the time period required by Rule 424 (b); and no stop
order suspending the effectiveness of the Registration Statement shall
have been issued and no proceedings for that purpose shall have been
instituted or threatened.
(b) The Representative shall have received opinions of counsel
for the Company and the Seller, portions of which may be delivered by
Cravath, Swaine & Moore, outside counsel for the Company and the
Seller, portions of which may be delivered by ____________________,
Esq., in-house counsel for the Company and the Seller, portions of
which may be delivered by ___________________________, special
regulatory counsel for the Company and the Seller, and portions of
which may be delivered by Richards, Layton & Finger, P. A., special
Delaware counsel for the Company and the Seller, each dated the Closing
Date, in form and substance reasonably satisfactory to the
Representative, to the effect that:
(i) each of the Company and the Seller (a) has been
duly incorporated and is validly existing as a corporation in
good standing under the laws of the jurisdiction in which it
is organized, (b) has all requisite corporate power and
authority to own its properties, conduct its
<PAGE> 9
9
business as presently conducted and execute, deliver and
perform its obligations under this Agreement, the Sale
Agreement, the Transfer Agreement and the Servicing Agreement,
as applicable, and (c) is duly qualified to do business, in
all jurisdictions (and is in good standing under the laws of
all such jurisdictions) to the extent that such qualification
and good standing is or shall be necessary to protect the
validity and enforceability of this Agreement, the Basic
Documents to which the Company and/or the Seller is party and
each other instrument or agreement necessary or appropriate to
the proper administration of this Agreement and the
transactions contemplated hereby;
(ii) (a) the Transfer Agreement and the Servicing
Agreement have been duly authorized, executed and delivered by
the Company and constitute legal, valid and binding
instruments enforceable against the Company in accordance with
their terms (subject, as to enforcement of remedies, to
applicable bankruptcy, reorganization, insolvency, moratorium
or other similar laws or equitable principles affecting
creditors' rights generally from time to time in effect);
(b) the Transfer Agreement and the Sale Agreement
have been duly authorized, executed and delivered by the
Seller and constitute legal, valid and binding instruments
enforceable against the Seller in accordance with their terms
(subject, as to enforcement of remedies, to applicable
bankruptcy, reorganization, insolvency moratorium or other
similar laws or equitable principles affecting creditors'
rights generally from time to time in effect);
(iii) to the best knowledge of such counsel, there is
no pending or threatened action, suit or proceeding before any
court or governmental agency, authority or body or any
arbitrator involving the Company, the Seller or any of their
subsidiaries of a character required to be disclosed in the
Registration Statement which is not adequately disclosed in
the Final Prospectus, and there is no franchise, contract or
other document of a character required to be described in the
Registration Statement or Final Prospectus, or to be filed as
an exhibit, which is not described or filed as required;
(iv) this Agreement has been duly authorized,
executed and delivered by the Company and the Seller;
(v) no consent, approval, authorization or order of
any court or governmental agency or body is required for the
consummation of the transactions contemplated herein, except
such as have been obtained under the Pennsylvania Electricity
Generation Customer Choice and Competition Act (the
"Competition Act") and such as may be required under the blue
sky laws of any jurisdiction in connection with the purchase
and distribution of the Transition Bonds by the Underwriters
and such other approvals (specified in such opinion) as have
been obtained;
(vi) neither the execution and delivery of this
Agreement, the Transfer Agreement, the Sale Agreement, the
Servicing Agreement, nor
<PAGE> 10
10
the consummation of the transactions contemplated by this
Agreement, the Transfer Agreement, the Sale Agreement or the
Servicing Agreement, nor the fulfillment of the terms of this
Agreement, the Transfer Agreement, the Sale Agreement or the
Servicing Agreement by the Company and the Seller as
applicable, will (A) conflict with, result in any breach of
any of the terms or provisions of, or constitute (with or
without notice or lapse of time) a default under the articles
of incorporation, bylaws or other organizational documents of
the Company or the Seller, or conflict with or breach any of
the terms or provisions of, or constitute (with or without
notice or lapse of time) a default under, any indenture,
material agreement or other material instrument to which the
Company or the Seller is a party or by which the Company or
the Seller is bound, (B) result in the creation or imposition
of any lien upon any properties of the Company or the Seller
pursuant to the terms of any such indenture, agreement or
other instrument (other than as contemplated by the Basic
Documents and the Competition Act), or (C) violate any law or
any order, rule or regulation applicable to the Company or the
Seller of any court or of any federal or state regulatory
body, administrative agency or other governmental
instrumentality having jurisdiction over the Company, the
Seller or any of their properties;
(vii) upon the delivery of the fully executed
Transfer Agreement and related Bill of Sale to the Seller, the
fully executed Sale Agreement and related Bill of Sale to the
Issuer and the payment of the purchase price of the Initial
Intangible Transition Property by the Issuer to the Seller
pursuant to the Sale Agreement, then (A) the transfer of the
Initial Intangible Transition Property by the Company to the
Seller pursuant to the Transfer Agreement and related Bill of
Sale conveys the Company's right, title and interest in the
Initial Intangible Transition Property to the Seller and will
be treated as an absolute transfer of all the Company's right,
title and interest in the Initial Intangible Transition
Property, other than for federal and state income and
franchise tax purpose, (B) the transfer of the Initial
Intangible Transition Property by the Seller to the Issuer
pursuant to the Sale Agreement and related Bill of Sale
conveys the Seller's right, title and interest in the Initial
Intangible Transition Property to the Issuer and will be
treated as an absolute transfer of all of the Seller's right,
title, and interest in the Initial Intangible Transition
Property, other than for federal and state income and
franchise tax purposes, (C) such transfers of the Initial
Intangible Transition Property are perfected, (D) such
transfers have priority over any other assignment of the
Initial Intangible Transition Property (except that the
transfer of Initial Intangible Transition Property from the
Company to the Seller pursuant to the Transfer Agreement and
related Bill of Sale shall not have priority over the sale of
the Initial Intangible Transition Property to the Issuer from
the Seller pursuant to the Sale Agreement and related Bill of
Sale), and (E) the Initial Intangible Transition Property is
free and clear of all liens created prior to the respective
transfers to the Seller and the Issuer pursuant to the
applicable Bills of Sale; and
<PAGE> 11
11
(viii) the Initial Intangible Transition Property is
not subject to the Lien of the Mortgage Bond Indenture, dated
as of _____, between the Company and ________, as trustee.
In rendering such opinion, Cravath, Swaine & Moore may rely as to matters
involving the application of laws of the State of Pennsylvania, to the extent
deemed proper and specified in such opinion, upon the opinion of other counsel
of good standing believed to be reliable and who are satisfactory to counsel for
the Underwriters, and such counsel may rely as to matters of fact, to the extent
deemed proper, on certificates of responsible officers of the Company and the
Seller. References to the Final Prospectus in this paragraph (b) include any
supplements thereto at the Closing Date.
(c) The Representative shall have received opinions of counsel
for the Issuer, portions of which may be delivered by Cravath, Swaine &
Moore, outside counsel for the Issuer, portions of which may be
delivered by __________________, Esq., in-house counsel for the Issuer,
portions of which may be delivered by _________________, special
regulatory counsel for the Issuer, and portions of which may be
delivered by Richards, Layton & Finger, P.A., special Delaware counsel
for the Issuer, each dated the Closing Date, in form and substance
reasonably satisfactory to the Representative, to the effect that:
(i) the Issuer has been duly formed and is validly
existing as a limited liability company and is in good
standing under the laws of the State of Delaware, with full
power and authority to execute, deliver and perform its
obligations under this Agreement, the Sale Agreement, the
Servicing Agreement and the Indenture;
(ii) the Sale Agreement, the Servicing Agreement and
the Indenture have been duly authorized, executed and
delivered by the Issuer and constitute legal, valid and
binding instruments enforceable against the Issuer in
accordance with their terms (subject, as to enforcement of
remedies, to applicable bankruptcy, reorganization,
insolvency, moratorium or other similar laws or equitable
principles affecting creditors' rights generally from time to
time in effect); and the Transition Bonds have been duly
authorized and executed by the Issuer, and when authenticated
in accordance with the provisions of the Indenture and
delivered to and paid for by the Underwriters in accordance
with the terms of this Agreement, will constitute legal, valid
and binding obligations of the Issuer entitled to the benefits
of the Indenture and enforceable against the Issuer in
accordance with their terms (subject, as to enforcement of
remedies, to applicable bankruptcy, reorganization,
insolvency, moratorium or other similar laws or equitable
principles affecting creditors' rights generally from time to
time in effect);
(iii) this Agreement has been duly authorized,
executed and delivered by the Issuer;
(iv) the Indenture has been duly qualified under the
Trust Indenture Act;
<PAGE> 12
12
(v) to the best knowledge of such counsel, there is
no pending or threatened action, suit or proceeding before any
court or governmental agency, authority or body or any
arbitrator involving the Issuer, or relating to the Transition
Bonds, the Competition Act, the qualified rate order issued by
the PUC to the Company on November 19, 1998, as supplemented
by a supplemental qualified rate order issued by the PUC to
the Company on August 12, 1999 (collectively, the "Qualified
Rate Order") or the use and enjoyment of Initial Intangible
Transition Property of a character required to be disclosed in
the Registration Statement which is not adequately disclosed
in the Final Prospectus, and there is no franchise, contract
or other document of a character required to be described in
the Registration Statement or Final Prospectus, or to be filed
as an exhibit, which is not described or filed as required;
(vi) the Registration Statement has become effective
under the Act; any required filing of the Basic Prospectus,
any Preliminary Final Prospectus and the Final Prospectus, and
any supplements thereto, pursuant to Rule 424(b) has been made
in the manner and within the time period required by Rule 424
(b); to the best knowledge of such counsel, no stop order
suspending the effectiveness of the Registration Statement has
been issued, no proceedings for that purpose have been
instituted or threatened, and the Registration Statement and
the Final Prospectus (other than the financial statements and
other financial and statistical information contained therein
as to which such counsel need express no opinion) comply as to
form in all material respects with the applicable requirements
of the Act, the Exchange Act and the Trust Indenture Act and
the respective rules thereunder; and such counsel has no
reason to believe that at the Effective Date the Registration
Statement contained any untrue statement of a material fact or
omitted to state any material fact required to be stated
therein or necessary to make the statements therein, in the
light of the circumstances under which they were made, not
misleading or that the Final Prospectus as of its date and the
Closing Date includes any untrue statement of a material fact
or omits to state a material fact necessary to make the
statements therein, in the light of the circumstances under
which they were made, not misleading (other than the financial
statements and other financial and statistical information
contained therein as to which such counsel need express no
opinion);
(vii) no consent, approval, authorization or order of
any court or governmental agency or body is required for the
consummation of the transactions contemplated herein, except
such as have been obtained under the Competition Act and such
as may be required under the blue sky laws of any jurisdiction
in connection with the purchase and distribution of the
Transition Bonds by the Underwriters and such other approvals
(specified in such opinion) as have been obtained;
(viii) neither the execution and delivery of this
Agreement, the Sale Agreement, the Servicing Agreement or the
Indenture, nor the issue and sale of the Transition Bonds, nor
the consummation of the transactions contemplated by this
Agreement, the Sale Agreement, the Servicing Agreement, or the
Indenture, nor the fulfillment of the terms of
<PAGE> 13
13
this Agreement, the Sale Agreement, the Servicing Agreement or
the Indenture by the Issuer, will (A) conflict with, result in
any breach of any of the terms or provisions of, or constitute
(with or without notice or lapse of time) a default under the
Limited Liability Company Agreement of the Issuer, or conflict
with or breach any of the terms or provisions of, or
constitute (with or without notice or lapse of time) a default
under, any indenture, agreement or other instrument known to
such counsel and to which the Issuer is a party or by which
the Issuer is bound, (B) result in the creation or imposition
of any lien upon any properties of the Issuer pursuant to the
terms of any such indenture, agreement or other instrument
(other than as contemplated by the Basic Documents and the
Competition Act), or (C) violate any law or any order, rule or
regulation applicable to the Issuer of any court or of any
federal or state regulatory body, administrative agency or
other governmental instrumentality having jurisdiction over
the Issuer, or any of its properties;
(ix) (A) to the extent that the provisions of the
Competition Act apply to the grant of a security interest by
the Issuer in the Collateral pursuant to the Indenture, then
upon the giving of value by the Bond Trustee to the Issuer
with respect to the Collateral, (I) the Indenture creates in
favor of the Bond Trustee a security interest in the rights of
the Issuer in the Collateral, (II) such security interest is
valid and enforceable against the Issuer and third parties
(subject to the rights of any third parties holding security
interests in such Collateral perfected in the manner described
in the Competition Act) and has attached, (III) such security
interest is perfected, and (IV) such perfected security
interest is of first priority, (B) to the extent that the
provisions of the Competition Act do not apply to the grant of
a security interest by the Issuer in the Collateral pursuant
to the Indenture, then upon the giving of value by the Bond
Trustee to the Issuer with respect to the Collateral, (I) the
Indenture creates in favor of the Bond Trustee a security
interest in the rights of the Issuer in the Collateral, and
such security interest is enforceable against the Issuer with
respect to such Collateral, (II) such security interest is
perfected, and (III) such perfected security interest is of
first priority;
(x) the Issuer is not an "investment company" or
under the "control" of an "investment company" as such terms
are defined under the Investment Company Act of 1940, as
amended.
(xi) the statements included in the Final Prospectus
under the captions "The Competition Act", "West Penn's
Restructuring Plan", "The QRO and The Intangible Transition
Charges", "The Transition Bonds", "The Transfer Agreement",
"The Sale Agreement", "The Servicing Agreement", and "The
Indenture" fairly summarize the matters described therein; and
(xii) the statements included in the Final Prospectus
under the captions "United States Taxation" and "Erisa
Considerations", to the extent that they constitute matters of
law on legal conclusions with respect thereto, provide a fair
and accurate summary of such law and conclusions.
<PAGE> 14
14
In rendering such opinion, Cravath, Swaine & Moore may rely as to matters
involving the application of laws of the Commonwealth of Pennsylvania, to the
extent deemed proper and specified in such opinion, upon the opinion of other
counsel of good standing believed to be reliable and who are satisfactory to
counsel for the Underwriters, and such counsel may rely as to matters of fact,
to the extent deemed proper, on certificates of responsible officers of the
Issuer and public officials. References to the Final Prospectus in this
paragraph (c) include any supplements thereto at the Closing Date.
(d) The Representative and the Issuer have received an opinion
of ___________, counsel to the Bond Trustee, dated the Closing Date, in
form and substance reasonably satisfactory to the Representative, to
the effect that:
(i) [the Bond Trustee is validly existing as a
national banking association in good standing under the
federal laws of the United States of America;]
(ii) the Indenture has been duly authorized, executed
and delivered by the Bond Trustee, and constitutes a legal,
valid and binding instrument enforceable against the Bond
Trustee in accordance with its terms (subject, as to
enforcement of remedies, to applicable bankruptcy,
reorganization, insolvency, moratorium or other similar laws
or equitable principles affecting creditors' rights generally
from time to time in effect); and
(iii) the Transition Bonds have been duly
authenticated by the Trustee.
(e) The Representative shall have received from Latham &
Watkins, counsel for the Underwriters, such opinion or opinions, dated
the Closing Date, with respect to the issuance and sale of the
Transition Bonds, the Indenture, the Registration Statement, the Final
Prospectus (together with any supplement thereto) and other related
matters as the Representative may reasonably require, and the Company,
the Seller and the Issuer shall have furnished to such counsel such
documents as they request for the purpose of enabling them to pass upon
such matters.
(f) The Representative and the Bond Trustee shall have
received a certificate of the Issuer, signed by the [President] and the
principal financial or accounting officer of the Issuer, dated the
Closing Date, to the effect that the signers of such certificate have
carefully examined the Registration Statement, the Final Prospectus,
any supplement to the Final Prospectus and this Agreement and that:
(i) the representations and warranties of the Issuer
in this Agreement and in the Indenture are true and correct in
all material respects on and as of the Closing Date with the
same effect as if made on the Closing Date, and the Issuer has
complied with all the agreements and satisfied all the
conditions on its part to be performed or satisfied at or
prior to the Closing Date;
<PAGE> 15
15
(ii) no stop order suspending the effectiveness of
the Registration Statement has been issued and no proceedings
for that purpose have been instituted or, to the Issuer's best
knowledge, threatened; and
(iii) since the dates as of which information is
given in the Final Prospectus (exclusive of any supplement
thereto), there has been no material adverse change in (x) the
condition (financial or other), prospects, earnings, business
or properties of the Issuer, whether or not arising from
transactions in the ordinary course of business, or (y) the
Initial Intangible Transition Property, except as set forth in
or contemplated in the Final Prospectus (exclusive of any
supplement thereto).
(g) The Representative and the Bond Trustee shall have
received a certificate of the Company, signed by the [Vice President
and Treasurer] and the principal financial officer of the Company,
dated the Closing Date, to the effect that the signers of such
certificate have carefully examined the Registration Statement, the
Final Prospectus, any supplement to the Final Prospectus and this
Agreement and that:
(i) the representations and warranties of the Company
in this Agreement, the Transfer Agreement and the Servicing
Agreement are true and correct in all material respects on and
as of the Closing Date with the same effect as if made on the
Closing Date, and the Company has complied with all the
agreements and satisfied all the conditions on its part to be
performed or satisfied at or prior to the Closing Date;
(ii) no stop order suspending the effectiveness of
the Registration Statement has been issued and no proceedings
for that purpose have been instituted or, to the Company's
best knowledge, threatened; and
(iii) since the dates as of which information is
given in the Final Prospectus (exclusive of any supplement
thereto), there has been no material adverse change in (x) the
condition (financial or other), prospects, earnings, business
or properties of the Company and its subsidiaries taken as a
whole, whether or not arising from transactions in the
ordinary course of business, or (y) the Initial Intangible
Transition Property, except as set forth in or contemplated in
the Final. Prospectus (exclusive of any supplement thereto)
(h) The Representative and the Bond Trustee shall have
received a certificate of the Seller, signed by the Vice President and
Treasurer and the principal financial officer of the Seller, dated the
Closing Date, to the effect that the signers of such certificate have
carefully examined the Registration Statement, the Final Prospectus,
any supplement to the Final Prospectus and this Agreement and that:
(i) The representations and warranties of the Seller
in this Agreement and the Sale Agreement are true and correct
in all material
<PAGE> 16
16
respects on and as of the Closing Date with the same effect as
if made on the Closing Date, and the Seller has complied with
all the agreements and satisfied all the conditions on its
part to be performed or satisfied at or prior to the Closing
Date;
(ii) no stop order suspending the effectiveness of
the Registration Statement has been issued and no proceedings
for that purpose have been instituted or, to the Seller's best
knowledge, threatened; and
(iii) since the dates as of which information is
given in the Final Prospectus (exclusive of any supplement
thereto), there has been no material adverse change in (x) the
condition (financial or other), prospects, earnings, business
or properties of the Seller and its subsidiaries taken as a
whole, whether or not arising from transactions in the
ordinary course of business, or (y) the Initial Intangible
Transition Property, except as set forth in or contemplated in
the Final Prospectus (exclusive of any supplement thereto)
(i) At the Closing Date, ________________ shall have furnished
to the Representative (i) a letter or letters (which may refer to
letters previously delivered to one or more of the Representative),
dated the Closing Date, in form and substance satisfactory to the
Representative, confirming that they are independent accountants within
the meaning of the Act and the Exchange Act and the respective
applicable published rules and regulations thereunder and stating in
effect that they have performed certain specified procedures as a
result of which they determined that certain information of an
accounting, financial or statistical nature (which is limited to
accounting, financial or statistical information derived from the
general accounting records of the Company and its subsidiaries) set
forth in the Registration Statement and the Final Prospectus, agrees
with the accounting records of the Company and its subsidiaries,
excluding any questions of legal interpretation, and (ii) the opinion
or certificate, dated the Closing Date, in form and substance
satisfactory to the Representative, satisfying the requirements of
Section 2.10(i) of the Indenture.
References to the Final Prospectus in this paragraph (i) include any
supplement thereto at the date of the letter.
In addition, except as provided in Schedule I hereto, at the Execution
Time, _______________ shall have furnished to the Representative a letter or
letters, dated the Execution Time, in form and substance satisfactory to the
Representative, to the effect set forth above.
(j) Subsequent to the Execution Time or, if earlier, the dates
as of which information is given in the Registration Statement
(exclusive of any amendment thereof) and the Final Prospectus
(exclusive of any supplement thereto), there shall not have been any
change, or any development involving a prospective change, in or
affecting either (i) the business, properties or financial condition of
the Company, the Seller or the Issuer or (ii) the Initial Intangible
Transition Property, the Transition Bonds, the Qualified Rate Order or
the Competition Act, the effect of which is, in the judgment of the
Representative, so
<PAGE> 17
17
material and adverse as to make it impractical or inadvisable to
proceed with the offering or delivery of the Transition Bonds as
contemplated by the Registration Statement (exclusive of any amendment
thereof) and the Final Prospectus (exclusive of any supplement
thereto).
(k) The Representative and the Issuer, shall have received on
the Closing Date an opinion letter or letters of Cravath, Swaine &
Moore, counsel to the Company, the Seller and the Issuer, dated the
Closing Date, in form and substance reasonably satisfactory to the
Representative, (i) with respect to the characterization of the
transfer of the Initial Intangible Transition Property by the Company
to the Seller as a "true sale" for bankruptcy purposes, [(ii) to the
effect that a court would not order the substantive consolidation of
the assets and liabilities of the Seller with those of the Company in
the event of a bankruptcy, reorganization or other insolvency
proceeding involving the Company], (iii) with respect to the
characterization of the transfer of the Initial Intangible Transition
Property by the Seller to the Issuer as a "true sale" for bankruptcy
purposes, and (iv) to the effect that a court would not order the
substantive consolidation of the assets and liabilities of the Issuer
with those of the Seller or the Company, in the event of a bankruptcy,
reorganization or other insolvency proceeding involving the Seller or
the Company, respectively.
(l) The Representative and the Issuer shall have received on
the Closing Date an opinion letter or letters of counsel for the
Company, portions of which may be delivered by Cravath, Swaine & Moore,
outside counsel for the Company, portions of which may be delivered by
_____________, special regulatory counsel for the Company, and portions
of which may be delivered by _________________, in-house counsel for
the Company, each dated the Closing Date, in form and substance
reasonably satisfactory to the Representative, to the effect that: (i)
the Qualified Rate Order has been duly authorized and adopted by the
PUC and is irrevocable to the extent provided therein; (ii) the
decisions of the PUC adopting the Qualified Rate Order are
non-appealable; and (iii) any state action (whether by legislative
action, PUC action, or otherwise ) to revoke or limit the Qualified
Rate Order, the Intangible Transition Property, or the Intangible
Transition Charges would be subject to a successful constitutional
contracts clause challenge under the United States and Pennsylvania
Constitutions.
(m) On or prior to the Closing Date, the Company shall have
furnished to the Representative (i) copies of the private letter
ruling, dated _____, 1999, issued by the Internal Revenue Service to
the Company, and (ii) copies of the Declaration on Form U-1 issued by
the SEC to the Company on _____, 1999 under the Public Utility Holding
Company Act of 1935.
(n) The Representative and the Bond Trustee shall have
received on the Closing Date an opinion letter or letters of Richards,
Layton & Finger, P.A., special Delaware counsel to the Issuer, dated
the Closing Date, in form and substance reasonably satisfactory to the
Representative, to the effect that: (i) if properly presented to a
Delaware court, a Delaware court applying Delaware law, would conclude
that (x) in order for a person to file a voluntary bankruptcy petition
on behalf of the Issuer, the prior unanimous written consent of the
Member and the Board of Directors (including the Independent Director),
as
<PAGE> 18
18
provided in Section __________ of the Limited Liability Company
Agreement of the Issuer (the "LLC Agreement"), is required, and (y)
such provision, contained in Section ___________ of the LLC Agreement,
that requires the unanimous written consent of the Member and the Board
of Directors (including the Independent Director) in order for a person
to file a voluntary bankruptcy petition on behalf of the Issuer,
constitutes a legal, valid and binding agreement of the Member and is
enforceable against the Member, in accordance with its terms; and (ii)
the LLC Agreement constitutes a legal, valid and binding agreement of
the Member, and is enforceable against the Member in accordance with
its terms.
(o) The Transition Bonds shall have been rated in the highest
long-term rating category by each of the Rating Agencies.
(p) On or prior to the Closing Date, the Issuer shall have
delivered to the Representative evidence, in form and substance
reasonably satisfactory to the Representative, that appropriate filings
have been or are being made in accordance with the Competition Act and
other applicable law reflecting the grant of a security interest by the
Issuer in the Collateral to the Bond Trustee, including filings with
the PUC and the filing of the UCC financing statements in the office of
the [Secretary] of the Commonwealth of Pennsylvania.
(q) On or prior to the Closing Date, the Issuer shall have
delivered to the Representative evidence, in form and substance
satisfactory to the Representative, of the PUC's issuance of the
Qualified Rate Order relating to the Transition Property.
(r) On or prior to the Closing Date, the Issuer shall have
furnished to the Representative the documents required pursuant to
Section 2.10 of the Indenture.
(s) Prior to the Closing Date, the Issuer, the Company and the
Seller shall have furnished to the Representative such further
information, certificates, opinions and documents as the Representative
may reasonably request, including any documents provided to the Rating
Agencies.
If any of the conditions specified in this Section 6 shall not have
been fulfilled in all material respects when and as provided in this Agreement,
or if any of the opinions and certificates mentioned above or elsewhere in this
Agreement shall not be in all material respects reasonably satisfactory in form
and substance to the Representative and counsel for the Underwriters, this
Agreement and all obligations of the Underwriters hereunder may be canceled at,
or at any time prior to, the Closing Date by the Representative. Notice of such
cancellation shall be given to the Issuer in writing or by telephone or
telegraph confirmed in writing.
The documents required to be delivered by this Section 6 shall be
delivered at the offices of Cravath, Swaine & Moore, Worldwide Plaza, 825 Eighth
Avenue, New York, New York 10019 on the Closing Date.
7. Reimbursement of Underwriters' Expenses. If the sale of the
Transition Bonds provided for herein is not consummated because any condition to
the obligations of the Underwriters set forth in Section 6 hereof is not
satisfied, because of
<PAGE> 19
19
any termination pursuant to Section 10 hereof or because of any refusal,
inability or failure on the part of the Company, the Seller or the Issuer to
perform any agreement herein or comply with any provision hereof other than by
reason of a default (including under Section 9) by any of the Underwriters, the
Company, the Seller and the Issuer will, jointly and severally, reimburse the
Underwriters upon demand for all out-of-pocket expenses (including reasonable
fees and disbursements of counsel) that shall have been incurred by them in
connection with the proposed purchase and sale of the Transition Bonds.
8. Indemnification and Contribution. (a) The Company, the Seller and
the Issuer will, jointly and severally, indemnify and hold harmless each
Underwriter, the directors, officers, members, employees and agents of each
Underwriter, and each person who controls any Underwriter, within the meaning of
either the Act or the Exchange Act against any and all losses, claims, damages
or liabilities, joint or several, to which they or any of them may become
subject under the Act, the Exchange Act or other Federal or state statutory law
or regulation, at common law or otherwise, insofar as such losses, claims,
damages or liabilities (or actions in respect thereof) arise out of or are based
upon any untrue statement or alleged untrue statement of a material fact
contained in the registration statement for the registration of the Transition
Bonds as originally filed or in any amendment thereof, or in the Basic
Prospectus, any Preliminary Final Prospectus or the Final Prospectus, or in any
amendment thereof or supplement thereto, or arise out of or are based upon the
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading, and will reimburse
each such indemnified party, as incurred, for any legal or other expenses
reasonably incurred by them in connection with investigating or defending any
such loss, claim, damage, liability or action; provided, however, that neither
the Company, the Seller nor the Issuer will be liable in any such case to the
extent that any such loss, claim, damage or liability arises out of or is based
upon any such untrue statement or alleged untrue statement or omission or
alleged omission made therein in reliance upon and in conformity with written
information furnished to the Issuer, the Seller or the Company by or on behalf
of any Underwriter through the Representative specifically for inclusion
therein; provided further, that with respect to any untrue statement or omission
of material fact made in any Preliminary Final Prospectus, the indemnity
agreement contained in this Section 8(a) shall not inure to the benefit of any
Underwriter or any person controlling such Underwriter from whom the person
asserting any such loss, claim, damage or liability purchased the Transition
Bonds that are the subject thereof, to the extent that any such loss, claim,
damage or liability of such Underwriter occurs under the circumstance where it
shall have been determined by a court of competent jurisdiction by final and
nonappealable judgment that (w) the Company, the Seller or the Issuer had
previously furnished copies of the Final Prospectus to the Representative, (x)
delivery of the Final Prospectus was required by the Act to be made to such
person, (y) the untrue statement or omission of a material fact contained in the
Preliminary Final Prospectus was corrected in the Final Prospectus and (z) there
was not sent or given to such person, at or prior to the written confirmation of
the sale of such Transition Bonds to such person, a copy of the Final
Prospectus. This indemnity agreement will be in addition to any liability which
the Company, the Seller and the Issuer may otherwise have.
(b) Each Underwriter severally agrees to indemnify and hold harmless
the Company, the Seller and the Issuer, each of their directors, each of their
officers who
<PAGE> 20
20
signs the Registration Statement, and each person who controls the Company, the
Seller or the Issuer within the meaning of either the Act or the Exchange Act,
to the same extent as the foregoing indemnity from the Company, the Seller and
the Issuer to each Underwriter, but only with reference to written information
relating to such Underwriter furnished to the Issuer, the Seller or the Company
by or on behalf of such Underwriter through the Representative specifically for
inclusion in the documents referred to in the foregoing indemnity. This
indemnity agreement will be in addition to any liability which any Underwriter
may otherwise have. The Issuer, the Seller and the Company acknowledge that the
statements set forth in the third, fourth, fifth, and sixth paragraphs under the
heading "Underwriting The Series 1999-A Bonds" and in the fourth paragraph under
the heading "Plan of Distribution" in any Preliminary Final Prospectus or the
Final Prospectus constitute the only information furnished in writing by or on
behalf of the several Underwriters for inclusion in the documents referred to in
the foregoing indemnity, and you, as the Representative, confirm that such
statements are correct.
(c) Promptly after receipt by an indemnified party under this Section 8
of notice of the commencement of any action, such indemnified party will, if a
claim in respect thereof is to be made against the indemnifying party under this
Section 8, notify the indemnifying party in writing of the commencement thereof;
but the failure so to notify the indemnifying party (i) will not relieve it from
liability under paragraph (a) or (b) above unless and to the extent it did not
otherwise learn of such action and such failure results in the forfeiture by the
indemnifying party of substantial rights and defenses and (ii) will not, in any
event, relieve the indemnifying party from any obligations to any indemnified
party other than the indemnification obligation provided in paragraph (a) or (b)
above. The indemnifying party shall be entitled to appoint counsel of the
indemnifying party's choice at the indemnifying party's expense to represent the
indemnified party in any action for which indemnification is sought (in which
case the indemnifying party shall not thereafter be responsible for the fees and
expenses of any separate counsel retained by the indemnified party or parties
except as set forth below); provided, however, that such counsel shall be
reasonably satisfactory to the indemnified party. Notwithstanding the
indemnifying party's election to appoint counsel to represent the indemnified
party in an action, the indemnified party shall have the right to employ
separate counsel (including local counsel), and the indemnifying party shall
bear the reasonable fees, costs and expenses of such separate counsel if (i) the
use of counsel chosen by the indemnifying party to represent the indemnified
party would present such counsel with a conflict of interest, (ii) the actual or
potential defendants in, or targets of, any such action include both the
indemnified party and the indemnifying party and the indemnified party shall
have reasonably concluded that there may be legal defenses available to it
and/or other indemnified parties which are different from or additional to those
available to the indemnifying party, (iii) the indemnifying party shall not have
employed counsel reasonably satisfactory to the indemnified party to represent
the indemnified party within a reasonable time after notice of the institution
of such action or (iv) the indemnifying party shall authorize the indemnified
party to employ separate counsel at the expense of the indemnifying party. An
indemnifying party will not, without the prior written consent of the
indemnified parties, settle or compromise or consent to the entry of any
judgment with respect to any pending or threatened claim, action, suit or
proceeding in respect of which indemnification or contribution may be sought
hereunder (whether or not the indemnified parties are actual or potential
parties to such claim or action) unless such settlement, compromise or consent
includes an unconditional release of each indemnified party from all liability
arising out of such claim, action, suit or proceeding.
<PAGE> 21
21
(d) In the event that the indemnity provided in paragraph (a) or (b) of
this Section 8 is unavailable to or insufficient to hold harmless an indemnified
party for any reason, the Company, the Seller, the Issuer and the Underwriters
agree to contribute to the aggregate losses, claims, damages and liabilities
(including legal or other expenses reasonably incurred in connection with
investigating or defending same) (collectively "Losses") to which the Issuer and
one or more of the Underwriters may be subject in such proportion as is
appropriate to reflect the relative benefits received by the Issuer and by the
Underwriters from the offering of the Transition Bonds; provided, however, that
in no case shall any Underwriter (except as may be provided in any agreement
among underwriters relating to the offering of the Transition Bonds) be
responsible for any amount in excess of the underwriting discount or commission
applicable to the Transition Bonds purchased by such Underwriter hereunder. If
the allocation provided by the immediately preceding sentence is unavailable for
any reason, the Company, the Seller, the Issuer and the Underwriters shall
contribute in such proportion as is appropriate to reflect not only such
relative benefits but also the relative fault of the Issuer and of the
Underwriters in connection with the statements or omissions which resulted in
such Losses as well as any other relevant equitable considerations. Benefits
received by the Issuer shall be deemed to be equal to the total net proceeds
from the offering (before deducting expenses) of the Transition Bonds and
benefits received by the Underwriters shall be deemed to be equal to the total
underwriting discounts and commissions, in each case as set forth on the cover
page of the Final Prospectus. Relative fault shall be determined by reference to
whether any alleged untrue statement or omission relates to information provided
by the Issuer or the Underwriters. The Company, the Seller, the Issuer and the
Underwriters agree that it would not be just and equitable if contribution were
determined by pro rata allocation or any other method of allocation which does
not take account of the equitable considerations referred to above.
Notwithstanding the provisions of this paragraph (d), no person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. For purposes of this Section 8, each person who
controls an Underwriter within the meaning of either the Act or the Exchange Act
and each director, officer, employee and agent of an Underwriter shall have the
same rights to contribution as such Underwriter, and each person who controls
the Issuer, the Seller or the Company within the meaning of either the Act or
the Exchange Act, each officer of the Issuer, the Seller or the Company who
shall have signed the Registration Statement and each director of the Issuer,
the Seller or the Company shall have the same rights to contribution as the
Issuer, the Seller or the Company, subject in each case to the applicable terms
and conditions of this paragraph (d).
9. Default by an Underwriter. If any one or more Underwriters shall
fail to purchase and pay for any of the Transition Bonds agreed to be purchased
by such Underwriter or Underwriters hereunder and such failure to purchase shall
constitute a default in the performance of its or their obligations under this
Agreement, the nondefaulting Underwriters shall be obligated severally to take
up and pay for (in the respective proportions which the amount of Transition
Bonds set forth opposite their names in Schedule II hereto bears to the
aggregate amount of Transition Bonds set forth opposite the names of all the
remaining Underwriters) the Transition Bonds which the defaulting Underwriter or
Underwriters agreed but failed to purchase; provided, however, that in the event
that the aggregate amount of Transition Bonds which the defaulting Underwriter
or Underwriters agreed but failed to purchase shall exceed 10% of the aggregate
amount of Transition Bonds set forth in Schedule II hereto, the
<PAGE> 22
22
nondefaulting Underwriters shall have the right to purchase all, but shall not
be under any obligation to purchase any, of the Transition Bonds, and if such
nondefaulting Underwriters do not purchase all the Transition Bonds, this
Agreement will terminate without liability to any nondefaulting Underwriter, the
Issuer, the Seller or the Company. In the event of a default by any Underwriter
as set forth in this Section 9, the Closing Date shall be postponed for such
period, not exceeding seven days, as the Representative shall determine in order
that the required changes in the Registration Statement and the Final Prospectus
or in any other documents or arrangements may be effected. Nothing contained in
this Agreement shall relieve any defaulting Underwriter of its liability, if
any, to the Issuer, the Seller and the Company and any nondefaulting Underwriter
for damages occasioned by its default hereunder.
10. Termination. This Agreement shall be subject to termination in the
absolute discretion of the Representative, by notice given to the Issuer prior
to delivery of and payment for the Transition Bonds, if prior to such time (i)
there shall have occurred any change, or any development involving a prospective
change, in or affecting either (A) the business, properties or financial
condition of the Issuer, the Seller or the Company or (B) the Initial Intangible
Transition Property, the Transition Bonds, the Qualified Rate Order or the
Competition Act, the effect of which, in the judgment of the Representative,
materially impairs the investment quality of the Transition Bonds or makes it
impractical or inadvisable to market the Transition Bonds, (ii) trading in the
Company's Common Stock shall have been suspended by the SEC or the New York
Stock Exchange or trading in securities generally on the New York Stock Exchange
shall have been suspended or limited or minimum prices shall have been
established on such Exchange, (iii) a banking moratorium shall have been
declared either by Federal, New York State or Pennsylvania State authorities or
(iv) there shall have occurred any outbreak or escalation of hostilities,
declaration by the United States of a national emergency or war or other
calamity or crisis the effect of which on financial markets is such as to make
it, in the judgment of the Representative, impracticable or inadvisable to
proceed with the offering or delivery of the Transition Bonds as contemplated by
the Final Prospectus (exclusive of any supplement thereto).
11. Computational Materials and ABS Term Sheets.
(a) Each Underwriter severally represents and warrants to the
Issuer, the Company and the Seller that it has not and will not use any
information that constitutes "Computational Materials," as defined in
the SEC's No-Action Letter, dated May 20, 1994, addressed to Kidder,
Peabody Acceptance Corporation I, Kidder Peabody & Co. Incorporated and
Kidder Structured Asset Corporation (as made generally applicable to
registrants, issuers and underwriters by the SEC's response to the
request of the Public Securities Association dated May 27, 1994), with
respect to the offering of the Transition Bonds.
(b) Each Underwriter severally represents and warrants to the
Issuer, the Company and the Seller that it has not and will not use any
information that constitutes "ABS Term Sheets," as defined in the SEC's
No-Action Letter, dated February 17, 1995, addressed to the Public
Securities Association, with respect to the offering of the Transition
Bonds.
12. Representations and Indemnities to Survive. The respective
agreements, representations, warranties, indemnities and other statements of the
<PAGE> 23
23
Company or its officers, the Issuer or its officers, the Seller or its officers
and of the Underwriters set forth in or made pursuant to this Agreement will
remain in full force and effect, regardless of any investigation made by or on
behalf of any Underwriter or of the Company, the Issuer, the Seller or any of
the officers, directors or controlling persons referred to in Section 9 hereof,
and will survive delivery of and payment for the Transition Bonds. The
provisions of Sections 7 and 6 hereof shall survive the termination or
cancelation of this Agreement.
13. Notices. All communications hereunder will be in writing and may be
given by United States mail, courier service, telegram, telex, telemessage,
telecopy, telefax, cable or facsimile (confirmed by telephone or in writing in
the case of notice by telegram, telex, telemessage, telecopy, telefax, cable or
facsimile) or any other customary means of communication, and any such
communication shall be effective when delivered, or if mailed, three days after
deposit in the United States mail with proper postage for ordinary mail prepaid,
and if sent to the Representative, to them at the address specified in Schedule
I hereto; and if sent to the Company, to it at ______________________________,
Attention: ; and if sent to the Issuer, to it at
________________________________________, Attention: Treasurer; and if sent to
the Seller, to it at ____________________________, Attention: . The parties
hereto, by notice to the others, may designate additional or different addresses
for subsequent communications.
14. Successors. This Agreement will inure to the benefit of and be
binding upon the parties hereto and their respective successors and the officers
and directors and controlling persons referred to in Section 8 hereof, and no
other person will have any right or obligation hereunder.
15. Applicable Law. This Agreement will be governed by and construed in
accordance with the laws of the State of New York.
16. Counterparts. This Agreement may be signed in any number of
counterparts, each of which shall be deemed an original, which taken together
shall constitute one and the same instrument.
<PAGE> 24
24
If the foregoing is in accordance with your understanding of our
agreement, please sign and return to us the enclosed duplicate hereof, whereupon
this letter and your acceptance shall represent a binding agreement among the
Company, the Issuer, the Seller and the several Underwriters.
Very truly yours,
WEST PENN POWER COMPANY,
by
------------------------------
Name:
Title:
WEST PENN FUNDING LLC,
by
------------------------------
Name:
Title:
WEST PENN FUNDING CORPORATION
by
------------------------------
Name:
Title:
<PAGE> 25
25
The foregoing Agreement is
hereby confirmed and accepted as
of the date specified in Schedule I
hereto.
MORGAN STANLEY & CO.
INCORPORATED
by
------------------------------
Name:
Title:
for themselves and the other several
Underwriters, if any, named in
Schedule II to the foregoing Agreement.
<PAGE> 26
26
SCHEDULE I
Underwriting Agreement dated , 1999
------------- --
Registration Statement No. 333-
-----
Representative(s);
Morgan Stanley & Co.
Incorporated
1585 Broadway
New York, New York 10036
Title, Purchase Price and Description of Bonds:
Title: West Penn Funding LLC $ Transition
Bonds, Series 1999 - A --------------
Principal Amount, Price to Public, Underwriting Discounts
and Commissions, Proceeds to the Issuer, and Required
Ratings:
<TABLE>
<CAPTION>
Underwriting
Total Principal Price to Discounts and Proceeds to Required
Amount of Class Public Commissions the Issuer Ratings
--------------- ------ ----------- ---------- -------
<S> <C> <C> <C> <C> <C>
Per Class A-1
Bond
Per Class A-2
Bond
Per Class A-3
Bond
Per Class A-4
Bond
Total
</TABLE>
<PAGE> 27
Plus the Underwriters will be reimbursed by the Issuer for:
$___________ of expenses,
consisting of $____________
of out-of-pocket expenses and
$______________for Underwriters' Counsel
Original Issue Discount (if any): $______________
Redemption provisions:
Other provisions:
Closing Date, Time and Location: ____________ __, 1999, _____a.m., Eastern
Standard Time, New York, NY
Type of Offering: Delayed Offering
Date referred to in Section 5(a) (vi) after which the Issuer may offer or sell
asset-backed securities in a special purpose vehicle without the consent of the
Representative(s): ___________ __, 1999
<PAGE> 28
SCHEDULE II
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT OF BONDS TO BE PURCHASED
------------------------------------------------------------------------------------------
CLASS A-1 CLASS A-2 CLASS A-3 CLASS A-4
UNDERWRITERS BONDS BONDS BONDS BONDS TOTAL
- ------------ ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Morgan Stanley & Co.
Incorporated
Goldman, Sachs & Co.
Banc of America Securities
LLC
PNC Capital Markets, Inc.
Pryor, McClendon, Counts &
Co., Inc.
Total.....................
</TABLE>
<PAGE> 1
EXHIBIT 4.1.2
ASSIGNMENT OF LIMITED LIABILITY COMPANY INTEREST
AND AMENDMENT TO
LIMITED LIABILITY COMPANY AGREEMENT
OF
WEST PENN FUNDING LLC
This Assignment of Limited Liability Company Interest
and Amendment to Limited Liability Company Agreement of West Penn Funding LLC,
dated as of ______________ __, 1999 (this "Assignment and Amendment Agreement"),
is entered into by and between Carol G. Russ, as the sole member of West Penn
Funding LLC, and West Penn Funding Corporation, a Delaware corporation.
W I T N E S S E T H :
WHEREAS, West Penn Funding LLC (the "Company") has
been formed as a limited liability company under the Delaware Limited Liability
Company Act (6 Del.C. Section 18101, et seq.) (the "Act") pursuant to a
Certificate of Formation of the Company, as filed in the office of the Secretary
of State of the State of Delaware on May 26, 1999, and a Limited Liability
Company Agreement of the Company, dated as of May 26, 1999 (the "Agreement");
WHEREAS, Carol G. Russ is the sole member of the
Company;
WHEREAS, Carol G. Russ desires to assign, transfer
and convey all of her limited liability company interest in the Company as a
member of the Company (the "Interest") to West Penn Funding Corporation, and
Carol G. Russ desires to
<PAGE> 2
2
resign from the Company as a member of the Company;
WHEREAS, West Penn Funding Corporation desires to
purchase the Interest presently held by Carol G. Russ, and West Penn Funding
Corporation desires to be admitted to the Company as a substitute member of the
Company; and
WHEREAS, the undersigned, to accomplish the
foregoing, desire to amend the Agreement in the manner set forth herein.
NOW, THEREFORE, the undersigned, in consideration of
the premises, covenants and agreements contained herein, does hereby agree as
follows:
1. Assignment. Notwithstanding any provision in the
Agreement to the contrary, for value received, the receipt and sufficiency of
which are hereby acknowledged, upon the execution of this Assignment and
Amendment Agreement by the parties hereto, Carol G. Russ does hereby assign,
transfer and convey the Interest to West Penn Funding Corporation.
2. Admission. Notwithstanding any provision in the
Agreement to the contrary, contemporaneously with the assignment described in
paragraph 1 of this Assignment and Amendment Agreement, West Penn Funding
Corporation shall be admitted to the Company as a substitute member of the
Company.
3. Resignation. Notwithstanding any provision in
<PAGE> 3
3
the Agreement to the contrary, immediately following the admission of West Penn
Funding Corporation as a substitute member of the Company, Carol G. Russ shall
and does hereby resign from the Company as a member of the Company, and shall
thereupon cease to be a member of the Company, and shall thereupon cease to have
or exercise any right or power as a member of the Company.
4. Continuation of the Company. The parties hereto
agree that the assignment of the Interest, the admission of West Penn Funding
Corporation as a substitute member of the Company and the resignation of Carol
G. Russ as a member of the Company shall not dissolve the Company and that the
business of the Company shall continue.
5. Books and Records. The member of the Company shall
take all actions necessary under the Act and the Agreement, including causing
the amendment of the Agreement, to evidence the resignation of Carol G. Russ
from the Company as a member of the Company and the admission of West Penn
Funding Corporation to the Company as a member of the Company.
6. Future Cooperation. Each of the parties hereto
agrees to cooperate at all times from and after the date hereof with respect to
all of the matters described herein, and to execute such further assignments,
releases, assumptions, amendments of the Agreement, notifications and
<PAGE> 4
4
other documents as may be reasonably requested for the purpose of giving effect
to, or evidencing or giving notice of, the transactions contemplated by this
Assignment and Amendment Agreement.
7. Contribution. West Penn Funding Corporation has
paid $1 to Carol G. Russ for the Interest.
8. Binding Effect. This Assignment and Amendment
Agreement shall be binding upon, and shall enure to the benefit of, the parties
hereto and their respective successors and assigns.
9. Execution in Counterparts. This Assignment and
Amendment Agreement may be executed in counterparts, each of which shall be
deemed an original, but all of which shall constitute one and the same
instrument.
10. Agreement in Effect. Except as hereby amended,
the Agreement shall remain in full force and effect.
11. Governing Law. This Assignment and Amendment
Agreement shall be governed by, and interpreted in accordance with, the laws of
the State of Delaware, all rights and remedies being governed by such laws.
<PAGE> 5
5
IN WITNESS WHEREOF, the parties hereto have caused this
Assignment and Amendment Agreement to be duly executed as of the day and
year first above written.
----------------------------------------
Carol G. Russ
WEST PENN FUNDING CORPORATION
By:
-------------------------------------
Name:
Title:
<PAGE> 1
EXHIBIT 4.1.3
AMENDED AND RESTATED LIMITED LIABILITY COMPANY AGREEMENT
OF
WEST PENN FUNDING LLC
This Amended and Restated Limited Liability Company Agreement (together
with the schedules attached hereto, this "Agreement") of West Penn Funding LLC
(the "Company"), is entered into by WEST PENN FUNDING CORPORATION, a Delaware
corporation, as the sole equity member (the "Member"), and ____________________
and ____________________, as the Special Members (as defined on Schedule A
hereto). Capitalized terms used and not otherwise defined herein have the
meanings set forth on Schedule A hereto.
The Member, by execution of this Agreement, (i) hereby continues the
Company as a limited liability company pursuant to and in accordance with the
Delaware Limited Liability Company Act (6 Del. C. Section 18-101 et seq.), as
amended from time to time (the "Act"), and this Agreement, (ii) hereby amends
and restates in its entirety the Limited Liability Company Agreement of the
Company, dated as of May 26, 1999 (the "Initial LLC Agreement"), as amended by
the Assignment of Limited Liability Company Interest and Amendment to Limited
Liability Company Agreement dated as of [ ], 1999 (the "Assignment Agreement"),
and, together with [NAMES OF SPECIAL MEMBERS/INDEPENDENT DIRECTORS], hereby
agrees as follows:
Section 1. Name.
The name of the limited liability company formed hereby is West Penn
Funding LLC.
Section 2. Principal Business Office.
The principal business office of the Company shall be located at 800
Cabin Hill Drive, Room [ ], Greensburg, Pennsylvania 15601 or such other
location as may hereafter be determined by the Member.
Section 3. Registered Office.
The address of the registered office of the Company in the State of
Delaware is c/o The Corporation Trust Company, Corporation Trust Center, 1209
Orange Street, in the City of Wilmington, County of New Castle, Delaware 19801.
Section 4. Registered Agent.
The name and address of the registered agent of the Company for service
of process on the Company in the State of Delaware is The Corporation Trust
Company, Corporation Trust Center, 1209 Orange Street, in the City of
Wilmington, County of New Castle, Delaware 19801.
1
<PAGE> 2
Section 5. Members.
(a) The mailing address of the Member is set forth on Schedule B
attached hereto. The Member was admitted to the Company as a member of the
Company upon its execution of the Assignment Agreement heretofore.
(b) Subject to Section 9(j), the Member may act by written consent.
(c) Upon the occurrence of any event that causes the Member to cease to
be a member of the Company (other than (i) upon an assignment by the Member of
all of its limited liability company interest in the Company and the admission
of the transferee pursuant to Sections 21 and 23, or (ii) the resignation of the
Member and the admission of an additional member of the Company pursuant to
Sections 22 and 23), each person acting as an Independent Director pursuant to
Section 10 shall, without any action of any Person and simultaneously with the
Member ceasing to be a member of the Company, automatically be admitted to the
Company as a Special Member and shall continue the Company without dissolution.
No Special Member may resign from the Company or transfer its rights as Special
Member unless (i) a successor Special Member has been admitted to the Company as
Special Member by executing a counterpart to this Agreement, and (ii) such
successor has also accepted its appointment as Independent Director pursuant to
Section 10; provided, however, the Special Members shall automatically cease to
be members of the Company upon the admission to the Company of a substitute
Member. Each Special Member shall be a member of the Company that has no
interest in the profits, losses and capital of the Company and has no right to
receive any distributions of Company assets. Pursuant to Section 18-301 of the
Act, a Special Member shall not be required to make any capital contributions to
the Company and shall not receive a limited liability company interest in the
Company. A Special Member, in its capacity as Special Member, may not bind the
Company. Except as required by any mandatory provision of the Act, each Special
Member, in its capacity as Special Member, shall have no right to vote on,
approve or otherwise consent to any action by, or matter relating to, the
Company, including, without limitation, the merger, consolidation or conversion
of the Company. In order to implement the admission to the Company of each
Special Member, each person acting as an Independent Director pursuant to
Section 10 shall execute a counterpart to this Agreement. Prior to its admission
to the Company as Special Member, each person acting as an Independent Director
pursuant to Section 10 shall not be a member of the Company.
Section 6. Certificates.
Howard L. Siegel, is hereby designated as an "authorized person" within
the meaning of the Act, and has executed, delivered and filed the Certificate of
Formation of the Company with the Secretary of State of the State of Delaware.
Upon the filing of the Certificate of Formation with the Secretary of State of
the State of Delaware, his powers as an "authorized person" ceased, and Carol
Russ, as the initial member under the Initial LLC Agreement thereupon became the
designated "authorized person" and after Carol Russ's assignment of her
membership interest in the Company to the Member pursuant to the Assignment
Agreement, the Member became and shall continue as the designated "authorized
person" within the meaning of the Act. The Member or an Officer shall execute,
deliver and file any other certificates (and any amendments and/or restatements
thereof) necessary for the Company to qualify to do business in Pennsylvania,
New York and in any other jurisdiction in which the Company may wish to conduct
business.
The existence of the Company as a separate legal entity shall continue
until cancellation of the Certificate of Formation as provided in the Act.
2
<PAGE> 3
Section 7. Purposes. The purpose to be conducted or promoted by the Company is
to engage in the following activities:
(a)
(i) to acquire, own, hold, administer, service, or enter
into agreements for the servicing of, finance,
manage, sell, assign, pledge, collect amounts due on
and otherwise deal with the Intangible Transition
Property and other assets to be acquired pursuant to
the Basic Documents and any proceeds or rights
associated therewith;
(ii) to issue, sell, authorize and deliver the Transition
Bonds and to enter into any agreement or document
providing for the authorization, issuance, sale and
delivery of the Transition Bonds;
(iii) to sell, exchange, pledge, encumber or otherwise
dispose of all or any part of the Intangible
Transition Property and its other assets and property
and, in connection therewith, to accept, collect,
hold, sell, exchange or otherwise dispose of
evidences of indebtedness or other property received
pursuant thereto, including the encumbrance of all of
the Intangible Transition Property and its other
assets and property as collateral security for the
Transition Bonds;
(iv) to execute, deliver and perform the Basic Documents;
(v) to invest proceeds from the Intangible Transition
Property and its other assets and any capital and
income of the Company in accordance with the Basic
Documents or as otherwise determined by the Board and
not inconsistent with this Section 7 or the Basic
Documents;
(vi) to acquire, own, hold, sell, transfer, service,
convey, safekeep, dispose of, pledge, assign, borrow
money against, finance, refinance or otherwise deal
with, publicly or privately and whether with
unrelated third parties or with affiliated entities;
and
(vii) to engage in any lawful act or activity and to
exercise any powers permitted to limited liability
companies organized under the laws of the State of
Delaware that are related or incidental to and
necessary, convenient or advisable for the
accomplishment of the above-mentioned purposes
(including the entering into of interest rate or
basis swap, cap, floor or collar agreements, currency
exchange agreements or similar hedging transactions
and referral, management, servicing and
administration agreements).
(b) The Company, by or through the Member, or any Director or Officer
on behalf of the Company, may enter into and perform the Basic Documents and all
documents, agreements, certificates, or financing statements contemplated
thereby or related thereto, all without any further act, vote or approval of any
other Person notwithstanding any other provision of this Agreement, the Act or
applicable law, rule or regulation. The foregoing authorization shall not
3
<PAGE> 4
be deemed a restriction on the powers of the Member or any Director or Officer
to enter into other agreements on behalf of the Company.
(c) The Company hereby ratifies and approves all actions taken by
Carol G. Russ, in her prior capacity as sole member of the Company, on behalf
of the Company in connection with the execution, delivery and filing with the
Securities and Exchange Commission of the Registration Statement on Form S-3
and Amendment No. 1 and Amendment No. 2 thereto.
Section 8. Powers.
Subject to Section 9(j), the Company, and the Board of Directors and
the Officers of the Company on behalf of the Company, (i) shall have and
exercise all powers necessary, convenient or incidental to accomplish its
purposes as set forth in Section 7 and (ii) shall have and exercise all of the
powers and rights conferred upon limited liability companies formed pursuant to
the Act.
Section 9. Management.
(a) Board of Directors. Subject to Section 9(j), the business and
affairs of the Company shall be managed by or under the direction of a Board of
one or more Directors designated by the Member. Subject to Section 10, the
Member may determine at any time in its sole and absolute discretion the number
of Directors to constitute the Board. The authorized number of Directors may be
increased or decreased by the Member at any time in its sole and absolute
discretion, upon notice to all Directors, and subject in all cases to Section
10. The initial number of Directors shall be five, two of which shall be
Independent Directors pursuant to Section 10. Each Director elected, designated
or appointed by the Member shall hold office until a successor is elected and
qualified or until such Director's earlier death, resignation, expulsion or
removal. Each Director shall execute and deliver the Management Agreement.
Directors need not be a Member. The initial Directors designated by the Member
are listed on Schedule D hereto.
(b) Powers. Subject to Section 9(j), the Board of Directors shall have
the power to do any and all acts necessary, convenient or incidental to or for
the furtherance of the purposes described herein, including all powers,
statutory or otherwise. Subject to Section 7, the Board of Directors has the
authority to bind the Company.
(c) Meeting of the Board of Directors. The Board of Directors of the
Company may hold meetings, both regular and special, within or outside the State
of Delaware. Regular meetings of the Board may be held without notice at such
time and at such place as shall from time to time be determined by the Board.
Special meetings of the Board may be called by the President on not less than
one day's notice to each Director by telephone, facsimile, mail, telegram or any
other means of communication, and special meetings shall be called by the
President or Secretary in like manner and with like notice upon the written
request of any one or more of the Directors.
(d) Quorum: Acts of the Board. At all meetings of the Board, a majority
of the Directors shall constitute a quorum for the transaction of business and,
except as otherwise provided in any other provision of this Agreement, the act
of a majority of the Directors present at any meeting at which there is a quorum
shall be the act of the Board. If a quorum shall not be present at any meeting
of the Board, the Directors present at such meeting may adjourn the meeting from
time to time, without notice other than announcement at the meeting, until a
quorum shall be present. Any action required or permitted to be taken at any
meeting of the Board or of any committee thereof may be taken without a meeting
if all members of the Board or committee, as the case may be, consent thereto in
writing, and the writing or writings are filed with the minutes of proceedings
of the Board or committee, as the case may be.
(e) Electronic Communications. Members of the Board, or any committee
designated by the Board, may participate in meetings of the Board, or any
committee, by means
4
<PAGE> 5
of telephone conference or similar communications equipment that allows all
Persons participating in the meeting to hear each other, and such participation
in a meeting shall constitute presence in Person at the meeting. If all the
participants are participating by telephone conference or similar communications
equipment, the meeting shall be deemed to be held at the principal place of
business of the Company.
(f) Committees of Directors.
(i) The Board may, by resolution passed by a majority of
the whole Board, designate one or more committees,
each committee to consist of one or more of the
Directors of the Company. The Board may designate one
or more Directors as alternate members of any
committee, who may replace any absent or disqualified
member at any meeting of the committee.
(ii) In the absence or disqualification of a member of a
committee, the member or members thereof present at
any meeting and not disqualified from voting, whether
or not such members constitute a quorum, may
unanimously appoint another member of the Board to
act at the meeting in the place of any such absent or
disqualified member.
(iii) Any such committee, to the extent provided in the
resolution of the Board, shall have and may exercise
all the powers and authority of the Board in the
management of the business and affairs of the
Company. Such committee or committees shall have such
name or names as may be determined from time to time
by resolution adopted by the Board. Each committee
shall keep regular minutes of its meetings and report
the same to the Board when required.
(g) Compensation of Directors; Expenses. The Board shall have the
authority to fix the compensation of Directors. The Directors may be paid their
expenses, if any, of attendance at meetings of the Board, which may be a fixed
sum for attendance at each meeting of the Board or a stated salary as Director.
No such payment shall preclude any Director from serving the Company in any
other capacity and receiving compensation therefor. Members of special or
standing committees may be allowed like compensation for attending committee
meetings.
(h) Removal of Directors. Unless otherwise restricted by law, any
Director or the entire Board of Directors may be removed or expelled, with or
without cause, at any time by the Member, and, subject to Section 10, any
vacancy caused by any such removal or expulsion may be filled by action of the
Member.
(i) Directors as Agents. To the extent of their powers set forth in
this Agreement and subject to Section 9(j), the Directors are agents of the
Company for the purpose of the Company's business, and the actions of the
Directors taken in accordance with such powers set forth in this Agreement shall
bind the Company. Notwithstanding the last sentence of Section 18-402 of the
Act, except as provided in this Agreement or in a resolution of the Directors, a
Director may not bind the Company.
(j) Limitations on the Company's Activities.
(i) This Section 9(j) is being adopted in order to comply
with certain provisions required in order to qualify
the Company as a "special purpose" entity.
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<PAGE> 6
(ii) The Member shall not, so long as any Obligation is
outstanding, amend, alter, change or repeal the
definition of "Independent Director" or Sections 7,
8, 9, 10, 16, 20, 21, 22, 23, 24, 25, 26 or 31 or
Schedule A of this Agreement without the unanimous
written consent of the Board (including all
Independent Directors). Subject to this Section 9(j),
the Member reserves the right to amend, alter, change
or repeal any provisions contained in this Agreement
in accordance with Section 31.
(iii) Notwithstanding any other provision of this Agreement
and any provision of law that otherwise so empowers
the Company, the Member, the Board, any Officer or
any other Person, neither the Member nor the Board
nor any Officer nor any other Person shall be
authorized or empowered, nor shall they permit the
Company, without the prior unanimous written consent
of the Member and the Board (including all
Independent Directors), to take any Material Action.
(iv) The Board and the Member shall cause the Company to
do or cause to be done all things necessary to
preserve and keep in full force and effect its
existence, rights (charter and statutory) and
franchises; provided, however, that the Company shall
not be required to preserve any such right or
franchise if: (1) the Board shall determine that the
preservation thereof is no longer desirable for the
conduct of its business and that the loss thereof is
not disadvantageous in any material respect to the
Company and (2) the Rating Agency Condition is
satisfied. The Board also shall cause the Company to:
(A) maintain its own separate books and records
and bank accounts;
(B) at all times hold itself out to the public
and all other Persons as a legal entity
separate from the Member and any other
Person;
(C) have a Board of Directors separate from that
of the Member and any other Person;
(D) file its own tax returns, if any, as may be
required under applicable law, to the extent
(I) not part of a consolidated group filing
a consolidated return or returns or (2) not
treated as a division for tax purposes of
another taxpayer, and pay any taxes so
required to be paid under applicable law;
(E) except as contemplated by the Basic
Documents, not commingle its assets with
assets of any other Person;
(F) conduct its business in its own name and
strictly comply with all organizational
formalities to maintain its separate
existence;
(G) maintain separate financial statements;
(H) pay its own liabilities only out of its own
funds;
(I) maintain an arm's length relationship with
its Affiliates and the Member;
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(J) pay the salaries of its own employees, if
any;
(K) not hold out its credit or assets as being
available to satisfy the obligations of
others;
(L) allocate fairly and reasonably any overhead
for shared office space;
(M) use separate stationery, invoices and
checks;
(N) except as contemplated by the Basic
Documents, not pledge its assets for the
benefit of any other Person;
(O) correct any known misunderstanding regarding
its separate identity;
(P) maintain adequate capital in light of its
contemplated business purpose, transactions
and liabilities;
(Q) cause its Board of Directors to meet at
least annually or act pursuant to written
consent and keep minutes of such meetings
and actions and observe all other Delaware
limited liability company formalities;
(R) not acquire any securities of the Member;
and
(S) cause the Directors, Officers, agents and
other representatives of the Company to act
at all times with respect to the Company
consistently and in furtherance of the
foregoing and in the best interests of the
Company.
Failure of the Company, or the Member
or Board on behalf of the Company, to comply
with any of the foregoing covenants or any
other covenants contained in this Agreement
shall not affect the status of the Company
as a separate legal entity or the limited
liability of the Member or the Directors.
(v) So long as any Obligation is outstanding, the Board
shall not cause or permit the Company to:
(A) except as contemplated by the Basic
Documents, guarantee any obligation of any
Person, including any Affiliate;
(B) engage, directly or indirectly, in any
business other than the actions required or
permitted to be performed under Section 7,
the Basic Documents or this Section 9(j);
(C) incur, create or assume any indebtedness
other than as expressly permitted under the
Basic Documents;
(D) make or permit to remain outstanding any
loan or advance to, or own or acquire any
stock or securities of, any Person, except
that the Company may invest in those
investments permitted under the
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Basic Documents and may make any advance
required or expressly permitted to be made
pursuant to any provisions of the Basic
Documents and permit the same to remain
outstanding in accordance with such
provisions;
(E) to the fullest extent permitted by law,
engage in any dissolution, liquidation,
consolidation, merger, asset sale or
transfer of ownership interests other than
such activities as are expressly permitted
pursuant to any provision of the Basic
Documents; or
(F) form, acquire or hold any subsidiary
(whether corporate, partnership, limited
liability company or other).
Section 10. Independent Director.
As long as any Obligation is outstanding, the Member shall cause the
Company at all times to have at least two Independent Directors who will be
appointed by the Member. To the fullest extent permitted by law, including
Section 18-1101(c) of the Act, the Independent Directors shall consider only the
interests of the Company, including its respective creditors, in acting or
otherwise voting on the matters referred to in Section 9(j)(iii). No resignation
or removal of an Independent Director, and no appointment of a successor
Independent Director, shall be effective until such successor (i) shall have
accepted his or her appointment as an Independent Director by a written
instrument, which may be a counterpart signature page to the Management
Agreement, and (ii) shall have executed a counterpart to this Agreement as
required by Section 5(c). In the event of a vacancy in the position of
Independent Director, the Member shall, as soon as practicable, appoint a
successor Independent Director. All right, power and authority of the
Independent Directors shall be limited to the extent necessary to exercise those
rights and perform those duties specifically set forth in this Agreement. Except
as provided in the second sentence of this Section 10, in exercising their
rights and performing their duties under this Agreement, any Independent
Director shall have a fiduciary duty of loyalty and care similar to that of a
director of a business corporation organized under the General Corporation Law
of the State of Delaware. No Independent Director shall at any time serve as
trustee in bankruptcy for any Affiliate of the Company.
Section 11. Officers.
(a) Officers. The initial Officers of the Company shall be designated
by the Member. The additional or successor Officers of the Company shall be
chosen by the Board and shall consist of at least a President, a Secretary and a
Treasurer. The Board of Directors may also choose one or more Vice Presidents,
Assistant Secretaries and Assistant Treasurers. Any number of offices may be
held by the same person. The Board shall choose a President, a Secretary and a
Treasurer. The Board may appoint such other Officers and agents as it shall deem
necessary or advisable who shall hold their offices for such terms and shall
exercise such powers and perform such duties as shall be determined from time to
time by the Board. The salaries of all Officers and agents of the Company shall
be fixed by or in the manner prescribed by the Board. The Officers of the
Company shall hold office until their successors are chosen and qualified. Any
Officer may be removed at any time, with or without cause, by the affirmative
vote of a majority of the Board. Any vacancy occurring in any office of the
Company shall be filled by the Board. Upon the effectiveness of this Agreement,
the Officers of the Company designated by the Member are listed on Schedule E
hereto and any persons formerly appointed as Officers of the Company shall
automatically cease to be Officers of the Company.
(b) President. The President shall be the chief executive officer of
the Company, shall preside at all meetings of the Board, shall be responsible
for the general and active
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management of the business of the Company and shall see that all orders and
resolutions of the Board are carried into effect. The President or any other
Officer authorized by the President or the Board shall execute all bonds,
mortgages and other contracts, except: (i) where required or permitted by law or
this Agreement to be otherwise signed and executed, including Section 7(b); (ii)
where signing and execution thereof shall be expressly delegated by the Board to
some other Officer or agent of the Company, and (iii) as otherwise permitted in
Section 11(c).
(c) Vice President. In the absence of the President or in the event of
the President's inability to act, the Vice President, if any (or in the event
there be more than one Vice President, the Vice Presidents in the order
designated by the Directors, or in the absence of any designation, then in the
order of their election), shall perform the duties of the President, and when so
acting, shall have all the powers of and be subject to all the restrictions upon
the President. The Vice Presidents, if any, shall perform such other duties and
have such other powers as the Board may from time to time prescribe.
(d) Secretary and Assistant Secretary. The Secretary shall be
responsible for filing legal documents and maintaining records for the Company.
The Secretary shall attend all meetings of the Board and record all the
proceedings of the meetings of the Company and of the Board in a book to be kept
for that purpose and shall perform like duties for the standing committees when
required. The Secretary shall give, or shall cause to be given, notice of all
meetings of the Member, if any, and special meetings of the Board, and shall
perform such other duties as may be prescribed by the Board or the President,
under whose supervision the Secretary shall serve. The Assistant Secretary, or
if there be more than one, the Assistant Secretaries in the order determined by
the Board (or if there be no such determination, then in order of their
election), shall, in the absence of the Secretary or in the event of the
Secretary's inability to act, perform the duties and exercise the powers of the
Secretary and shall perform such other duties and have such other powers as the
Board may from time to time prescribe.
(e) Treasurer and Assistant Treasurer. The Treasurer shall have the
custody of the Company funds and securities and shall keep full and accurate
accounts of receipts and disbursements in books belonging to the Company and
shall deposit all moneys and other valuable effects in the name and to the
credit of the Company in such depositories as may be designated by the Board.
The Treasurer shall disburse the funds of the Company as may be ordered by the
Board, taking proper vouchers for such disbursements, and shall render to the
President and to the Board, at its regular meetings or when the Board so
requires, an account of all of the Treasurer's transactions and of the financial
condition of the Company. The Assistant Treasurer, or if there shall be more
than one, the Assistant Treasurers in the order determined by the Board (or if
there be no such determination, then in the order of their election), shall, in
the absence of the Treasurer or in the event of the Treasurer's inability to
act, perform the duties and exercise the powers of the Treasurer and shall
perform such other duties and have such other powers as the Board may from time
to time prescribe.
(f) Officers as Agents. The Officers, to the extent of their powers set
forth in this Agreement or otherwise vested in them by action of the Board not
inconsistent with this Agreement, are agents of the Company for the purpose of
the Company's business and, subject to Section 9(j), the actions of the Officers
taken in accordance with such powers shall bind the Company.
(g) Duties of Board and Officers. Except to the extent otherwise
provided herein, each Director and Officer shall have a fiduciary duty of
loyalty and care similar to that of directors and officers of business
corporations organized under the General Corporation Law of the State of
Delaware.
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Section 12. Limited Liability.
Except as otherwise expressly provided by the Act, the debts,
obligations and liabilities of the Company, whether arising in contract, tort or
otherwise, shall be the debts, obligations and liabilities solely of the
Company, and neither the Member nor the Special Members nor any Director shall
be obligated personally for any such debt, obligation or liability of the
Company solely by reason of being a Member, Special Member or Director of the
Company.
Section 13. Capital Contributions.
The Member has contributed to the Company property of an agreed value
as listed on Schedule B attached hereto. In accordance with Section 5(c), the
Special Members shall not be required to make any capital contributions to the
Company.
Section 14. Additional Contributions.
The Member is not required to make any additional capital contribution
to the Company. However, the Member may make additional capital contributions to
the Company at any time upon the written consent of such Member. To the extent
that the Member makes an additional capital contribution to the Company, the
Member shall revise Schedule B of this Agreement. The provisions of this
Agreement, including this Section 14, are intended to benefit the Member and the
Special Members and, to the fullest extent permitted by law, shall not be
construed as conferring any benefit upon any creditor of the Company (and no
such creditor of the Company shall be a third-party beneficiary of this
Agreement) and the Member and the Special Members shall not have any duty or
obligation to any creditor of the Company to make any contribution to the
Company or to issue any call for capital pursuant to this Agreement.
Section 15. Allocation of Profits and Losses.
The Company's profits and losses shall be allocated to the Member.
Section 16. Distributions.
Distributions shall be made to the Member at the times and in the
aggregate amounts determined by the Board. Notwithstanding any provision to the
contrary contained in this Agreement, the Company shall not be required to make
a distribution to the Member on account of its interest in the Company if such
distribution would violate Section 18-607 of the Act or any other applicable law
or any Basic Document.
Section 17. Books and Records.
The Board shall keep or cause to be kept complete and accurate books of
account and records with respect to the Company's business. The books of the
Company shall at all times be maintained by the Board. The Member and its duly
authorized representatives shall have the right to examine the Company books,
records and documents during normal business hours. The Company, and the Board
on behalf of the Company, shall not have the right to keep confidential from the
Member any information that the Board would otherwise be permitted to keep
confidential from the Member pursuant to Section 18-305(c) of the Act. The
Company's books of account shall be kept using the method of accounting
determined by the Member. The Company's independent auditor, if any, shall be an
independent public accounting firm selected by the Member.
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Section 18. Reports.
(a) Within 60 days after the end of each fiscal quarter, the Board
shall cause to be prepared an unaudited report setting forth as of the end of
such fiscal quarter:
(i) unless such quarter is the last fiscal quarter, a
balance sheet of the Company; and
(ii) unless such quarter is the last fiscal quarter, an
income statement of the Company for such fiscal
quarter.
(b) The Board shall use diligent efforts to cause to be prepared and
mailed to the Member, within 90 days after the end of each fiscal year, an
audited or unaudited report setting forth as of the end of such fiscal year:
(i) a balance sheet of the Company;
(ii) an income statement of the Company for such fiscal
year; and
(iii) a statement of the Member's capital account.
(c) The Board shall, after the end of each fiscal year, use reasonable
efforts to cause the Company's independent accountants, if any, to prepare and
transmit to the Member as promptly as possible any such tax information as may
be reasonably necessary to enable the Member to prepare its federal, state and
local income tax returns relating to such fiscal year.
Section 19. Other Business.
The Member, the Special Members and any Affiliate of the Member or the
Special Members may engage in or possess an interest in other business ventures
(unconnected with the Company) of every kind and description, independently or
with others. The Company shall not have any rights in or to such independent
ventures or the income or profits therefrom by virtue of this Agreement.
Section 20. Exculpation and Indemnification.
(a) Neither the Member nor the Special Members nor any Officer,
Director, employee or agent of the Company nor any employee, representative,
agent or Affiliate of the Member or the Special Members (collectively, the
"Covered Persons") shall be liable to the Company or any other Person who has an
interest in or claim against the Company for any loss, damage or claim incurred
by reason of any act or omission performed or omitted by such Covered Person in
good faith on behalf of the Company and in a manner reasonably believed to be
within the scope of the authority conferred on such Covered Person by this
Agreement, except that a Covered Person shall be liable for any such loss,
damage or claim incurred by reason of such Covered Person's gross negligence or
willful misconduct.
(b) To the fullest extent permitted by applicable law, a Covered Person
shall be entitled to indemnification from the Company for any loss, damage or
claim incurred by such Covered Person by reason of any act or omission performed
or omitted by such Covered Person in good faith on behalf of the Company and in
a manner reasonably believed to be within the scope of the authority conferred
on such Covered Person by this Agreement, except that no Covered Person shall be
entitled to be indemnified in respect of any loss, damage or claim incurred by
such Covered Person by reason of such Covered Person's gross negligence or
willful
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misconduct with respect to such acts or omissions; provided, however, that any
indemnity under this Section 20 by the Company shall be provided out of and to
the extent of Company assets only, and the Member and the Special Members shall
not have personal liability on account thereof; and provided further, that so
long as any Obligation is outstanding, no indemnity payment from funds of the
Company (as distinct from funds from other sources, such as insurance) of any
indemnity under this Section 20 shall be payable from amounts allocable to any
other Person pursuant to the Basic Documents.
(c) To the fullest extent permitted by applicable law, expenses
(including legal fees) incurred by a Covered Person defending any claim, demand,
action, suit or proceeding shall, from time to time, be advanced by the Company
prior to the final disposition of such claim, demand, action, suit or proceeding
upon receipt by the Company of an undertaking by or on behalf of the Covered
Person to repay such amount if it shall be determined that the Covered Person is
not entitled to be indemnified as authorized in this Section 20.
(d) A Covered Person shall be fully protected in relying in good faith
upon the records of the Company and upon such information, opinions, reports or
statements presented to the Company by any Person as to matters the Covered
Person reasonably believes are within such other Person's professional or expert
competence and who has been selected with reasonable care by or on behalf of the
Company, including information, opinions, reports or statements as to the value
and amount of the assets, liabilities, or any other facts pertinent to the
existence and amount of assets from which distributions to the Member might
properly be paid.
(e) To the extent that, at law or in equity, a Covered Person has
duties (including fiduciary duties) and liabilities relating thereto to the
Company or to any other Covered Person, a Covered Person acting under this
Agreement shall not be liable to the Company or to any other Covered Person for
its good faith reliance on the provisions of this Agreement or any approval or
authorization granted by the Company or any other Covered Person. The provisions
of this Agreement, to the extent that they restrict the duties and liabilities
of a Covered Person otherwise existing at law or in equity, are agreed by the
Member and the Special Members to replace such other duties and liabilities of
such Covered Person.
(f) The foregoing provisions of this Section 20 shall survive any
termination of this Agreement.
Section 21. Assignments.
Subject to Section 23, the Member may assign in whole or in part its
limited liability company interest in the Company. If the Member transfers all
of its limited liability company interest in the Company pursuant to this
Section 21, the transferee shall be admitted to the Company as a member of the
Company upon its execution of an instrument signifying its agreement to be bound
by the terms and conditions of this Agreement, which instrument may be a
counterpart signature page to this Agreement. Such admission shall be deemed
effective immediately prior to the transfer and, immediately following such
admission, the transferor Member shall cease to be a member of the Company.
Notwithstanding anything in this Agreement to the contrary, any successor to the
Member by merger or consolidation in compliance with the Basic Documents shall,
without further act, be the Member hereunder, and such merger or consolidation
shall not constitute an assignment for purposes of this Agreement and the
Company shall continue without dissolution.
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Section 22. Resignation.
So long as any Obligation is outstanding, the Member may not resign,
except as permitted under the Basic Documents and if the Rating Agency Condition
is satisfied. If the Member is permitted to resign pursuant to this Section 22,
an additional member of the Company shall be admitted to the Company, subject to
Section 23, upon its execution of an instrument signifying its agreement to be
bound by the terms and conditions of this Agreement, which instrument may be a
counterpart signature page to this Agreement. Such admission shall be deemed
effective immediately prior to the resignation and, immediately following such
admission, the resigning Member shall cease to be a member of the Company.
Section 23. Admission of Additional Members.
One or more additional members of the Company may be admitted to the
Company with the written consent of the Member; provided, however, that,
notwithstanding the foregoing, so long as any Obligation remains outstanding, no
additional Member may be admitted to the Company unless the Rating Agency
Condition is satisfied.
Section 24. Dissolution.
(a) Subject to Section 9(j), the Company shall be dissolved, and its
affairs shall be wound up upon the first to occur of the following: (i) the
termination of the legal existence of the last remaining member of the Company
or the occurrence of any other event which terminates the continued membership
of the last remaining member of the Company in the Company unless the business
of the Company is continued in a manner permitted by this Agreement or the Act
or (ii) the entry of a decree of judicial dissolution under Section 18-802 of
the Act. Upon the occurrence of any event that causes the last remaining member
of the Company to cease to be a member of the Company, to the fullest extent
permitted by law, the personal representative of such member is hereby
authorized to, and shall, within 90 days after the occurrence of the event that
terminated the continued membership of such member in the Company, agree in
writing (i) to continue the Company and (ii) to the admission of the personal
representative or its nominee or designee, as the case may be, as a substitute
member of the Company, effective as of the occurrence of the event that
terminated the continued membership of the last remaining member of the Company
in the Company.
(b) Notwithstanding any other provision of this Agreement, the
Bankruptcy of the Member or a Special Member shall not cause the Member or
Special Member, respectively, to cease to be a member of the Company and upon
the occurrence of such an event, the business of the Company shall continue
without dissolution.
(c) In the event of dissolution, the Company shall conduct only such
activities as are necessary to wind up its affairs (including the sale of the
assets of the Company in an orderly manner), and the assets of the Company shall
be applied in the manner, and in the order of priority, set forth in Section
18-804 of the Act.
(d) The Company shall terminate when (i) all of the assets of the
Company, after payment of or due provision for all debts, liabilities and
obligations of the Company shall have
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been distributed to the Member in the manner provided for in this Agreement and
(ii) the Certificate of Formation shall have been canceled in the manner
required by the Act.
Section 25. Waiver of Partition; Nature of Interest.
Except as otherwise expressly provided in this Agreement, to the
fullest extent permitted by law, each of the Member and the Special Members
hereby irrevocably waives any right or power that such Person might have to
cause the Company or any of its assets to be partitioned, to cause the
appointment of a receiver for all or any portion of the assets of the Company,
to compel any sale of all or any portion of the assets of the Company pursuant
to any applicable law or to file a complaint or to institute any proceeding at
law or in equity to cause the dissolution, liquidation, winding up or
termination of the Company. The Member shall not have any interest in any
specific assets of the Company, and the Member shall not have the status of a
creditor with respect to any distribution pursuant to Section 16 hereof. The
interest of the Member in the Company is personal property.
Section 26. Benefits of Agreement; No Third-Party Rights.
None of the provisions of this Agreement shall be for the benefit of or
enforceable by any creditor of the Company or by any creditor of the Member or a
Special Member. Nothing in this Agreement shall be deemed to create any right in
any Person (other than Covered Persons) not a party hereto, and this Agreement
shall not be construed in any respect to be a contract in whole or in part for
the benefit of any third Person (except as provided in Section 29).
Section 27. Severability of Provisions.
Each provision of this Agreement shall be considered severable and if
for any reason any provision or provisions herein are determined to be invalid,
unenforceable or illegal under any existing or future law, such invalidity,
unenforceability or illegality shall not impair the operation of or affect those
portions of this Agreement which are valid, enforceable and legal.
Section 28. Entire Agreement.
This Agreement constitutes the entire agreement of the parties with
respect to the subject matter hereof.
Section 29. Binding Agreement.
Notwithstanding any other provision of this Agreement, the Member
agrees that this Agreement, including, without limitation, Sections 7, 8, 9, 10,
20, 21, 22, 23, 24, 26, 29 and 31, constitutes a legal, valid and binding
agreement of the Member, and is enforceable against the Member by the
Independent Directors, in accordance with its terms. In addition, the
Independent Directors shall be intended beneficiaries of this Agreement.
Section 30. Governing Law.
This Agreement shall be governed by and construed under the laws of the
State of Delaware (without regard to conflict of laws principles), all rights
and remedies being governed by said laws.
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Section 31. Amendments.
Subject to Section 9(j), this Agreement may be modified, altered,
supplemented or amended pursuant to a written agreement executed and delivered
by the Member. Notwithstanding anything to the contrary in this Agreement, so
long as any Obligation is outstanding, this Agreement may not be modified,
altered, supplemented or amended unless the Rating Agency Condition is satisfied
except: (i) to cure any ambiguity or (ii) to convert or supplement any provision
in a manner consistent with the intent of this Agreement and the other Basic
Documents.
Section 32. Counterparts.
This Agreement may be executed in any number of counterparts, each of
which shall be deemed an original of this Agreement and all of which together
shall constitute one and the same instrument.
Section 33. Notices.
Any notices required to be delivered hereunder shall be in writing and
personally delivered, mailed or sent by telecopy, electronic mail or other
similar form of rapid transmission, and shall be deemed to have been duly given
upon receipt (a) in the case of the Company, to the Company at its address in
Section 2, (b) in the case of the Member, to the Member at its address as listed
on Schedule B attached hereto and (c) in the case of either of the foregoing, at
such other address as may be designated by written notice to the other party.
Section 34. Effectiveness.
Pursuant to Section 18-201 (d) of the Act, this Agreement shall be
effective as of _______ __, 1999.
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IN WITNESS WHEREOF, the undersigned, intending to be legally bound
hereby, has duly executed this Amended and Restated Limited Liability Company
Agreement as of the ____ day of ___________, 1999.
MEMBER:
WEST PENN FUNDING CORPORATION
By: ________________________________
Name:
Title:
SPECIAL MEMBERS:
____________________________________
Name:
____________________________________
Name:
S-2
<PAGE> 17
SCHEDULE A
Definitions
A. Definitions
When used in this Agreement, the following terms not otherwise defined
herein have the following meanings:
"Act" has the meaning set forth in the preamble to this Agreement.
"Administrative Services Agreement" means the Administrative Services
Agreement dated as of [ ], 1999, between the Company and Allegheny Power Service
Corporation, as administrative agent, as the same may be amended or supplemented
from time to time.
"Affiliate" means, with respect to any Person, any other Person
directly or indirectly Controlling or Controlled by or under direct or indirect
common Control with such Person.
"Agreement" means this Amended and Restated Limited Liability Company
Agreement of the Company, together with the schedules attached hereto, as
amended, restated or supplemented or otherwise modified from time to time.
"Bankruptcy" means, with respect to any Person, if such Person (i)
makes an assignment for the benefit of creditors, (ii) files a voluntary
petition in bankruptcy, (iii) is adjudged a bankrupt or insolvent, or has
entered against it an order for relief, in any bankruptcy or insolvency
proceedings, (iv) files a petition or answer seeking for itself any
reorganization, arrangement, composition, readjustment, liquidation or similar
relief under any statute, law or regulation, (v) files an answer or other
pleading admitting or failing to contest the material allegations of a petition
filed against it in any proceeding of this nature, (vi) seeks, consents to or
acquiesces in the appointment of a trustee, receiver or liquidator of the Person
or of all or any substantial part of its properties, or (vii) if 120 days after
the commencement of any proceeding against the Person seeking reorganization,
arrangement, composition, readjustment, liquidation or similar relief under any
statute, law or regulation, if the proceeding has not been dismissed, or if
within 90 days after the appointment without such Person's consent or
acquiescence of a trustee, receiver or liquidator of such Person or of all or
any substantial part of its properties, the appointment is not vacated or
stayed, or within 90 days after the expiration of any such stay, the appointment
is not vacated. The foregoing definition of "Bankruptcy" is intended to replace
and shall supersede and replace the definition of"Bankruptcy" set forth in
Sections 18-101(1) and 18-304 of the Act.
"Basic Documents" means this Agreement, the Management Agreement, the
Sale Agreement, the Bill of Sale, the Servicing Agreement, the Indenture
(including any Series Supplement), the Administrative Services Agreement, the
Transition Bonds and all documents and certificates contemplated thereby or
delivered in connection therewith.
"Bill of Sale" means the Bill of Sale dated as of [ ], 1999, between
the Company and the Seller relating to the sale of the Intangible Transition
Property from the Seller to the Company.
"Board" or "Board of Directors" means the Board of Directors of the
Company.
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"Bond Trustee" means [ ], a [ ], as bond trustee under the Indenture,
or any successors to the foregoing.
"Certificate of Formation" means the Certificate of Formation of the
Company filed with the Secretary of State of the State of Delaware on May 26,
1999, as amended or amended and restated from time to time.
"Class" means, with respect to any Series, any one of the classes of
Transition Bonds of that Series.
"Company" means West Penn Funding LLC, a Delaware limited liability
company.
"Control" means the possession, directly or indirectly, of the power to
direct or cause the direction of the management or policies of a Person, whether
through the ownership of voting securities or general partnership or managing
member interests, by contract or otherwise. "Controlling" and "Controlled" shall
have correlative meanings. Without limiting the generality of the foregoing, a
Person shall be deemed to Control any other Person in which it owns, directly or
indirectly, a majority of the ownership interests.
"Covered Persons" has the meaning set forth in Section 20(a).
"Customers" means each person that (i) was a customer of West Penn
located within West Penn's retail electric service territory on January 1, 1997
or that became a customer of electric services within such territory after
January 1, 1997, (ii) is still located within such territory, and (iii) is in a
Rate Schedule that has been assigned stranded cost responsibility.
"Directors" means the Persons elected to the Board of Directors from
time to time by the Member, including the Independent Directors, in their
capacity as managers of the Company. A Director is hereby designated as a
"manager" of the Company within the meaning of Section 18-101(10) of the Act.
"Indenture" means the indenture dated as of [ ], 1999, between the
Company and the Bond Trustee, as the same may be amended and supplemented from
time to time, including by any Series Supplement.
"Independent Director" means a natural person who, for the five-year
period prior to his or her appointment as Independent Director has not been, and
during the continuation of his or her service as Independent Director is not:
(i) an employee, director, stockholder, partner or officer of the Company or any
of its Affiliates (other than his or her service as an Independent Director of
the Company); (ii) a customer or supplier of the Company or any of its
Affiliates; or (iii) any member of the immediate family of a person described in
(i) or (ii).
"Intangible Transition Charges" means the amounts authorized by the PUC
to be imposed on all Customer bills with respect to the Intangible Transition
Property and collected, through a non-bypassable mechanism, by West Penn or its
successor or by any other entity which provides electric service to Customers,
to recover Qualified Transition Expenses pursuant to the Qualified Rate Order.
"Intangible Transition Property" means the irrevocable right of West
Penn or its successor or assignee to collect Intangible Transition Charges from
Customers to recover the Qualified Transition Expenses described in the
Qualified Rate Order, including all right, title and interest of West Penn or
its successor or assignee in such order and in all revenues, collections,
A-2
<PAGE> 19
claims, payments, money or proceeds of or arising from Intangible Transition
Charges pursuant to such order, and all proceeds of any of the foregoing.
"Management Agreement" means the agreement of the Directors in the form
attached hereto as Schedule C. The Management Agreement shall be deemed
incorporated into, and a part of, this Agreement.
"Material Action" means to consolidate or merge the Company with or
into any Person, or sell all or substantially all of the assets of the Company,
or to institute proceedings to have the Company be adjudicated bankrupt or
insolvent, or consent to the institution of bankruptcy or insolvency proceedings
against the Company or file a petition seeking, or consent to, reorganization or
relief with respect to the Company under any applicable federal or state law
relating to bankruptcy, or consent to the appointment of a receiver, liquidator,
assignee, trustee, sequestrator (or other similar official) of the Company or a
substantial part of its property, or make any assignment for the benefit of
creditors of the Company, or admit in writing the Company's inability to pay its
debts generally as they become due, or, to the fullest extent permitted by law,
take action in furtherance of any such action, or dissolve or liquidate the
Company.
"Member" means West Penn Funding Corporation, as the member of the
Company, and includes any Person admitted as an additional member of the Company
or a substitute member of the Company pursuant to the provisions of this
Agreement, each in its capacity as a member of the Company; provided, however,
the term "Member" shall not include the Special Members.
"Obligations" shall mean the indebtedness, liabilities and obligations
of the Company under or in connection with this Agreement, the other Basic
Documents or any related document in effect as of any date of determination.
"Officer" means an officer of the Company described in Section 11.
"Officer's Certificate" means a certificate signed by any Officer of
the Company who is authorized to act for the Company in matters relating to the
Company.
"Person" means any individual, corporation, partnership, joint venture,
limited liability company, limited liability partnership, association, joint
stock company, trust, unincorporated organization, or other organization,
whether or not a legal entity, and any governmental authority.
"PUC" means the Pennsylvania Public Utility Commission or any
successor.
"Qualified Rate Order" means the order of the PUC issued on November
19, 1998, as supplemented by a supplemental qualified rate order of the PUC
issued on August 12, 1999, adopted in accordance with the Statute, which, among
other things, creates the Intangible Transition Property and authorizes the
imposition and collection of the Intangible Transition Charges by West Penn or
its assignee.
"Qualified Transition Expenses" has the meaning assigned to that term
in the Qualified Rate Order.
"Rate Schedule" means each of the rate schedules into which Customers
are divided as of the date hereof, as such rate schedules may be reconfigured
from time to time.
A-3
<PAGE> 20
"Rating Agency" means any rating agency rating the Transition Bonds of
any Class or Series at the time of issuance thereof at the request of the
Company. If no such organization or successor is any longer in existence,
"Rating Agency" shall be a nationally recognized statistical rating organization
or other comparable Person designated by the Company, notice of which
designation shall be given to the Bond Trustee under the Indenture and the
Servicer.
"Rating Agency Condition" means, with respect to any action, the
notification in writing by each Rating Agency to West Penn, the Seller, the
Servicer, the Bond Trustee and the Company that such action will not result in a
reduction or withdrawal of the then current rating by such Rating Agency of any
outstanding Series or Class of Transition Bonds issued by the Company.
"Sale Agreement" means the Intangible Transition Property Sale
Agreement dated as of [ ], 1999, between the Seller and the Company, relating to
the sale of Intangible Transition Property to the Company, as the same may be
amended or supplemented from time to time.
"Seller" means West Penn Funding Corporation and its successors in
interest to the extent permitted under the Sale Agreement.
"Series" means any series of Transition Bonds issued by the Company.
"Series Supplement" means an indenture supplemental to the Indenture
that authorizes a particular Series of Transition Bonds.
"Servicer" means West Penn, as the servicer of the Intangible
Transition Property, and each successor to West Penn (in the same capacity)
pursuant to Section 5.03 or 6.04 of the Servicing Agreement.
"Servicing Agreement" means the Servicing Agreement dated as of [ ],
1999, between the Company and the Servicer, as the same may be amended and
supplemented from time to time.
"Special Member" means, upon such person's admission to the Company as
a member of the Company pursuant to Section 5(c), a person acting as Independent
Director, in such person's capacity as a member of the Company. A Special Member
shall only have the rights and duties expressly set forth in this Agreement.
"Statute" means the Pennsylvania Electricity Generation Customer Choice
and Competition Act, Chapter 28 of Title 66 of the Pennsylvania Consolidated
Statutes, 66 Pa. C.S., Section 2801, et seq.
"Transition Bonds" means "transition bonds" (as defined in the Statute)
issued by the Company.
"West Penn" means West Penn Power Company, a Pennsylvania corporation.
B. Rules of Construction
Definitions in this Agreement apply equally to both the singular and
plural forms of the defined terms. The words "include" and "including" shall be
deemed to be followed by the phrase "without limitation." The terms "herein,"
"hereof" and "hereunder" and other words of similar import refer to this
Agreement as a whole and not to any particular Section, paragraph or
A-4
<PAGE> 21
subdivision. The Section titles appear as a matter of convenience only and shall
not affect the interpretation of this Agreement. All Section, paragraph, clause,
Exhibit or Schedule references not attributed to a particular document shall be
references to such parts of this Agreement.
A-5
<PAGE> 22
SCHEDULE B
Member
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
Agreed Value of Membership
Name Mailing Address Capital Contribution Interest
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
West Penn
Funding [$______________] 100%
Corporation
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
B-1
<PAGE> 23
SCHEDULE C
Management Agreement
______________________ __, 1999
Management Agreement --West Penn Funding LLC
For good and valuable consideration, each of the undersigned Persons,
who have been designated as directors of West Penn Funding LLC, a Delaware
limited liability company (the "Company"), in accordance with the Amended and
Restated Limited Liability Company Agreement of the Company, dated as of
______________________ __, 1999, as it may be amended or restated from time to
time (the "LLC Agreement"), hereby agree as follows:
1. Each of the undersigned accepts such Person's rights and authority
as a Director under the LLC Agreement and agrees to perform and discharge such
Person's duties and obligations as a Director under the LLC Agreement, and
further agrees that such rights, authorities, duties and obligations under the
LLC Agreement shall continue until such Person's successor as a Director is
designated or until such Person's resignation or removal as a Director in
accordance with the LLC Agreement. Each of the undersigned agrees and
acknowledges that it has been designated as a "manager" of the Company within
the meaning of the Delaware Limited Liability Company Act.
2. So long as any Obligation is outstanding, each of the undersigned
agrees, solely in its capacity as a creditor of the Company on account of any
indemnification or other payment owing to the undersigned by the Company, not to
acquiesce, petition or otherwise invoke or cause the Company to invoke the
process of any court or governmental authority for the purpose of commencing or
sustaining a case against the Company under any federal or state bankruptcy,
insolvency or similar law or appointing a receiver, liquidator, assignee,
trustee, custodian, sequestrator or other similar official of the Company or any
substantial part of the property of the Company, or ordering the winding up or
liquidation of the affairs of the Company.
3. THIS MANAGEMENT AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF DELAWARE, AND ALL RIGHTS AND REMEDIES
SHALL BE GOVERNED BY SUCH LAWS WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF
LAWS.
Initially capitalized terms used and not otherwise defined herein have
the meanings set forth in the LLC Agreement.
This Management Agreement may be executed in any number of
counterparts, each of which shall be deemed an original of this Management
Agreement and all of which together shall constitute one and the same
instrument.
C-1
<PAGE> 24
IN WITNESS WHEREOF, the undersigned have executed this Management
Agreement as of the day and year first above written.
__________________________
__________________________
__________________________
__________________________
__________________________
C-2
<PAGE> 25
SCHEDULE D
DIRECTORS
1.
2.
3.
4.
5.
C-3
<PAGE> 26
SCHEDULE E
OFFICERS TITLE
President
Vice President
Treasurer
Secretary
C-4
<PAGE> 1
EXHIBIT 4.4
REGISTERED $[ ]
No. ______
SEE REVERSE FOR CERTAIN DEFINITIONS
CUSIP NO.
THE PRINCIPAL OF THIS CLASS [ ] TRANSITION BOND WILL BE PAID
IN INSTALMENTS AS SET FORTH HEREIN. ACCORDINGLY, THE OUTSTANDING PRINCIPAL
AMOUNT OF THIS CLASS [ ] TRANSITION BOND AT ANY TIME MAY BE LESS THAN THE AMOUNT
SHOWN ON THE FACE HEREOF.
WEST PENN FUNDING LLC
TRANSITION BONDS, SERIES 1999-A, Class [ ].
<TABLE>
<CAPTION>
Bond Original Principal Expected Final
Rate Amount Payment Date
---- ------------------ --------------
<S> <C> <C>
[ ]% $[ ] [ ], [ ]
</TABLE>
West Penn Funding LLC, a limited liability company organized
and existing under the laws of the State of Delaware (herein referred to as the
"Issuer"), for value received, hereby promises to pay to the Registered Holder
hereof, or registered assigns, the Original Principal Amount shown above in
[quarterly] instalments on the Payment Dates and in the amounts specified on the
reverse hereof or, if less, the amounts determined pursuant to Section 8.02(d)
of the Indenture, in each year, commencing on the date determined as provided on
the reverse hereof and ending on or before the Class [ ] Termination Date, to
pay the entire unpaid principal hereof on the Class [ ] Termination Date and to
pay interest, at the Bond Rate shown above, on each [ ], [ ], [ ] and [ ] or if
any such day is not a Business Day, the next succeeding Business Day, commencing
on [ ], 1999 and continuing until the earlier of the payment of the principal
hereof and the Class [ ] Termination Date (each a "Payment Date"), on the
principal amount of this Class [ ] Transition Bond outstanding from time to
time. Interest on this Class [ ] Transition Bond will accrue for each Payment
Date from the most recent Payment Date on which interest has been paid to
<PAGE> 2
2
but excluding such Payment Date or, if no interest has yet been paid, from [ ],
1999. Interest will be computed on the basis of a 360-day year of four 90-day
periods. Such principal of and interest on this Class [ ] Transition Bond shall
be paid in the manner specified on the reverse hereof.
The principal of and interest on this Class [ ] Transition
Bond are payable in such coin or currency of the United States of America as at
the time of payment is legal tender for payment of public and private debts. All
payments made by the Issuer with respect to this Class [ ] Transition Bond shall
be applied first to interest due and payable on this Class [ ] Transition Bond
as provided above and then to the unpaid principal of and premium, if any, on
this Class [ ] Transition Bond, all in the manner set forth in Section 8.02(d)
of the Indenture.
Reference is made to the further provisions of this Class [ ]
Transition Bond set forth on the reverse hereof, which shall have the same
effect as though fully set forth on the face of this Class [ ] Transition Bond.
Unless the certificate of authentication hereon has been
executed by the Bond Trustee whose name appears below by manual signature, this
Class [ ] Transition Bond shall not be entitled to any benefit under the
Indenture referred to on the reverse hereof, or be valid or obligatory for any
purpose.
<PAGE> 3
3
IN WITNESS WHEREOF, the Issuer has caused this instrument to
be signed, manually or in facsimile, by an Authorized Officer of the Issuer.
Date:
WEST PENN FUNDING LLC,
by
---------------------------
Name:
Title:
<PAGE> 4
4
BOND TRUSTEE'S CERTIFICATE OF AUTHENTICATION
Dated: _______________, 199[ ]
This is one of the Class [ ] Transition Bonds of the Series
1999-A Transition Bonds, designated above and referred to in the
within-mentioned Indenture.
[BOND TRUSTEE], not in its
individual capacity but solely as
Bond Trustee on behalf of the
Transition Bondholders,
by
--------------------------
Authorized Signatory
<PAGE> 5
5
[REVERSE OF TRANSITION BOND]
This Series 1999-A, Class [ ] Transition Bond is one of a duly
authorized issue of Transition Bonds of the Issuer, designated as its Transition
Bonds (herein called the "Transition Bonds"), issued and to be issued in one or
more Series, which Series are issuable in one or more Classes, and this Series
1999-A Transition Bond, in which this Class [ ] Transition Bond represents an
interest, consists of 4 Classes, including the Class [ ] Transition Bonds
(herein called the "Class [ ] Transition Bonds"), all issued and to be issued
under an indenture dated as of [ ], 1999, and a series supplement thereto dated
as of [ ], 1999 (such series supplement, as supplemented or amended, the
"Supplement" and, collectively with such indenture, as supplemented or amended,
the "Indenture"), each between the Issuer and [ ], as Bond Trustee (the "Bond
Trustee", which term includes any successor bond trustee under the Indenture),
to which Indenture and all indentures supplemental thereto reference is hereby
made for a statement of the Collateral property pledged, the nature and extent
of the security, the respective rights, obligations and immunities thereunder of
the Issuer, the Bond Trustee and the Holders of the Transition Bonds and the
terms and conditions under which additional Transition Bonds may be issued. All
terms used in this Class [ ] Transition Bond that are defined in the Indenture,
as supplemented or amended, shall have the meanings assigned to them in the
Indenture.
The Class [ ] Transition Bonds, the other Classes of Series
1999-A Transition Bonds and any other Series of Transition Bonds issued by the
Issuer are and will be equally and ratably secured by the Collateral pledged as
security therefor as provided in the Indenture.
The principal of this Class [ ] Transition Bond shall be
payable on each Payment Date only to the extent that amounts in the Collection
Account are available therefor, and only until the outstanding principal balance
thereof on such Payment Date (after giving effect to all payments of principal,
if any, made on such Payment Date) has been reduced to the principal balance
specified in the Expected Amortization Schedule which is attached to the
Supplement as Schedule A, unless payable earlier either because (i) an Event of
Default shall have occurred and be continuing and the Bond Trustee or the
Holders of Transition
<PAGE> 6
6
Bonds representing not less than a majority of the Outstanding Amount of the
Transition Bonds of all Series have declared the Transition Bonds to be
immediately due and payable in accordance with Section 5.02 of the Indenture or
(ii) the Issuer, at its option, shall have called for the redemption of the
Series 1999-A Transition Bonds in whole or from time to time in part pursuant to
Section 10.01 of the Indenture. However, actual principal payments may be made
in lesser than expected amounts and at later than expected times as determined
pursuant to Section 8.02(d) of the Indenture. The entire unpaid principal amount
of this Class [ ] Transition Bond shall be due and payable on the earlier of the
Class [ ]Termination Date hereof and the Redemption Date, if any, herefor.
Notwithstanding the foregoing, the entire unpaid principal amount of the
Transition Bonds shall be due and payable, if not then previously paid, on the
date on which an Event of Default shall have occurred and be continuing and the
Bond Trustee or the Holders of the Transition Bonds representing not less than a
majority of the Outstanding Amount of the Transition Bonds have declared the
Transition Bonds to be immediately due and payable in the manner provided in
Section 5.02 of the Indenture. All principal payments on the Class [ ]
Transition Bonds shall be made pro rata to the Class [ ] Transition Bondholders
entitled thereto based on the respective principal amounts of the Class [ ]
Transition Bonds held by them.
Payments of interest on this Class [ ] Transition Bond due and
payable on each Payment Date, together with the instalment of principal or
premium, if any, due on this Class [ ] Transition Bond on such Payment Date
shall be made by check mailed first-class, postage prepaid, to the Person whose
name appears as the Registered Holder of this Class [ ] Transition Bond (or one
or more Predecessor Transition Bonds) in the Transition Bond Register as of the
close of business on the Record Date or in such other manner as may be provided
in the Supplement, except that with respect to Class [ ] Transition Bonds
registered on the Record Date in the name of a Clearing Agency, payments will be
made by wire transfer in immediately available funds to the account designated
by such Clearing Agency and except for the final instalment of principal and
premium, if any, payable with respect to this Class [ ] Transition Bond on a
Payment Date which shall be payable as provided below. Such checks shall be
mailed to the Person entitled thereto at the address of such Person as it
appears in the Transition Bond Register as of the applicable Record Date without
requiring
<PAGE> 7
7
that this Class [ ] Transition Bond be submitted for notation of payment. Any
reduction in the principal amount of this Class [ ] Transition Bond (or any one
or more Predecessor Transition Bonds) effected by any payments made on any
Payment Date shall be binding upon all future Holders of this Class [ ]
Transition Bond and of any Class [ ] Transition Bond issued upon the
registration of transfer hereof or in exchange hereof or in lieu hereof, whether
or not noted hereon. If funds are expected to be available, as provided in the
Indenture, for payment in full of the then remaining unpaid principal amount of
this Class [ ] Transition Bond on a Payment Date, then the Bond Trustee, in the
name of and on behalf of the Issuer, will notify the Person who was the
Registered Holder hereof as of the second preceding Record Date to such Payment
Date by notice mailed no later than five days prior to such final Payment Date
and shall specify that such final instalment will be payable to the Registered
Holder hereof as of the Record Date immediately preceding such final Payment
Date and only upon presentation and surrender of this Class [ ] Transition Bond
and shall specify the place where this Class [ ] Transition Bond may be
presented and surrendered for payment of such instalment.
The Issuer shall pay interest on overdue instalments of
interest on this Class [ ] Transition Bond at the Class [ ] Bond Rate to the
extent lawful.
As provided in the Indenture, the Class [ ] Transition Bonds
may be redeemed, in whole or from time to time in part, at the option of the
Issuer on any Redemption Date at the Redemption Price.
As provided in the Indenture and subject to certain
limitations set forth therein, the transfer of this Class [ ] Transition Bond
may be registered in the Transition Bond Register upon surrender of this Class [
] Transition Bond for registration of transfer at the office or agency
designated by the Issuer pursuant to the Indenture, duly endorsed by, or
accompanied by a written instrument of transfer in form satisfactory to the Bond
Trustee duly executed by the Holder hereof or his attorney duly authorized in
writing, with such signature guaranteed by an Eligible Guarantor Institution,
and thereupon one or more new Class [ ] Transition Bonds of any Authorized
Initial Denominations and in the same aggregate initial principal amount will be
issued to the designated transferee or transferees. No service charge will be
charged for any
<PAGE> 8
8
registration of transfer or exchange of this Class [ ] Transition Bond, but the
transferor may be required to pay a sum sufficient to cover any tax or other
governmental charge that may be imposed in connection with any registration of
transfer or exchange.
Each Class [ ] Transition Bondholder, by acceptance of a Class
[ ] Transition Bond, covenants and agrees that no recourse may be taken,
directly or indirectly, with respect to the obligations of the Issuer or the
Bond Trustee on the Class [ ] Transition Bonds or under the Indenture or any
certificate or other writing delivered in connection herewith or therewith,
against (i) any owner of a beneficial interest in the Issuer or (ii) any
partner, owner, beneficiary, agent, officer, director or employee of the Bond
Trustee, any holder of a beneficial interest in the Issuer or the Bond Trustee
or of any successor or assign of the Bond Trustee, except as any such Person may
have expressly agreed (it being understood that all of the Bond Trustee's
obligations are in its individual capacity).
Prior to the due presentment for registration of transfer of
this Class [ ] Transition Bond, the Issuer, the Bond Trustee and any agent of
the Issuer or the Bond Trustee may treat the Person in whose name this Class [ ]
Transition Bond is registered (as of the day of determination) as the owner
hereof for the purpose of receiving payments of principal of and premium, if
any, and interest on this Class [ ] Transition Bond and for all other purposes
whatsoever, whether or not this Class [ ] Transition Bond be overdue, and
neither the Issuer, the Bond Trustee nor any such agent shall be affected by
notice to the contrary.
The Indenture permits, with certain exceptions as therein
provided, the amendment thereof and the modification of the rights and
obligations of the Issuer and the rights of the Holders of the Transition Bonds
under the Indenture at any time by the Issuer with the consent of the Holders of
Transition Bonds representing a majority of the Outstanding Amount of all
Transition Bonds at the time Outstanding of each Series or Class to be affected.
The Indenture also contains provisions permitting the Holders of Transition
Bonds representing specified percentages of the Outstanding Amount of the
Transition Bonds of all Series, on behalf of the Holders of all the Transition
Bonds, to waive compliance by the Issuer with certain provisions of the
Indenture and
<PAGE> 9
9
certain past defaults under the Indenture and their consequences. Any such
consent or waiver by the Holder of this Class [ ] Transition Bond (or any one of
more Predecessor Transition Bonds) shall be conclusive and binding upon such
Holder and upon all future Holders of this Class [ ] Transition Bond and of any
Class [ ] Transition Bond issued upon the registration of transfer hereof or in
exchange hereof or in lieu hereof whether or not notation of such consent or
waiver is made upon this Class [ ] Transition Bond. The Indenture also permits
the Bond Trustee to amend or waive certain terms and conditions set forth in the
Indenture without the consent of Holders of the Transition Bonds issued
thereunder.
The term "Issuer" as used in this Class [ ] Transition Bond
includes any successor to the Issuer under the Indenture.
The Issuer is permitted by the Indenture, under certain
circumstances, to merge or consolidate, subject to the rights of the Bond
Trustee and the Holders of Transition Bonds under the Indenture.
The Class [ ] Transition Bonds are issuable only in registered
form in Authorized Initial Denominations as provided in the Indenture and the
Supplement, subject to certain limitations therein set forth.
This Class [ ] Transition Bond, the Indenture and the
Supplement shall be construed in accordance with the laws of the State of New
York, without reference to its conflict of law provisions, and the obligations,
rights and remedies of the parties hereunder and thereunder shall be determined
in accordance with such laws.
No reference herein to the Indenture and no provision of this
Class [ ] Transition Bond or of the Indenture shall alter or impair the
obligation of the Issuer, which is absolute and unconditional, to pay the
principal of and interest on this Class [ ] Transition Bond at the times, place,
and rate, and in the coin or currency herein prescribed.
<PAGE> 10
10
ASSIGNMENT
Social Security or taxpayer I.D. or other identifying number of assignee
___________________
FOR VALUE RECEIVED, the undersigned hereby sells, assigns
and transfers unto______________________________________________________________
________________________________________________________________________________
(name and address of assignee)
the within Class [ ] Transition Bond and all rights thereunder, and hereby
irrevocably constitutes and appoints
_______________________________________________________________________________,
attorney, to transfer said Class [ ] Transition Bond on the books kept for
registration thereof, with full power of substitution in the premises.
Dated: ___________________ __________________________*
Signature Guaranteed:
__________________________ ___________________________
* NOTE: The signature to this assignment must correspond with the name
of the registered owner as it appears on the face of the within Class [ ]
Transition Bond in every particular, without alteration, enlargement or any
change whatsoever.
<PAGE> 1
EXHIBIT 5.1
[LETTERHEAD OF RICHARDS, LAYTON & FINGER P.A.]
September 10, 1999
West Penn Funding LLC
800 Cabin Hill Drive
Greensburg, PA 15601
Re: West Penn Funding LLC -- Legality of Transition Bonds
Ladies and Gentlemen:
We have acted as special Delaware counsel for West Penn Funding
Corporation, a Delaware corporation ("Funding"), and West Penn Funding LLC, a
Delaware limited liability company (the "Company"), in connection with the
matters set forth herein. At your request, this opinion is being furnished to
you.
For purposes of giving the opinions hereinafter set forth, our
examination of documents has been limited to the examination of executed or
conformed counterparts, or copies otherwise proved to our satisfaction, of the
following:
(a) The Certificate of Formation of the Company, dated as of May 26,
1999, as filed in the office of the Secretary of State of the State of Delaware
(the "Secretary of State") on May 26, 1999;
(b) The Limited Liability Company Agreement of the Company, dated as
of May 26, 1999, executed by Carol G. Russ, as the sole member of the Company;
<PAGE> 2
West Penn Funding LLC
September 10, 1999
Page 2
(c) The Form of Assignment of Limited Liability Company Interest and
Amendment to Limited Liability Company Agreement of the Company, to be entered
into between Carol G. Russ, as the assignor, and Funding, as the assignee,
attached as an Exhibit to the Registration Statement (as hereinafter defined);
(d) The Form of Amended and Restated Limited Liability Company
Agreement of the Company (the "LLC Agreement"), to be executed by Funding, as
the sole member of the Company (the "Member"), and the Special Members (as
defined in the LLC Agreement), attached as an Exhibit to the Registration
Statement (as hereinafter defined);
(e) The form of Management Agreement, to be executed by each member
of the Board of Directors of the Company, including the Independent Directors
(as defined in the LLC Agreement);
(f) Amendment No. 2 to the Registration Statement (the
"Registration Statement") on Form S-3, including a related prospectus (the
"Prospectus"), to be filed by the Company with the Securities and Exchange
Commission on or about September 10, 1999;
(g) The form of Indenture, to be executed by the Company and the
Bond Trustee to be named therein, attached as an exhibit to the Registration
Statement pursuant to which the Transition Bonds are to be issued;
(h) The form of Series Supplement, to be executed by the Company and
the Bond Trustee (the "Series Supplement");
(i) The form of Transition Bonds, Series 1999-A, attached as an
Exhibit to the Series Supplement (the "Transition Bonds"); and
(j) A Certificate of Good Standing for the Company, dated September
8, 1999, obtained from the Secretary of State.
Initially capitalized terms used herein and not otherwise defined are
used as defined in the LLC Agreement. The documents listed in paragraphs (g)
and (h) above are hereinafter referred to each as a "Transaction Document" and
collectively as the "Transaction Documents."
For purposes of this opinion, we have not reviewed any documents
other than the documents listed in paragraphs (a) through (j) above. In
particular, we have not reviewed any document (other than the documents listed
in paragraphs (a) through (j)
<PAGE> 3
West Penn Funding LLC
September 10, 1999
Page 3
above) that is referred to in or incorporated by reference into any document
reviewed by us. We have assumed that there exists no provision in any document
that we have not reviewed that is inconsistent with the opinions stated herein.
We have conducted no independent factual investigation of our own but rather
have relied solely upon the foregoing documents, the statements and information
set forth therein and the additional matters recited or assumed herein, all of
which we have assumed to be true, complete and accurate in all material
respects.
With respect to all documents examined by us, we have assumed that (i) all
signatures on documents examined by us are genuine, (ii) all documents submitted
to us as originals are authentic, and (iii) all documents submitted to us as
copies conform with the original copies of those documents.
For purposes of this opinion, we have assumed (i) except to the extent
provided in paragraph 1 below, the due organization or due formation, as the
case may be, and valid existence in good standing of each party to the documents
examined by us under the laws of the jurisdiction governing its organization or
formation and the legal capacity of natural persons who are signatories to the
documents examined by us, (ii) except to the extent provided in paragraph 2
below, that each of the parties to the documents examined by us has the power
and authority to execute and deliver, and to perform its obligations under, such
documents, and (iii) except to the extent provided in paragraph 3 below, the due
authorization, execution and delivery by all parties thereto of all documents
examined by us. We have not participated in the preparation of the Registration
Statement and assume no responsibility for its contents.
This opinion is limited to the laws of the State of Delaware (excluding the
securities laws of the State of Delaware), and we have not considered and
express no opinion on the laws of any other jurisdiction, including federal laws
and rules and regulations relating thereto. Our opinions are rendered only with
respect to Delaware laws and rules, regulations and orders thereunder which are
currently in effect.
Based upon the foregoing, and upon our examination of such questions of law
and statutes of the State of Delaware as we have considered necessary or
appropriate, and subject to the assumptions, qualifications, limitations and
exceptions set forth herein, we are of the opinion that:
1. The Company has been duly formed and is validly existing in good
standing as a limited liability company under the laws of the State of Delaware.
<PAGE> 4
West Penn Funding LLC
September 10, 1999
Page 4
2. Under the Delaware Limited Liability Company Act, 6 Del. C. Section
18-101, et seq. (the "LLC Act") and the LLC Agreement, the Company has all
necessary limited liability company power and authority to execute and deliver
the Transaction Documents and issue the Transition Bonds, and to perform its
obligations under the Transaction Documents.
3. Under the LLC Act and the LLC Agreement, the execution and delivery by
the Company of the Transaction Documents and the Transition Bonds, and the
performance by the Company of its obligations under the Transaction Documents,
have been duly authorized by all necessary limited liability company action on
the part of the Company.
We consent to the filing of this opinion with the Securities and Exchange
Commission as an exhibit to the Registration Statement. In giving the foregoing
consent, we do not thereby admit that we come within the category of Persons
whose consent is required under Section 7 of the Securities Act of 1933, as
amended, or the rules and regulations of the Securities and Exchange Commission
thereunder. Except as stated above, without our prior written consent, this
opinion may not be furnished or quoted to, or relied upon by, any other Person
for any purpose.
Very truly yours,
/s/ Richards, Layton & Finger, P.A.
JGL/GWL/smc
<PAGE> 1
EXHIBIT 5.2
[Letterhead of]
CRAVATH, SWAINE & MOORE
[New York Office]
(212) 474-1000
September 10, 1999
West Penn Funding LLC
Registration Statement on Form S-3
(Registration No. 333-79619)
Ladies and Gentlemen:
We have acted as counsel to West Penn Funding LLC, a Delaware
limited liability company (the "Issuer"), in connection with the preparation of
the registration statement on Form S-3 (Registration No. 333-79619) and the
amendments thereto (the "Registration Statement") initially filed with the
Securities and Exchange Commission (the "Commission") on May 28, 1999, for the
registration under the Securities Act of 1933, as amended (the "Act"), of up to
$670,000,000 aggregate principal amount of the Issuer's Transition Bonds, Series
1999-A (the "Transition Bonds"), to be sold in a proposed public offering (the
"Offering"), all as set forth in the Registration Statement. The Transition
Bonds will be issued under an Indenture in the form of Exhibit 4.3 to the
Registration Statement (the "Indenture") to be executed by the Issuer and the
Bond Trustee named therein (the "Bond Trustee").
In that connection, we have examined originals, or copies
certified or otherwise identified to our satisfaction, of such documents,
limited liability company records and other instruments as we have deemed
necessary for the purposes of this opinion, including the following: (a) the
Certificate of Formation of the Issuer dated May 26, 1999 (the "Certificate of
Formation"), (b) the Amended and Restated Limited Liability Company Agreement of
the Issuer, (c) the Registration Statement and (d) the Indenture.
<PAGE> 2
2
Based upon the foregoing and in reliance thereon, and subject
to (i) compliance with applicable state securities laws, (ii) receipt from the
Securities and Exchange Commission of an order declaring the Registration
Statement effective and (iii) the filing with the Secretary of State of the
State of Delaware of the Certificate of Formation of the Issuer, it is our
opinion that when (A) the Bond Trustee is qualified to act as Bond Trustee under
the Indenture, (B) the Bond Trustee has duly executed and delivered the
Indenture, (C) the Indenture has been duly authorized and validly executed and
delivered by the Issuer to the Bond Trustee, (D) the Indenture has been duly
qualified under the Trust Indenture Act of 1939, as amended, (E) the Board of
Directors of the Issuer or a duly constituted and acting committee thereof (such
Board of Directors or committee being hereinafter referred to as the "Board")
has taken all necessary action to approve the issuance and terms of such
Transition Bonds, the terms of the Offering thereof and related matters, and (F)
such Transition Bonds have been duly executed, authenticated, issued and
delivered in accordance with the provisions of the Indenture, and the applicable
definitive underwriting or similar agreement approved by the Board upon payment
of the consideration therefor provided for therein, such Transition Bonds will
constitute valid and binding obligations of the Issuer, enforceable against the
Issuer in accordance with their terms (subject to applicable bankruptcy,
insolvency, reorganization, fraudulent conveyance, moratorium or other similar
laws affecting creditors' rights generally from time to time in effect and
subject to general principles of equity, regardless of whether considered in a
proceeding in equity or at law).
<PAGE> 3
3
We hereby consent to the filing of this opinion as an exhibit
to the Registration Statement, and we further consent to the use of our name
under the caption "Legal Matters" in the prospectus forming a part of said
Registration Statement. We further consent to the incorporation of this opinion
by reference as an exhibit to any Rule 462(b) Registration Statement. In giving
these consents, we do not hereby admit that we are within the category of
persons whose consent is required under Section 7 of the Act or the Rules and
Regulations of the Commission.
Very truly yours,
/s/ Cravath, Swaine & Moore
Cravath, Swaine & Moore
West Penn Funding LLC
800 Cabin Hill Drive
Greensburg, PA 15601
<PAGE> 1
EXHIBIT 8.1.1
[Letterhead of]
CRAVATH, SWAINE & MOORE
[New York Office]
(212) 474-1000
September 10, 1999
West Penn Funding LLC
-----------------------------------
Registration Statement on Form S-3
-----------------------------------
(Registration No. 333-79619)
-----------------------------------
Ladies and Gentlemen:
We have acted as special U.S. Federal income tax counsel to West Penn
Funding LLC, a Delaware limited liability company (the "Issuer"), in connection
with the preparation of the registration statement on Form S-3 (Registration No.
333-79619) and the amendments thereto (the "Registration Statement") initially
filed with the Securities and Exchange Commission (the "Commission") on May 28,
1999, for the registration under the Securities Act of 1933, as amended (the
"Act"), of up to $670,000,000 aggregate principal amount of the Issuer's
Transition Bonds, Series 1999-A (the "Transition Bonds"), to be sold in a
proposed public offering, all as set forth in the Registration Statement. The
Transition Bonds will be issued under an Indenture in the form of Exhibit 4.3 to
the Registration Statement (the "Indenture") to be executed by the Issuer and
the Bond Trustee named therein.
In that connection, we have examined originals, or copies certified or
otherwise identified to our satisfaction, of such documents, limited liability
company records and other instruments as we have deemed necessary for the
purposes of this opinion, including the following: (a) the Certificate of
Formation of the Issuer dated May 26, 1999, (b) the Amended and Restated Limited
Liability Company Agreement of the Issuer, (c) the Registration Statement,
<PAGE> 2
2
(d) the Indenture and (e) the Internal Revenue Service ruling issued to West
Penn Power Company dated July 23, 1999.
Based upon the foregoing and subject to the qualifications hereinafter
set forth, we are of the opinion that the statements in the prospectus (the
"Prospectus") forming a part of the Registration Statement under the headings
"Prospectus Summary--Tax Status" and "United States Taxation" accurately
describe the material U.S. tax consequences to holders of the Transition Bonds.
Our opinion is based upon existing statutory, regulatory and judicial
authority, any of which may be changed at any time with retroactive effect. Any
change in applicable laws or the facts and circumstances surrounding the
issuance, or any inaccuracy in the statements upon which we have relied, may
affect the continuing validity of our opinion as set forth herein. We assume no
responsibility to inform you of any such change or inaccuracy that may occur or
come to our attention. Finally, our opinion is limited to the tax matters
specifically covered hereby, and we have not been asked to address, nor have we
addressed, any other tax consequences to prospective investors of acquiring,
holding and disposing of the Transition Bonds.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement, and we further consent to the use of our name under the
headings "United States Taxation" and "Legal Matters" in the Prospectus. We
further consent to the incorporation of this opinion by reference as an exhibit
to any Rule 462(b) Registration Statement. In giving these consents, we do not
hereby admit that we are within the category of persons whose consent is
required under Section 7 of the Act or the Rules and Regulations of the
Commission.
Very truly yours,
/s/ Cravath, Swaine & Moore
Cravath, Swaine & Moore
West Penn Funding LLC
800 Cabin Hill Drive
Greensburg, PA 15601
<PAGE> 1
EXHIBIT 8.1.2.
[BALLARD SPAHR ANDREWS & INGERSOLL, LLP LETTERHEAD]
OPINION OF BALLARD SPAHR ANDREWS & INGERSOLL, LLP WITH RESPECT
TO MATERIAL COMMONWEALTH OF PENNSYLVANIA TAX MATTERS
September 10, 1999
West Penn Funding LLC
800 Cabin Hill Drive
Greensburg, PA 15601
RE: WEST PENN FUNDING LLC
Ladies and Gentlemen:
We have acted as special Pennsylvania tax counsel to West Penn Funding
LLC, a Delaware limited liability company (the "Company"), in connection
with the preparation of the Registration Statement, as amended to the date
hereof, filed on Form S-3 (the "Registration Statement") with the Securities
and Exchange Commission in connection with the registration under the
Securities Act of 1933, as amended, of Transition Bonds of the Company to be
offered from time to time as described in the prospectus (the "Prospectus")
included as part of the Registration Statement.
We hereby adopt and confirm to you our Pennsylvania tax opinion as set
forth under the headings "Summary of Terms - Tax Status" in the supplement to
the Prospectus and "Prospectus Summary - Tax Status" and "Material Commonwealth
of Pennsylvania Tax Matters" in the Prospectus, and hereby consent to the
filing of the opinion as an exhibit to the Registration Statement and the
reference to this firm under the headings "Summary of Terms - Tax Status" in
the supplement to the Prospectus and "Prospectus Summary - Tax Status" and
"Material Commonwealth of Pennsylvania Tax Matters in the Prospectus."
Very truly yours,
/s/ BALLARD SPAHR ANDREWS &
INGERSOLL, LLP
<PAGE> 1
EXHIBIT 10.4
BEFORE THE
PENNSYLVANIA PUBLIC UTILITY COMMISSION
Application of West Penn Power :
Company for Approval of its : Docket No. R-00973981
Restructuring Plan Under Section 2806 :
of the Public Utility Code, et al. :
JOINT PETITION FOR FULL SETTLEMENT OF
WEST PENN POWER COMPANY'S RESTRUCTURING PLAN AND
RELATED COURT PROCEEDINGS
November 3, 1998
i
<PAGE> 2
TABLE OF CONTENTS
1. SUMMARY OF SETTLEMENT................................................ 3
II. BACKGROUND.......................................................... 5
III. TERMS AND CONDITIONS............................................... 8
A. Stranded Costs.................................................... 8
B. Collection and Rates.............................................. 13
C. Provider of Last Resort........................................... 17
D. Environmental Issues.............................................. 22
E. Universal Service and Energy Conservation......................... 26
F. Industrial Tariffs................................................ 28
G. Billing and Metering.............................................. 29
H. Phase-In.......................................................... 34
I. EGS Function...................................................... 34
J. Code of Conduct................................................... 36
K. Transfer of Generating Assets..................................... 36
L. Miscellaneous..................................................... 39
M. Resolution of Other Issues........................................ 41
N. Withdrawal of Pending State And Federal Court Cases............... 41
O. Effectiveness, Duration And Enforcement Of Settlement............. 43
P. Complete Agreement; No Alterations Or Modifications............... 44
IV. PUBLIC INTEREST CONSIDERATIONS...................................... 46
V. CONCLUSION........................................................... 49
i
<PAGE> 3
APPENDICES TO JOINT PETITION FOR SETTLEMENT
A. Summary of West Penn Power Company's System Average
unbundled Rates and CTC Revenues
B. West Penn Power Company's General Tariffs
Supplement No. 119 to Tariff No. 37
Supplement No. 140 to Tariff No. 39
C. Rules for Competitive Billing and Metering
D. Rate Credits for Competitive Metering and Billing
E. Application of West Penn Power Company for a Qualified Rate Order
F. West Penn Power Company Electric Generation Coordination Tariff
G. West Penn Power Competitive Safeguards
H. West Penn Power Company Interim Code of Conduct
I. West Penn Power Company Competitive Organization
J. West Penn Power Company Generation Assets and Liability Accounts
for Transfer
K. West Penn Power Company Proof of Revenues (1999-2008)
[Appendices not included in this filing]
<PAGE> 4
BEFORE THE
PENNSYLVANIA PUBLIC UTILITY COMMISSION
Application of West Penn Power Company for :
Approval of Restructuring Plan Under : Docket No. R-00973981
Section 2806 of the Public Utility Code :
JOINT PETITION FOR FULL SETTLEMENT OF
WEST PENN POWER COMPANY'S
RESTRUCTURING PLAN AND
RELATED COURT PROCEEDINGS
West Penn Power Company ("West Penn" or "Allegheny" or
the"Company"); the Office of Consumer Advocate ("OCA"); the Office of Small
Business Advocate ("OSBA"); the Office of Trial Staff ("OTS"); the West Penn
Power Industrial Intervenors ("WPPII"); Allegheny Electric Cooperative ("AEC");
Pennsylvania Retailers' Association ("PRA"); Enron Power Marketing,
Inc.("Enron"); Mid-Atlantic Power Supply Association ("MAPSA"); New Energy
Ventures East L.L.C. ("NEV"); Community Action Association of Pennsylvania
("CAAP"); the Environmentalists; Hospital Shared Services, Inc./ Administrative
Resources, Inc. ("HSS/ARI"); and The Pennsylvania State University ("Penn
State"); PECO Energy Company ("PECO") and other parties designated on the
signature pages (all such parties collectively referred to as the "Joint
Petitioners"), by their counsel, respectfully submit this Joint Petition for
Full Settlement of West Penn's Proposed Restructuring Plan and Related Appeals
("Joint Petition").
The terms and conditions of the Joint Petition represent a
comprehensive settlement which resolves all issues before the Commonwealth Court
and all issues before the U.S. District Court arising from challenges by the
Joint Petitioners to the Commission's final order, reconsideration order,
compliance order and any related appeals regarding West Penn's Application for
Approval of its Restructuring Plan Under Section 2806 of the Public Utility
Code. The Joint Petitioners aver that this comprehensive settlement is in the
public
<PAGE> 5
interest and, therefore, request that the Commission: (1) approve without
modification the proposed settlement as set forth in the Joint Petition; (2)
amend the Commission's final order, reconsideration order and compliance orders
as necessary to implement the full settlement; (3) approve the tariff
supplements necessary to implement the proposed settlement as appended hereto;
(4) issue a Qualified Rate Order authorizing West Penn to securitize up to $670
million of stranded assets and costs as agreed to herein; (5) approve West
Penn's transfer of generation assets as set forth herein, including potential
adjustment of recovery of stranded costs determined, at West Penn's option, by
divestiture of generation assets; and (6) approve West Penn's establishment of a
regulatory asset for CTC revenues as described more fully herein.
In support of their request, the Joint Petitioners state as
follows:
2
<PAGE> 6
I. SUMMARY OF SETTLEMENT
The Joint Petitioners have agreed to the proposed settlement
terms and conditions set forth in this document as a means to resolve, finally
and equitably, all issues arising from West Penn's proposed restructuring plan,
in lieu of further protracted and expensive litigation in state and federal
courts.
In particular, the Joint Petitioners have agreed to terms and
conditions that fairly balance the interests of all parties affected by West
Penn's restructuring plan and that foster the creation of a competitive market.
All West Penn retail customer classes will receive a guaranteed 2.5% rate
reduction effective January 1, 1999, the start date of retail electric
generation competition, through December 31, 1999. In addition to the guaranteed
rate reduction, customers shall receive system-average shopping credits of 3.16
cents per KWH on January 1, 1999, with a steady escalation of the shopping
credit throughout the entire recovery period of the Competitive Transition
Charges ("CTCs"). Customers that elect to shop for generation could receive rate
reductions in 1999 equal to the 2.5% rate decrease plus savings produced by the
difference between their generation purchase price and their shopping credit. In
addition, West Penn agrees to cap its rates to customers at the levels currently
in effect until at least January 1, 2006 and its generation rates at the levels
set forth in Appendix A until at least January 1, 2009, subject to the terms
contained herein.
In the event that Allegheny Energy, Inc.'s ("Allegheny
Energy") proposed merger with DQE, Inc. ("DQE") is consummated, system average
shopping credits will escalate from 3.16 cents per KWH in 1999 to 4.09 cents per
KWH in 2008, and distribution rates will be reduced starting in 2001.
In addition, subject to the terms contained herein, West Penn
shall (1) recover a substantially smaller amount of stranded cost recovery than
it claimed before the
3
<PAGE> 7
Commission; (2) be subject to competitive safeguards to ensure fair dealing; (3)
expand its current universal service programs; (4) accelerate the phase-in for
customer choice for all customer classes; (5) educate consumers about
restructuring; (6) facilitate funding of sustainable energy; (7) encourage small
renewable energy technologies; (8) withdraw all of its proceedings before the
Commonwealth Court and its civil complaint before the U.S. District Court
challenging the Commission's Restructuring Order, Reconsideration Order, and
Compliance Orders at Docket No. R-00973981; (9) accelerate the recognition of
CTC revenue through the creation of a regulatory asset; (10) be required to
securitize up to 100% of stranded costs with 75% of the savings realized from
such securitization shared with consumers; (11) be permitted to transfer
generation assets to an affiliate; and (12) be required to adjust the CTC
recovery in the event West Penn sells its generation assets within the next
three years.
The other Joint Petitioners, in turn, agree to resolve all
objections to West Penn's Restructuring Plan, as set forth herein, and to
withdraw (1) all cases pending before the Commonwealth Court which challenge the
constitutionality of the Electric Competition Act except as specifically
provided in Paragraph N.5. and (2) all proceedings pending before the
Commonwealth Court which challenge the Commission's Restructuring Order,
Reconsideration Order and Compliance Orders at Docket No. R-00973981, as set
forth in Part N herein.
II. BACKGROUND
1. On December 3, 1996, Governor Ridge signed into law the
Electricity Generation Customer Choice and Competition Act (66 Pa. C.S.
Sections 2801 et seq.) (the "Electric Competition Act"). The Electric
Competition Act fundamentally restructures the
4
<PAGE> 8
provision of retail electric service in Pennsylvania by mandating the
introduction of customer choice of generation supplier commencing January 1,
1999.
2. On August 1, 1997, West Penn submitted a comprehensive
Restructuring Plan in which it requested the Commission to approve (1) the
imposition of unbundled rates, CTCs and specific tariff provisions to ensure
customers direct access to all electric generation suppliers licensed under
Chapter 28 of the Public Utility Code to offer services authorized under the
licenses within the Commonwealth of Pennsylvania ("EGSs"); (2) the recovery of
$1.2 billion of stranded costs net of mitigation; (3) the implementation of a
plan to meet its universal service obligations, including a mechanism to recover
the costs of those obligations; (4) the implementation of a proposed Consumer
Education Program; and (5) implementation of procedures to establish West Penn
as a provider of last resort.
3. West Penn provided notice of its Restructuring Plan filing
to all customers by bill insert. In addition, notice of the filing was published
in newspapers of general circulation in West Penn's service territory. West Penn
also provided a summary of the filing to all individuals on the Commission's
Executive Director's Stakeholders list.
4. West Penn's filing was assigned to Administrative Law Judge
Larry Gesoff (the "ALJ"). Thereafter, the parties above intervened in the
proceeding. Extensive testimony addressing almost every aspect of West Penn's
Restructuring Plan was filed by West Penn and the other active parties. In
addition, three public input hearings were held at which a total of thirteen
individuals testified. Evidentiary hearings were held on December 15-19, 1997,
and January 5-7, 1998. The record in this proceeding was closed on
5
<PAGE> 9
January 30, 1998. On February 12, 1998, ALJ Gesoff denied West Penn's Motion to
Compel and Reopen.
5. On March 23, 1998, ALJ Gesoff issued his Recommended
Decision. Among other things, the ALJ recommended that West Penn recover,
through the CTC, approximately $241 million in stranded costs.
6. At its public meeting on May 21, 1998, the Commission
adopted an Opinion and Order which modified the ALJ's Recommended Decision and
West Penn's proposed Restructuring Plan. The Opinion and Order, which issued on
May 29, 1998, determined, inter alia, that West Penn's proven net stranded costs
were $593 million (or $524.2 million in the event that the proposed merger
between Allegheny Energy and DQE is consummated) and that unbundling of West
Penn's rates resulted in a customer shopping credit of 3.12 cents per KWH in the
first year (assuming that the merger took place).
7. On June 12, 1998, West Penn and HSS/ARI, filed petitions
requesting that the Commission rehear, reconsider, clarify and amend certain
aspects of its Restructuring Order. By Opinion and Order entered July 21, 1998,
the Commission denied the petitions with a few limited exceptions; the
Commission granted West Penn's request to correct a typographical error which
incorrectly identified the date of full phase-in, and to correct an error in the
Deferred Emission Allowances calculation. This change increased the amount of
stranded costs recoverable by West Penn by $522,000. In order to preserve the
shopping credit of 3.12 cents per KWH in 1999, the Commission extended the
recovery period for West Penn's CTC through June 30, 2006.
6
<PAGE> 10
8. In response to the Restructuring Order entered May 29,
1998, the Reconsideration Order entered July 21, 1998, and the Commission's
orders on West Penn's compliance filings, West Penn has filed appeals to the
Commonwealth Court and a civil complaint action in the U.S. District Court. In
addition, an appeal to the Commonwealth Court challenging various aspects of the
Commission's orders has been filed by HSS/ARI. Cross appeals have been filed by
OCA and WPPII. WPPII also filed an appeal from one of the Commission's
Compliance Orders. An original jurisdiction action for Declaratory Judgment was
filed with the Commonwealth Court by West Penn on September 2, 1998.
9. On and after August 14, 1998, the Joint Petitioners signed
a "Pre-Settlement Agreement" designed to set forth the procedural ground rules
for participation in settlement negotiations aimed at resolving the matter in
lieu of further litigation in state and federal courts. Talks initially
terminated without a resolution, but were restarted on October 16, 1998. This
Joint Petition is the product of these negotiations.
III. TERMS AND CONDITIONS
1. The Joint Petitioners, intending to be legally bound and
for consideration given, agree as follows:
A. STRANDED COSTS
A. 1. West Penn shall be permitted to recover from
its retail electric customers $670 million of stranded assets and costs ($630
million in the event a merger with DQE occurs) through either a CTC (to remain
in effect from January 1, 1999 to December 31, 2008) and/or an Intangible
Transition Charge ("ITC") to be put in place any time after the effective date
of this Settlement and the issuance of transition bonds and to remain in effect
up to December 31, 2008.
7
<PAGE> 11
A.2. West Penn requests the Commission to declare
that good cause has been shown under Section 2808 of the Electric Competition
Act to permit West Penn to recover the stranded assets and costs set forth below
through a CTC or ITC extending to December 31, 2008. West Penn also requests
that the Commission expressly find that the transition and stranded cost
recovery and level of CTC/ITC charges to customers and the recording of a
regulatory asset associated with such recovery as provided herein are just and
reasonable and that securitization of up to $670 million of stranded costs is
just and reasonable and in the public interest.
A.3. The other Joint Petitioners do not object to
these findings. The total authorized recovery of $670 million (or $630 million
in the event of a merger with DQE) includes all amounts previously approved for
recovery by the Commission in its May 29, 1998 Restructuring Order and its July
21, 1998 Reconsideration Order at Docket No. R-00973981, and all amounts of
stranded cost recovery above the amount previously ordered by the Commission
shall be deemed to apply to West Penn's owned generation assets.
A.4. Under the terms of this Settlement, West Penn
shall be permitted to recover $670 million (or $630 million in the event of a
merger with DQE) for transition and stranded costs through a CTC and/or an ITC
as set forth in Appendices A, B and K and Paragraphs A.1, A.5, B.I. and B.2.
Subject to the provisions of Section A.6, this total authorized recovery of $670
million (or $630 million in the event of a merger with DQE) constitutes full and
final satisfaction of all transition and stranded costs that West Penn has
claimed or could have claimed before the Commission pursuant to Section 2808 of
the Electric Competition Act. The Appendices also set forth the shopping credits
and CTC recovery of $630 million dollars, in the event the merger with DQE is
consummated.
8
<PAGE> 12
A.5. West Penn will seek to securitize an amount not
exceeding $670 million (or $630 million in the event of a merger with DQE) in
stranded costs, subject to the requirements of the Electric Competition Act and
the terms and conditions set forth below. The Joint Petitioners agree that 75%
of the annual net savings of West Penn's securitization of stranded costs will
be applied to reduce the CTC/ITC as those savings are realized as set forth in a
securitization compliance filing and the remaining 25% of the annual net savings
of securitization will be retained by West Penn. The savings from securitization
are provided for in these CTC/ITC reductions and constitute full compliance with
Sections 2808(e) and 2812(b)(2) of the Electric Competition Act and no further
rate adjustment is required. 66 Pa. C.S. Sections 2808(e) and 2812(b)(2).
West Penn is required to seek securitization of its stranded assets and costs
under reasonable terms and conditions, absent a legal impediment as reasonably
determined by West Penn's Vice President-Legal. The effectiveness of this
Settlement is contingent upon the issuance by the Commission simultaneous with
approval of this Settlement of an irrevocable Qualified Rate Order as set forth
in Appendix E under Section 2812 of the Electric Competition Act (66 Pa. C.S.
Section 2812) authorizing the issuance of up to $670 million (or $630 million in
the event of a merger with DQE) of Transition Bonds at any time after the
issuance of such Qualified Rate Order, provided that the ITC charges to
customers terminate no later than December 31, 2008. West Penn hereby applies
for the issuance of a Qualified Rate Order as set forth in Appendix E which is
incorporated as a part of this Settlement. The Joint Petitioners agree not to
oppose West Penn's application for a Qualified Rate Order and West Penn's
securitization of its stranded assets and costs in accordance with this
agreement. The Joint Petitioners agree that, to the extent necessary, the
testimony, exhibits, applications and other documents submitted by the parties
and the record from the hearings in this proceeding form the basis for this
Settlement and West Penn's Application for a Qualified Rate Order.
9
<PAGE> 13
A.6 Notwithstanding anything else contained herein to
the contrary, in the event West Penn (or its affiliate, if a transfer has been
undertaken pursuant to Section K) enters into a definitive agreement to sell all
or a portion of its generating assets under the circumstances set forth below on
or before January 1, 2002, West Penn shall, upon application to and approval by
the Commission, adjust its stranded cost recovery amount to reflect actual
stranded costs as determined by a divestiture of generation assets. Such
adjustment shall only apply to generation sales pursuant to a voluntary
divestiture of all West Penn owned generation, or to an involuntary divestiture
of individual stations required by a final order of this Commission, the Federal
Energy Regulatory Commission or the Department of Justice as a condition of
approval for the proposed merger of Allegheny Energy and DQE. Such adjustment
shall take into account any expenses associated with a divestiture, including
any impact on securitization bonds. In the event of a partial divestiture,
ordered as set forth above, the Company's stranded costs will be adjusted by the
difference between the after tax proceeds from such sale and the market value of
the sold assets as set forth in Appendix L. If West Penn seeks a voluntary
divestiture of a portion of its generating assets, West Penn shall seek approval
of such transfer from the Commission and all parties reserve the right to
present all positions in that proceeding regarding appropriate adjustment to the
stranded cost amount.
A. 7. In the event West Penn (or its affiliate, if a
transfer has been undertaken pursuant to Section K) enters into a definitive
agreement to sell all of its generating assets after January 1, 2002, 100% of
the net Pennsylvania jurisdictional proceeds shall be utilized to offset all of
the Company's stranded costs (including all CTC collections) up to the total
amount of the stranded cost approved for recovery in this Settlement. Such
adjustment shall take into account any reasonable, verifiable and necessary
expenses associated with a divestiture, including any impact on securitization
bonds. If such
10
<PAGE> 14
transaction results in an increased stranded cost amount, no increased stranded
costs shall be recovered from ratepayers.
A. 8. West Penn agrees that it will not contend this
Settlement provides for inadequate recovery of NUG-related stranded costs as the
basis for unilaterally reducing the contract rates paid to FERC-qualifying
facilities selling power to West Penn under PUC-approved contracts. This
settlement is not intended to limit and does not limit, in any way any other
argument or claim West Penn may make regarding the rates paid to FERC-qualifying
facilities selling power to West Penn under PUC-approved contracts. This
settlement is also not intended to preclude and does not preclude mutually
agreed upon buy down or buy out agreements or any other voluntary contract
renegotiations.
B. COLLECTION AND RATES
B.1. West Penn shall reduce its retail electric rates
by 2.5% effective January 1, 1999, and that 2.5% rate decrease will continue in
effect through December 31, 1999. The January 1, 1999 rate decrease reflects the
Company's obligation, as of the effective date of this Settlement, to make a
refund to customers from 1998 revenues of $ 25.1 million (which excludes gross
receipts tax). The rate decrease will apply to each rate classification and all
customers within those rate classifications as set forth in Appendices B and K.
B.1.a. On January 1, 1999, West Penn will unbundle
its retail electric rates into the following components: (1) distribution
charges, (2) transmission charges, (3) a CTC and, if applicable, an ITC and (4)
a generation shopping credit. Transmission and distribution charges, and the
amount for the ancillary services included therein shall be priced and stated
separately. The system-wide average values for these components for the
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years and the appropriate income recognition for CTC amounts, both with and
without the merger, are indicated as set forth in the following Appendix A. The
proposed tariffs set forth in Appendix B are the tariffs that implement this
Settlement.
B.1.b. The parties have contested the appropriate
method of setting CTC rates. The parties agree to resolve this conflict by
acknowledging that the annual stranded cost values that West Penn is authorized
to receive are as specified in Appendix A. The resulting annual CTC Revenue
Requirements, subject to annual reconciliation and adjustment as required by
Section 2808(f) of the Act, to be collected from West Penn's customers are shown
in Appendix A which also shows how CTC revenues will be divided between
regulatory asset amortization and return. West Penn is authorized to create a
regulatory asset for the stranded cost recovery values for 1999 through 2002,
and the recovery of that regulatory asset shall be amortized over the years 2003
through 2008 as shown in Appendix A.
B.2. The Joint Petitioners agree that the rate cap
exceptions set forth in Section 2804(4) of the Electric Competition Act shall
apply to the rates set forth in this Settlement, except as otherwise
specifically set forth herein. If at any time during the CTC Recovery Period,
West Penn requests and is granted a rate increase pursuant to Section 2804(4) of
the Electric Competition Act (Rate Cap Exceptions) such increase shall not
reduce the shopping credits listed in Appendices A and B and such increase shall
be allocated to the appropriate unbundled rate category in accordance with
determinations of the Commission.
B.3. The cap on West Penn's transmission and
distribution charges, which otherwise would expire on June 30, 2001 under
Section 2804(4) of the Electric
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Competition Act (66 Pa. C.S. Section 2804(4)), will be extended until December
31, 2005 for all retail customers. As set forth in Appendices A and B, the
generation rate cap is extended from the end of 2005 to the end of 2008, three
years beyond the statutory rate cap period provided in the Electric Competition
Act, and is increased to 4.11 cents/KWH in 2006 and 2007, and increased to 4.39
cents/KWH in 2008. To the extent that West Penn transfers any generating
capacity to an affiliate pursuant to Paragraph K.1 of this Settlement, any power
subsequently purchased by West Penn from that affiliate shall be deemed to be
within the control of West Penn for purposes of determining the applicability of
the rate cap exception in Section 2804 (4)(iii)(D) of the Electric Competition
Act. In any proceeding under that subsection, the Commission shall consider the
impact of any sales by that affiliate to third parties in determining whether
the rate cap exception should be granted.
B.4. The Joint Petitioners shall not file a complaint
with the Commission or otherwise challenge West Penn's current retail
transmission or distribution rate structure, or the level of retail transmission
charges or the level of West Penn's retail distribution rates as set forth in
Appendices A and B hereto until the expiration of the transmission and
distribution cap as set forth above. Any Joint Petitioner, however, may
participate as a complainant or otherwise in any future transmission rate
proceeding in which an increase in West Penn's transmission rates or change in
rate structure is proposed and, further, may file a complaint or otherwise
participate in any proceeding before the Commission to adjust West Penn's
distribution rates as a result of any increase in West Penn's transmission rates
or change in rate structure in effect as of November 1, 1998.
B.5. The transmission and distribution rate cap of
1.73 cents per KWH includes 1.72 cents per KWH for all existing costs and
services and .01 cents per KWH for the sustainable energy fund during the
transmission and distribution rate cap
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period. No new fees shall be proposed or charged during the transmission and
distribution rate cap period for a cost or service that is included in the
bundled transmission and distribution rate. In the event of merger with DQE, the
transmission and distribution rates set forth in Appendix A will apply.
B.6. Pursuant to this Settlement, West Penn agrees to
cap the sum of its transmission and distribution charges, as described above.
If, during the period that this rate cap is in effect, West Penn's transmission
charges or rates (including but not limited to ancillary charges) are increased,
then West Penn's distribution rates will be reduced in a non-discriminatory
manner sufficient to avoid exceeding the transmission and distribution rate cap.
Within sixty days after issuance of a Federal Energy Regulatory Commission
("FERC") Order modifying West Penn's transmission revenue requirement or rate
structure to the extent that such change or modification affects West Penn's
transmission charges, West Penn shall submit a tariff supplement with supporting
data to the Pennsylvania Public Utility Commission which makes any necessary
changes to West Penn's distribution rates to ensure that the sum of the
distribution rates and the transmission rates and charges to each class of
customers does not exceed the transmission and distribution rate cap.
C. PROVIDER OF LAST RESORT
C.1. West Penn agrees that, for the duration of the
CTC/ITC recovery period, it will serve as the provider of last resort for all
retail electric customers in its service territory that do not choose or cannot
choose to purchase power from alternative suppliers, subject to the following
terms, conditions and qualifications:
C.1.a. 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
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from an EGS -- shall be assigned to a provider of last resort-default supplier
other than West Penn that will be selected on the basis of a Commission-approved
energy and capacity market price bidding process, except as provided in C.l.h.
This service shall be referred to as Competitive Default Service ("CDS").
C.1.b. For purposes of this bidding process, all of
the customers selected shall constitute a single bidding block. To qualify for
the CDS bidding process an EGS must, among other Commission-approved
requirements, agree to provide in 2002 at least 2.0% of its offered energy
supply for CDS service from solar, wind, sustainable biomass (including landfill
gas but excluding incineration of Municipal Solid Waste), geothermal or ocean
power. This increment shall increase by annual increments of 0.5% thereafter.
The requirement to include these levels of sources in the resource mix may be
lowered by the Commission if the cost of the power from these sources increases
the cost of the entire block by more than 2% over what the cost would be without
these sources.
C.1.c. Terms and conditions of CDS shall be
established, maintained, and modified by the Commission. Competitive Default
Service bids will require a term that will be established by the Commission.
Bids will provide a fixed rate for the term, unless an alternative rate
structure is approved by the Commission. Any bid that exceeds the generation
shopping credit will be rejected. West Penn's EDC or West Penn's divisional or
affiliated EGSs may not bid (either directly or as a partner or participant in
any business combination with a bidder) on CDS service. Any non-affiliated EGS
or consortium of EGSs that are licensed by the Commission and that meet
applicable terms and conditions and standards for CDS service may bid to provide
CDS service. Chapter 56 billing and collection costs, uncollectible expense, and
universal service costs shall be unbundled by West Penn. Revenues equal to the
amount of these unbundled costs shall be portable with customers
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randomly assigned to the CDS and shall be provided to the CDS provider to the
extent it is providing services funded by these unbundled costs.
C.l.d. A customer assigned to CDS retains the right
to elect a competitive EGS or return to West Penn default provider of last
resort service at any time with no switching charge. If a consumer returns to
CDS for any reason, the consumer will receive service from its CDS on the same
terms and conditions and at the same rate available to other CDS customers. The
CDS provider will, at the customer's option, provide a single bill, subject to
the same standards for EGS consolidated billing as provided in Appendix C and as
established by the Commission. The CDS will include all customer care functions,
including processing customer accounts in accordance with all applicable
regulations, including but not limited to Chapter 56. The CDS will be rebid
annually, unless an alternative bidding term is approved by the Commission. If,
30 days prior to the annual bid the number of residential customers served by
the CDS has fallen below 17%, a further random selection of customers shall be
assigned to CDS service to restore the number of customers for the 20% level.
The further random selection shall be chosen in a manner to be determined by the
Commission. The Commission will develop qualifications for an EGS to bid on CDS,
including credit worthiness and increased bond amount.
C.1.e. The EGS selected as the CDS provider will
assume all responsibilities and obligations associated with provider of last
resort service that are specified by the Commission. By January 1, 2001, the
Commission will issue final standards governing the PLR responsibilities and
obligations of West Penn and the CDS in West Penn's service territory. Provided,
however, that nothing in the Commission's final standards shall permit a CDS to
install, initially test or maintain a residential meter prior to January 1,
2003.
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C.l.f. West Penn's distribution company shall satisfy
its obligation as provider of last resort by maintaining or purchasing, at
wholesale, required amounts of energy and capacity from other generation
suppliers including, in its sole discretion, any generation affiliates, and
reselling that energy and capacity. Until January 1, 2001, West Penn will charge
customers its tariff rates as set forth in Appendices A and B.
C.1.g. On and after January 1, 2001 West Penn as
provider of last resort-default supplier will price its generation service to
residential customers at its sole discretion with the following limitations.
West Penn will establish a rate for each residential rate schedule. The rate
will be:
C.l.g. (i) no less than the price charged by the CDS
selected to be the alternative provider of last resort-default supplier in the
20% bid; and
C.1.g.(ii) no higher than the shopping credit.
C.1.h. In no event will the price exceed the shopping
credit or be lower than the winning CDS bid. In the event that no qualifying
bids are received at or below the shopping credit, West Penn shall provide PLR
service at the rate cap levels. Notwithstanding the above, West Penn retains the
right to file a petition with the Commission seeking authorization for a rate
cap exception pursuant to Section 2804 (4) (iii). Residential customers that
remain with or return to West Penn provider of last resort-default service will
pay the rate as set by West Penn during January of each year.
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C.1.i. West Penn, as provider of last resort-default
supplier, will price its service to industrial and commercial customers at
tariffed rates or at special contract rates as set forth in Appendix B.
C.1.j. The Joint Petitioners agree that through
December 31, 2008, customers may choose to purchase power from alternative
suppliers and later return to take generation service from West Penn's EDC, or
to their assigned provider of last resort-default supplier at the rates, riders
and schedules in the approved tariffs.
C.2. This Settlement does not address, and the Joint
Petitioners make no commitment regarding, West Penn's obligation to serve after
December 31, 2008, or the continuance or discontinuance of the right to choose
an alternative supplier and later return after December 31, 2008. The obligation
to serve beyond December 31, 2008 shall be subject to the Commission regulations
promulgated pursuant to Section 2807 (e), or any Commission order regarding the
obligation to serve.
D. ENVIRONMENTAL ISSUES
D.1. Renewable Energy Development. West Penn has
included in its Tariff a Net Energy Metering Rider (as shown in Appendix B)
which allows residential and small commercial customers to install and operate
renewable energy generation, including appropriate provisions for
self-generation and net metering. Renewable generation sources which qualify for
service may include photovoltaic systems, biomass, coal mine-based methane gas,
fuel cell, hydro, methane field, and wind. Also included, are hybrid renewable
generation systems and other renewable technologies specifically approved by the
Company.
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D.2. The design and installation of the customer's
generation must comply with all applicable laws and regulations and shall meet
all applicable safety and performance standards established by the National
Electric Code, the Institute of Electrical and Electronics Engineers,
Underwriters Laboratory and the Company. The Company has established standards
to insure safety and reliability of interconnected operations. These standards
are set forth in APS Engineering Manual Section 35, Subject Indices 1.0, 2.0 and
3.0 and are titled "Nonutility Generation", ("Standards"). These standards are
on file with the Pennsylvania Public Utility Commission and must be satisfied
before the Company will interconnect with the Customer. The interconnection
requirements for the inverter portion of photovoltaic systems as described in
IEEE P929 Recommended Practice for Utility Interface of Photovoltaic (PV)
Systems including its references to Inverter test procedure UL 1741 references
will be incorporated into the Company established standards as soon as the
recommended practice becomes a standard. As further evidence of West Penn's
commitment to this principal, the inspection fee included in Net Energy Metering
Rider for a qualifying photovoltaic generating system has been set at $35.00 and
the cost for the engineering review and inspection of other types of renewable
generation systems based on actual cost up to a maximum of $250.00.
D.3. Sustainable Energy Fund. West Penn will
establish a sustainable energy fund which shall be funded by a payment of
$11,425,721 on December 31, 1998. Beginning January 1, 2006, the fund shall be
funded from the 1.73 cents per KWH transmission and distribution rate at .01
cents per KWH (less applicable gross receipts tax) on all power sold after that
date, unless the Commission establishes new distribution rates. The .01 cent per
KWH shall not automatically be considered a cost of service element upon
expiration of the transmission and distribution rate cap. The Sustainable Energy
Fund shall be managed by an administrator designated by a seven-
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member Board of Directors to be nominated by the Joint Petitioners and approved
by the Commission. The fund shall operate according to the procedures set forth
in its by-laws, which are to be reviewed and approved by the Commission. The
fund is to have an annual audit and is to make semi-annual reports to the
Commission and to the parties. The purpose of the fund is to promote the
development and use of renewable energy and clean energy technologies, energy
conservation and efficiency which promote clean energy.
D.4. Renewable Energy Pilot Program. West Penn agrees
to implement a low-income renewable energy pilot program for 1999 and 2000 which
will consist of a solar hot water heater program and a photovoltaic program. The
number of installations of solar hot-water heaters and photovoltaics shall be
determined in a cooperative effort between West Penn, the Commission's Bureau of
Consumer Services, the Office of Consumer Advocate, the Community Action
Association of Pennsylvania, and the Pennsylvania Weatherization Providers Task
Force and other interested parties during the design and development of the
renewable energy pilot program. The renewable energy pilot program will be
operated by Pennsylvania Weatherization Providers Task Force members agencies.
The budget for the solar hot water heater program will be $110,000 for each
year. The 1999 budget for photovoltaic installations will be $125,000 and the
2000 budget will be $265,000. The photovoltaic program may include small-scale
wind and pv/wind hybrid systems. There will be a 5% administration factor for
the entire budget. Funding of the renewable energy pilot program will be
provided in the Universal Service and Energy Conservation budget other than the
mandated LIURP and LIPURP funding levels set forth in the Commission Order of
May 29, 1998. To the extent that the Company's renewable pilot program expenses
in a given year do not reach the budgeted levels noted above, such unexpended
funds will be rolled over to be spent in later years.
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D.5. ECAP Programs. In order to foster competition in
the retail residential electric market in the western Pennsylvania region, and
strengthen Pennsylvania's conservation and renewable energy initiatives, West
Penn agrees to contribute four million dollars ($4 million) of shareholder funds
to the Energy Cooperative Association of Pennsylvania (ECAP), a licensed
aggregator, for a four-year program aimed at: (i) providing residential
customers, particularly low-income and rural households, with lower priced
electricity than they could secure on their own; (ii) enabling low-income
customers to also realize long term savings through participation in ECAP's
conservation services program consistent with West Penn's obligation under
Section 2804 (15) of the Act; (iii) providing an opportunity for clean and
renewable energy sources to be expanded, and to become a greater part of the
energy mix in Pennsylvania; and (iv) providing a practical opportunity to create
a fuel mix source and emissions disclosure test/pilot program.
D.5.a. All ECAP low-income and rural programs and
services will be provided through the same Community-Based Organization networks
in the manner prescribed in paragraphs D.4. and E.2. of this document except
where these local providers are not in a position to or unwilling to provide the
programs and services.
D.5.b. All ECAP low-income and rural program designs
will be submitted for review to the Commission's West Penn Consumer Advisory
Committee as provided for in paragraph E.5 of this document. A report on this
project shall be submitted annually by ECAP to the West Penn Consumer Advisory
Committee.
E. UNIVERSAL SERVICE AND ENERGY CONSERVATION
E. 1. West Penn shall implement a Universal Service
and Energy Conservation Program, including LIPURP and LIURP programs, in the
manner and at the
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funding levels approved in the Commission's order of May 29, 1998, at pages
247-255. For purposes of this Settlement, the maximum level of funding as
approved in the Order -- $5.88 million per year for LIPURP, and $2.202 million
per year for LIURP, as well as the renewable energy pilot program -- shall be
deemed to be reflected in the residential distribution rates set forth in the
West Penn Tariff at Appendices B and K.
E.2. West Penn shall use Community-Action Agencies to
operate its LIPURP and Pennsylvania Weatherization Providers Task Force member
agencies to operate its LIURP.
E.3. To the extent that the Company's expenses in a
given year do not reach the funding levels noted above, the excess monies
collected for the universal service fund shall be rolled over to be spent in
later years for universal service programs.
E.4. The allocation of any universal service and
energy conservation program costs among customer classes after the end of the
distribution and transmission rate cap shall be determined by the Commission at
that time.
E.5. A consumer advisory committee made up of
consumer, environmental, rural, public and utility representatives from or
serving the West Penn service territory, including representatives of the
Community-Action Association of Pennsylvania and the Pennsylvania Weatherization
Task Force, and a staff member of the Commission's Bureau of Consumer Services,
will be established to participate in the development of the Company's universal
service and energy conservation programs. The committee will periodically review
the Company's universal service and energy conservation programs and the Company
will consider all committee recommendations.
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F. INDUSTRIAL TARIFFS
F.1. For Schedule 40 and 46, the Company will prorate
provisions of those rate schedules based upon the transmission, distribution and
generation services purchased by the customer from the Company to the extent
such purchases impact the rate schedule calculations for minimum billing
demands, minimum bills, billing demand ratchets, and base bill demand and
consumption.
F.2. For individual customers served on Schedules 40
and 46, 1998 demand and energy levels will be utilized as base year consumption
for purposes of calculating the individual customer's CTC. A customer's growth
in demand and energy usage above the customer's 1998 base year levels will be
exempted from competitive transition charges. In no circumstance will the total
CTC revenue allocated each year and collected from either Rate Schedule 40 or 46
be reduced due to this provision.
F.3. The Company will unbundle special and
individualized contracts into transmission, distribution, competitive transition
charge and shopping credit components such that any discount or credit applied
to each component will be portable and shall apply on a comparable basis whether
or not a customer chooses to obtain generation supply from a competitive
supplier.
F.4. The availability section of the Opportunity
Power Rider shall be amended in order to permit eight levels of Opportunity
Power to be scheduled in any billing month as opposed to the current limitation
of four levels.
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G. BILLING AND METERING
G.1. Commercial and Industrial Metering. Subject to
review as described in Paragraph G.7., in consultation with the Joint
Petitioners regarding operational constraints, effective September 1, 1999, a
Commission-licensed EGS may provide, finance, install, own, maintain, calibrate
and remotely read advanced meters for service to commercial and industrial
customers located in West Penn's service territory subject to the ability of the
EGS to comply with Appendix C.(1)
G.1.a. Starting August 1, 1999, West Penn shall
maintain costbased rates in its tariff, to be approved by the Commission, to be
offered to EGSs and customers for installation, initial testing and maintenance
services for commercial and industrial customer advanced meters.
G.2. Commercial and Industrial Billing. In
consultation with the Joint Petitioners and subject to operational constraints,
effective September 1, 1999, a Commission-licensed EGS may (in addition to any
other rights to act as agent for the customer set forth in West Penn's tariffs)
act as agent to provide a single bill and provide associated billing and
collection services to commercial and industrial customers located in West
Penn's service territory, subject to the ability of the EGS to comply with
Appendix C.
G.3. Residential Metering. In consultation with the
Joint Petitioners regarding operational constraints, effective September 1,
1999, a Commission-licensed EGS
- --------
(1) Appendix C contains: (1) the original Appendix C to the PECO
Settlement; (2) the comprehensive PECO Energy Company Competitive Metering
Specifications; (3) the comprehensive PECO Energy Company Competitive Billing
Specifications as approved by the Commission in PECO's restructuring docket: and
(4) the Commission's Order of July 1, 1998 implementing competitive billing and
metering standards (Commission Docket No. R-00973953 and P-00971265).
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may provide, finance, own, calibrate and remotely read advanced meters for
service to residential customers located in West Penn's service territory
subject to the ability of the EGS to comply with Appendix C. An EGS shall not
install, initially test or maintain advanced meters for service to residential
customers located in West Penn's service territory prior to January 1, 2003.
Prior to January 1, 2003, all advanced meters for residential consumers shall be
installed, initially tested and maintained by West Penn.
G.3.a. For the period between September 1, 1999 and
December 31, 2002, West Penn employees will install and initially test one
EGS-provided advanced meter per year for each residential account, and will
maintain such meter, without assessing any additional fees or charges on the
customer or the EGS. Starting August 1, 1999, West Penn shall maintain
cost-based rates in its tariff for installation, initial testing and maintenance
of additional advanced residential meters. Neither West Penn nor any EGS shall
assess any fees or charges to residential customers for meter testing or
maintenance, except as permitted by 52 Pa. Code Chapters 56 and 57.
G.3.b. Starting October 1, 2002, West Penn shall
include cost based rates in its tariff, to be approved by the Commission, to be
charged to EGSs and customers for installation, initial testing and maintenance
services for residential advanced meters.
G.4. Residential Billing. Effective September 1,
1999, a Commission-licensed EGS may (in addition to any other rights to act as
agent for the customer set forth in West Penn's tariffs) act as agent to provide
a single bill and provide associated billing and collection services to its
residential customers located in West Penn's service territory, subject to the
ability of the EGS to comply with Appendix C.
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G.5. Manual Meters. West Penn, as the EDC, shall
provide, finance, install, own, maintain, calibrate and read all manual meters
that are used to provide service to retail electric customers located in West
Penn's service territory.
G.6. Billing and Metering Credits. West Penn will
unbundle its retail electric rates for metering, metering services, meter
reading, and billing and collection services to provide credits for those
customers that have the right and elect to have an EGS perform these services.
The unbundled rates for each customer class are set forth in Appendices B and D.
G.7. Determination of potential implementation
impediments for Competitive Metering and/or Billing on September 1, 1999. The
Bureau of Audits, working with a third party consultant, shall conduct a review
of any constraints raised by West Penn that may prevent implementation of
competitive metering and/or billing on September 1, 1999. The third party
consultant, who shall possess expertise in the area of utility billing and
metering systems, will be selected by the Commission, in consultation with the
Joint Petitioners. The review will examine those constraints which cannot
reasonably be overcome in time to implement competitive metering and/or billing
by September 1, 1999 and, if constraints are identified, will provide a
recommendation as to when those constraints can be eliminated. The cost of the
third party consultant shall be borne by West Penn at a cost not to exceed
$100,000. The review shall be completed no later than June 30, 1999, and a
report shall be submitted to the Commission and provided to the Joint
Petitioners.
G.8. Development of Standards. By March 1, 1999, the
Joint Petitioners agree to modify Appendix C only as necessary to assure the
standards are consistent with West Penn's systems and the provisions set forth
in this Part.
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G.9. Commission Standards. Regardless of whether the
Joint Petitioners reach agreement on the development of standards, by August 1,
1999, the Commission shall establish metering and billing standards for the West
Penn service territory which adopt Appendix C and include only such modification
to Appendix C necessary to make the standards consistent with West Penn
operational systems, including the specific applicability of provisions
contained within 52 Pa. Code Chapters 56 and 57 to EGSs performing consolidated
billing. Upon the entry of a final Commission order, these standards will be
applicable to those services being offered by the EDC or the EGS. These
Commission standards shall also include, at a minimum, data exchange and billing
format standards to facilitate the efficient, speedy and nondiscriminatory
exchange of information between West Penn and EGSs necessary to a properly
functioning competitive market for retail electric generation services. An EGS
that bills EDC charges must comply with all billing and disclosure requirements
for EDC charges applicable to an EDC absent waiver by the Commission, including
the unbundling of transmission and distribution rates.
G.10. Physical Disconnection. Only West Penn EDC
employees can physically disconnect or reconnect a customer's distribution
service. Physical termination of service for nonpayment may only be permitted
for failure to pay for 2 EDC or PLR service.
H. PHASE-IN
H.1. Direct access to electric generation suppliers
will be phased in for all customers located in West Penn's service territory in
accordance with the West Penn Restructuring Order, in three steps -- one-third
of the non-coincident peak load of each customer class of service will have
access on January 1, 1999, two-thirds of the non-
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coincident peak load of each customer class on January 2, 1999, and the
remainder on January 2, 2000.
H.2. In the event the Commission determines that an
additional six- month transition period is necessary prior to implementation of
retail access on a statewide basis, pursuant to Section 2806(c)(1) and/or (c)(2)
of the Public Utility Code. West Penn's service territory will be subject to a
similar six-month extension. 66 Pa. C.S. Section 2806(c)(1) and (c)(2).
I. EGS FUNCTION
I.1. As set forth in Appendix 1, West Penn shall
continue to operate functionally separate delivery and supply units. West Penn
shall be permitted to have an EGS function subject to the Commission's
Competitive Safeguards and Code of Conduct in Appendices G and H.
Notwithstanding the above, West Penn is permitted to create an EGS that is
structurally separate from West Penn EDC and West Penn GENCO that can serve
retail load both inside and outside of West Penn's current certificated service
territory and such structurally separate EGS shall be bound by the Competitive
Safeguards and Code of Conduct in Appendices G and H.
I.2. The interim EGS license granted to West Penn
shall remain in effect and West Penn will be permitted to provide generation
supplier services under such license to customers to which it was providing
service on the date this settlement is approved by the Commission through the
end of the last billing month of the contract under which service is being
provided to customers as of the date of this agreement. Upon application,
compliance with all applicable Commission regulations and notice to all Joint
Petitioners,
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West Penn may, pursuant to this Part I or Part K herein, transfer such license
to an affiliated corporation, even if West Penn may no longer provide service
under such license.
I.3. The Commission will develop Codes of Conduct,
separate and distinct from Codes of Conduct established in this proceeding,
which will apply to EDC activities in the marketplace and which will clarify the
PLR function. Issuance of Interim Guidelines Addressing Electric Distribution
Companies' Activities Relating to Their Provider of Last Resort Function, Docket
No. M-00960890 F. 0017.
J. CODE OF CONDUCT
J.1. West Penn further agrees that it will be subject
to and governed by the Code of Conduct set forth in Appendix H to this Joint
Petition upon final Commission approval of this Settlement. The Code of Conduct
set forth in Appendix H shall remain applicable to West Penn until the later of
January 1, 2001, or the date when the statewide generic code of conduct
established by the Commission in its rulemaking becomes effective.
K. TRANSFER OF GENERATING ASSETS
K.1. West Penn and its subsidiaries are permitted,
but not required, to transfer, lease or assign all of their generating assets
and liabilities, as those assets and liabilities are delineated in its
Restructuring Plan filing and included at the date of transfer in the accounts
set forth in Appendix J hereto, and any other assets necessary for the operation
of the generating plants, and their wholesale power purchase contracts (other
than PUC-approved contracts with qualifying facilities selling power to West
Penn) to a separate corporate entity or entities. The entity or entities may, at
West Penn's discretion, be an affiliate or subsidiary of West Penn or its parent
or a non-affiliate. If an affiliate, such entity
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or entities may function as an EGS (as set forth in Section I above) outside of
West Penn's service territory starting January 1, 1999, and as an EGS inside
West Penn's service territory after January 1, 2004, as set forth in more detail
in the Competitive Safeguards and the Code of Conduct attached hereto as
Appendices G and H. Such entity may also receive an EGS license as set forth
herein.
K.2. The wholesale power purchase contracts
transferred will exclude those wholesale power purchase contracts that West Penn
utilizes to satisfy its provider of last resort obligations. West Penn shall
also assign any market price based retail contracts entered into under West
Penn's interim EGS license prior to the date of this agreement. The generating
assets and liabilities shall be transferred at their net book value at the date
of transfer. Once the transfer is completed, the generation entity, if an
affiliate of West Penn, will be regulated by the Commission only if it makes
retail sales, and then only as an EGS.
K.3. West Penn hereby requests, and the effectiveness
of this Settlement is conditioned upon, the Commission's approval, without
addition, condition or modification, of all aspects of West Penn's transfer of
its generation assets and liabilities and wholesale power purchase contracts
under this Settlement and licensing as an EGS of the entity receiving such
assets, and the Commission's issuance of such orders and certificates of public
convenience as are necessary to implement those transfers. The Commission
approval includes, but is not limited to, approval under Chapters 5, 11, 19, 21,
and 28 of the Public Utility Code (66 Pa.C.S.). The Commission's approval shall
expressly contain the statements required by section 32(c) of the Public Utility
Holding Company Act of 1935, 15 U.S.C. Section 79z-5a(c), to wit: that the
transfer (1) will benefit consumers, (2) is in the public interest and (3) does
not violate state law.
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<PAGE> 34
K.4. The Joint Petitioners expressly acknowledge that
such transfers may require various regulatory approvals or waivers, including,
without limitation, the FERC, the Securities and Exchange Commission and perhaps
other agencies and third parties not subject to West Penn's control, and
therefore the Joint Petitioners will neither oppose, nor support any opposition
to, West Penn's requests to obtain such approvals. If such authorizations or
waivers (other than approval by this Commission) are not obtained in a manner
acceptable to West Penn, then West Penn will not transfer the generation assets
or liabilities or contracts affected, provided, however that if a generating
asset, liability or contract is not transferred, West Penn will continue to
separate that asset, liability or contract and its operation from its regulated
transmission and distribution functions by organizing generation assets,
liabilities or contracts into a functionally separate business unit or units.
Failure to obtain such authorization or waiver will not affect any other aspects
of this Settlement.
K.5. West Penn and its affiliates and subsidiaries
agree to be bound by the competitive safeguard provisions set forth in Appendix
G. Upon request of a Joint Petitioner the information referenced in paragraph 8
of Appendix G shall be provided directly to the Joint Petitioner, who shall not
disclose or use the information in a manner that violates the Commission's
standard rules governing proprietary information. Complaints under these
provisions shall be filed with the Commission and finally adjudicated by the
Commission within sixty days of filing.
K.6. In the event West Penn transfers its assets as
set forth in this section, the affiliate to which such assets are transferred
shall offer its owned capacity and associated energy in the amounts set forth in
paragraph 7 of Appendix G, at non-
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discriminatory terms, rates and conditions to unaffiliated licensed EGSs through
the year 2002.
L. MISCELLANEOUS
L.1. All parties will commit to work with all other
parties to support and successfully implement all aspects of the Settlement
Agreement.
L.2. Not later than November 30, 1998, the Company
shall file with the FERC, with service on the Joint Petitioners, such provisions
of the Settlement Agreement (including Appendix F and other appendices) that the
Company believes require FERC approval in order to effectuate the Settlement
Agreement including filings necessary to adjust the Allegheny Power System Power
Supply Agreement and the Allegheny Generating Company Power Agreement. The
filings shall include only such provisions as have been agreed to by the Joint
Petitioners. The Joint Petitioners agree to support or not to oppose such
filings.
L.3. West Penn and AEC agree that the Company will
provide AEC the option, at AEC's sole discretion, to terminate, effective May 1,
1999, the generation capacity and energy services portions of the 1974 Electric
Service Agreement, as amended, ("ESA") for the delivery points designated in the
ESA with no continuing generation obligation and without any additional contract
costs, contract penalties, stranded costs or extra contractual costs relating to
generation services to AEC other than any obligation arising from the buyouts of
the Milesburg, Shannopin and Burgettstown PURPA projects, as may ultimately be
determined by specific final rulings from FERC or other court of competent
jurisdiction (the "Option"). However, the execution of the Joint Petition may
not, in any way, be used to support the existence of any such buyout
obligations. AEC retains its
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full rights to oppose any filing seeking recovery of such buyout costs from it.
The Option, if exercised by AEC, must be by a writing delivered to the Company
at least 45 days in advance of May 1, 1999. Notwithstanding any other provisions
of the Joint Petition, nothing in this Joint Petition other than this paragraph
shall be deemed a modification of the existing capacity and energy sale and
purchase requirements of the existing ESA. Without limitation of any existing
rights to termination of the ESA, AEC shall decide whether, at its sole option,
to discontinue the generation service provisions of the ESA at least 45 days
prior to May 1, 1999. Even if AEC exercises the Option, the delivery service
provisions of the ESA may, at AEC's sole option, remain in effect as provided
for in the ESA as agreed to by the Company and AEC. Notwithstanding any
provision of this Joint Petition, AEC retains any and all rights AEC may have
under the ESA and may participate in any proceeding regarding the transfer of
West Penn generating assets to protect AEC's rights under the ESA; provided that
AEC shall not oppose the transfer of any generating assets, as provided in
Paragraph K hereof.
M. RESOLUTION OF OTHER ISSUES
M.1. Any issue not specifically addressed in this
Settlement and related agreements shall be treated and resolved in accordance
with the resolution of that issue adopted by the Commission at this docket in
the Restructuring Order entered May 29, 1998, the Reconsideration Order entered
July 21, 1998, and Compliance Orders entered July 28, 1998 and September 17,
1998.
N. WITHDRAWAL OF PENDING STATE AND FEDERAL COURT CASES
N.1. Within ten days of the execution of this Joint
Petition by all of the Joint Petitioners, the Petitioners in the following cases
with the concurrence and support of the Commission and other parties and
intervenors that are Joint Petitioners hereto,
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shall petition the Commonwealth Court to continue generally, further
consideration of their respective actions (all such actions collectively
referred to as the "Commonwealth Court Actions"):
1592 C.D. 1998 Hospital Shared Services and Administrative Resources, Inc.,
Petitioners v. PaPUC, Respondent
1700 C.D. 1998 West Penn Power, Petitioner v. PaPUC, Respondent
1798 C.D. 1998 Irwin A. Popowsky, Consumer Advocate, Cross-Petitioner v
PaPUC, Respondent
1821 C.D. 1998 West Penn Power Industrial Intervenors, Petitioner v. PaPUC,
Respondent
2076 C.D. 1998 West Penn Power, Petitioner, v. PaPUC, Respondent
2225 C.D. 1998 Irwin A. Popowsky, Consumer Advocate, Petitioner v. PaPUC,
Respondent
2308 C.D. 1998 West Penn Power, Petitioner, v. PaPUC, Respondent
2771 C.D. 1998 West Penn Power Industrial Intervenors, Petitioner v. PaPUC,
Respondent
2793 C.D. 1998 West Penn, Petitioner v. PaPUC, Respondent
2310 C.D. 1998 Citizen's Power, Inc. and the Pa. Public Interest Research
Group, Petitioners v. Pa. PUC, Respondent
798 M.D. 1998 West Penn Power, Petitioner, v. PaPUC, Respondent
N.3. Within ten days of the execution of this Joint
Petition by all of the Joint Petitioners, West Penn shall petition the United
States District Court to continue generally its action filed at Civil Docket No.
98-1117 (W.D.Pa.).
N.4. Within ten days after the Commission's approval
of this Joint Petition becomes final and no longer subject to administrative or
judicial challenge, West Penn shall (a) withdraw with prejudice all of its
pending Commonwealth Court Actions, (b) withdraw with prejudice all of its
pending Commonwealth Court Reconsideration Actions and (c) dismiss with
prejudice, pursuant to Rule 41(a)(1), its pending civil action before the U.S.
District Court, and the other Joint Petitioners shall similarly withdraw with
prejudice all of their Commonwealth Court Actions and Commonwealth Court
Reconsideration Actions.
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N.5. The Joint Petitioners agree that they shall not
initiate or join in any court challenge, arising out of the issues resolved by
this Settlement, to the constitutionality or legality of the Electric
Competition Act such that would prevent or preclude implementation of this
Settlement or any of its terms, this Joint Petition for Settlement or any order
approving this Joint Petition, except as provided in Paragraph P.1., and
provided that, notwithstanding any other provision of this Joint Petition,
nothing in this Joint Petition shall prevent any Joint Petitioner that is a
party to the restructuring proceedings of another utility from initiating or
continuing any court challenge, including a challenge to the constitutionality
or legality of the Electric Competition Act, arising from such proceedings.
O. EFFECTIVENESS, DURATION AND ENFORCEMENT OF SETTLEMENT
O.1. The settlement proposed herein will go into
effect upon the Commission's issuance of a final order approving this Joint
Petition and all the settlement terms and conditions without modification. The
terms of this Settlement shall be implemented and enforceable notwithstanding
the pendency of a legal challenge to the Commission's approval of this Joint
Petition or to actions taken by another regulatory agency or Court, unless such
implementation and enforcement is stayed or enjoined by the Commission, another
regulatory agency, or a Court having jurisdiction over the matter.
O.2. The obligations under this Settlement that apply
for a specific term set forth herein shall expire automatically in accordance
with the term specified, and shall require no further action for their
expiration. This Settlement, including all of the terms and conditions set forth
above, shall expire on December 31, 2008 except with respect to those aspects of
this Settlement, orders of the Commission implementing this Settlement or
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<PAGE> 39
West Penn's tariff approved as part of this Settlement, implementation of which
necessarily must be completed beyond that date.
O.3. The Joint Petitioners may enforce this Joint
Petition through any appropriate action before the Commission or through any
other available remedy. Joint Petitioners shall consider any final Commission
order related to the enforcement or interpretation of this Joint Petition as an
appealable order to Commonwealth Court. This shall be in addition to any other
available remedy at law and equity.
O.4. If a court grants a legal challenge to the
Commission's approval of this Joint Petition and issues a final non-appealable
order which prevents or precludes implementation of any material term of the
Settlement, or if some other legal bar has the same effect, then this Settlement
is voidable, upon written notice by any Joint Petitioner.
P. COMPLETE AGREEMENT; NO ALTERATIONS OR MODIFICATIONS
P.l. This Settlement resolves, with prejudice, all of
the issues specifically addressed herein and precludes the Joint Petitioners
from asserting contrary positions with respect to any such issue during
subsequent litigation, provided, however, that this Settlement is made without
admission against or prejudice to any factual or legal positions which any of
the Joint Petitioners may assert: (i) in the event that the Commission does not
issue a final, non-appealable Order approving this Settlement without
modification; or (ii) in other Pennsylvania utilities' Restructuring proceedings
before the Commission under Section 2806(d) of the Electric Competition Act and
related appeals; or (iii) other proceedings before the Commission or other for
as long as such positions are not in derogation of this Settlement. The Joint
Petitioners agree that this Settlement shall not
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constitute or be cited as controlling precedent in any other proceedings,
including Pennsylvania utilities' restructuring proceedings before the
Commission under Section 2806(d). This Settlement is determinative and
conclusive of all of the issues addressed herein and constitutes a final
adjudication as to the Joint Petitioners of the matters thereof.
P.2. This Settlement is expressly conditioned upon
the Commission's approval of all of the specific terms and conditions contained
herein without modification. If the Commission should fail to grant such
approval, or should modify any of the terms and conditions herein, this
Settlement will terminate and be of no force and effect. The Joint Petitioners
will make best efforts to support this Settlement and to secure its approval by
the Commission.
P.3. It is expressly understood and agreed that this
Settlement constitutes a negotiated resolution solely of West Penn's
restructuring proceedings at Docket No. R-00973981 and the related court appeals
and other actions listed herein.
IV. PUBLIC INTEREST CONSIDERATIONS
The Joint Petitioners submit that this Settlement is in the
public interest and should be approved in full for the following reasons:
1. Competition Will Be Promoted. Customers will receive
shopping credits that may allow shopping customers to achieve bill savings. In
addition, there will be an immediate overall 2.5 % rate decrease in 1999.
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2. Transmission And Distribution Charges Will Be Capped For An
Additional Period. The Settlement provides that the cap on West Penn's
transmission and distribution charges, which otherwise would expire on June 30,
2001, will be extended through 2005.
3. Generation Rates Will Be Capped For An Additional Three
Years. The Settlement provides that a cap on West Penn's generation rates, which
otherwise would expire December 31, 2005, will be in place as provided in the
Electric Competition Act (66 Pa. C.S. Section 2804(4)), until December 31, 2008
and is increased as set forth in Appendix A hereto.
4. Universal Service Coverage Will Be Expanded. The Settlement
provides for expansion of funding levels for West Penn's LIPURP and LIURP
programs. In addition, non-shopping customers will be served by the West Penn
EDC in its role as a provider of last resort or a competitive provider of last
resort that will offer electric service at market determined rates.
5. Economic Development and the Environment Will Benefit. The
Settlement is intended to promote competition to the benefit of business and
industry as well as to residential consumers. The Settlement promotes renewable
energy development and provides for a renewable energy pilot program. The
Settlement also provides for a sustainable energy fund designed to promote the
development and use of renewable energy and clean energy technologies, energy
conservation and efficiency which promote clean energy.
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6. The Securitization of Stranded Assets Will Be Facilitated.
The Settlement provides for the Commission to issue a Qualified Rate Order
authorizing West Penn to securitize up to $670 million ($630 million in the
event of a merger with DQE) of its recoverable stranded assets and costs.
7. Substantial Litigation And Associated Costs Will Be
Avoided. The Settlement amicably resolves a number of important and contentious
issues raised in the proceeding and, at the same time, provides for the
withdrawal of various actions currently pending before state and federal courts.
The administrative and appellate burden and costs to litigate these matters,
including likely future appeals, to conclusion would be substantial.
8. The Settlement Is Consistent With Commission Policies
Promoting Negotiated Settlements. The Joint Petitioners arrived at the
settlement terms after conducting extensive discovery, submitting comprehensive
testimony and engaging in in-depth discussions. The settlement terms and
conditions constitute a carefully crafted package representing reasonable
negotiated compromises on the issues addressed herein. Thus, this Settlement is
consistent with the Commission's rules and practices encouraging negotiated
settlements (see 52 Pa. Code Sections 5.231, 69.391, 69.401).
V. CONCLUSION
WHEREFORE, the Joint Petitioners, intending to be legally
bound, respectfully request that the Commission: (1) approve the settlement
terms and conditions set forth in the Joint Petition without modification; (2)
amend the Commission's Restructuring Order and Reconsideration Order as
necessary to implement the proposed Settlement; (3) approve the Tariff
Supplements attached as Appendix B to become effective pursuant to the terms set
forth therein; (4) issue the Qualified Rate Order set forth in
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Appendix E hereto; (5) approve West Penn's transfer of generating assets as set
forth herein; and (6) approve West Penn's establishment of a regulatory asset
for certain CTC revenues as set forth herein.
The undersigned counsel or representatives certify that they
have full authority to enter into this settlement and to act on behalf of their
respective parties, and each is executing this agreement as a duly authorized
representative of such party.
- ------------------------------------------- ----------
Michael P. Morrell Date
For West Penn
- ------------------------------------------- ----------
Irwin A. Popowsky, Esquire Date
Tanya J. McCloskey, Esquire
Edmund J. Berger, Esquire
For Office of Consumer Advocate
- ------------------------------------------- ----------
Bernard A. Ryan, Jr., Esquire Date
Steven C. Gray, Esquire
For Office of Small Business Advocate
- ------------------------------------------- ----------
Charles F. Hoffman, Esquire Date
Scott H. DeBroff, Esquire
For Office of Trial Staff
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- ------------------------------------------- ----------
David M. Kleppinger, Esquire Date
Derrick Williamson, Esquire
For West Penn Power Industrial Intervenors
- ------------------------------------------- ----------
Kenneth Zielonis Date
For Pennsylvania Retailers' Association
- ------------------------------------------- ----------
William T. Hawke, Esquire Date
For Mid-Atlantic Power Supply Association
- ------------------------------------------- ----------
Barbara Kates-Garnick Date
Jeff Bladen
For New Energy Ventures
- ------------------------------------------- ----------
Kevin J. Moody, Esquire Date
For Enron Power Marketing, Inc.
- ------------------------------------------- ----------
Patricia Armstrong, Esquire Date
For Allegheny Electric Cooperative, Inc.
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- ------------------------------------------- ----------
Kathleen O'Reilly, Esq. Date
For Environmentalists
- ------------------------------------------- ----------
Mark Sundback, Esquire Date
For Hospital Shared Services/Administrative Resources, Inc.
- ------------------------------------------- ----------
Charles E. Thomas, Jr., Esquire Date
For Pennsylvania State University
- ------------------------------------------- ----------
Eugene Brady Date
For Community Action Association of Pennsylvania
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43
<PAGE> 1
EXHIBIT 99.1
PUBLIC UTILITY COMMISSION
HARRISBURG, PA 17105-3265
Public Meeting held November 19, 1998
Commissioners Present:
John M. Quain, Chairman
Robert K. Bloom, Vice Chairman
David W. Rolka, Statement attached
Nora Mead Brownell
Aaron Wilson, Jr.
Application of West Penn Power Company
for Approval of a Restructuring Plan Under
Section 2806 of the Code. Docket No. R-00973981
FINAL OPINION AND ORDER
BY THE COMMISSION:
Before the Commission for consideration are the comments filed with
respect to our Tentative Order, entered November 4, 1998, in the above-captioned
proceedings. These proceedings concern the restructuring plans and resulting
litigation arising under the Electric Generation Customer Choice and Competition
Act, 66 Pa. C.S. Sections 2801-2812 ("Act"), Of West Penn Power Company ("West
Penn" or "the Company"). Our Tentative Order approved the terms of a proposed
full settlement ("Settlement") set forth in the Joint Petition for Full
Settlement of West Penn's Restructuring Plan and Related Court Proceedings,
dated November 3, 1998 ("Joint Petition"). In the Tentative Order, we provided
that the determinations contained therein would not become final until this
Commission considered all timely filed comments and issued a final order.
Comments have been received from the Environmentalists ("the
Environmentalists"), and the Mid-Atlantic Power Supplier Association ("MAPSA").
Also, a group of Joint Petitioners involved with universal service
<PAGE> 2
issues -- West Penn, the Office of Consumer Advocate ("OCA"), Community Action
Agencies of Pennsylvania ("CAAP") and the Environmentalists -- filed a joint
comment. The Dollar Energy Fund ("DEF"), an independent non-profit organization
that provides energy assistance programs to low income families throughout
Pennsylvania, did not participate in the West Penn restructuring proceeding, but
did file a comment.
We also received timely comments from individual West Penn
customers: Mrs. Hiram Boggs, William J. Graham, Adam Kushner, George H. Milne,
Frank Beachly, Edward J. Giron, and John Zutko.
BACKGROUND
The Joint Petition dated November 3, 1998 has been filed with the
following signatories: West Penn; the OCA; the Office of Small Business Advocate
("OSBA"), the Office of Trial Staff ("OTS"), West Penn Power Industrial
Intervenors ("WPPII")(1), CAAP, Allegheny Electric Cooperative, Inc. ("AEC"),
the Pennsylvania State University ("Penn State"), Pennsylvania Retailers'
Association ("PRA"), the Environmentalists(2), Hospital Shared
Services/Administrative Resources, Inc. ("HHS/ARI"), and PECO Energy Company
("PECO") (all parties collectively referred to as the Joint Petitioners).
As noted in the Tentative Order, the proposed terms and conditions
of the Joint Petition represent a comprehensive settlement of the complex
matters involved in achieving the restructuring of West Penn. The Joint Petition
is intended to resolve all issues on appeal before the Commonwealth Court and
the United States District Court arising from challenges by various Joint
Petitioners to this Commission's final orders and related determinations
regarding West Penn's Application for Approval
- --------
(1) WPPII includes in its membership ARMCO, Inc. who had signed the Joint
Petition individually.
(2) The Environmentalists include The Sierra Club, The Group Against Smog and
Pollution, Clean Water Action, Citizen Power, Inc., The Pennsylvania Public
Interest Research Group and Citizens' Organization on Utility Policies.
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<PAGE> 3
of its Restructuring Plan under Section 2806 of the Public Utility Code, 66
Pa. C.S. Section 2806. The essential accomplishments of the Settlement are as
follows:
- customers will receive overall rate decreases of 2.5% during
1999;
- two-thirds of all customers will have the opportunity to
choose an alternate electric generation supplier on January 2,
1999;
- customers will receive shopping credits that may allow
shopping customers to achieve bill savings in addition to the
guaranteed rate cuts;
- provisions of the settlement will insure that a competitive
market for electricity will be created and functioning by
January 1, 1999;
- in the event that West Penn divests itself of generation
assets, the net jurisdictional proceeds will be used to offset
the Company's stranded costs, that is recoverable from
ratepayers through West Penn's Competitive Transition Charge;
- transmission and distribution rates will be capped for an
additional four and one-half years, (to December 31, 2005);
- the generation rate caps will be extended for an additional
three years;
- universal service program will be expanded, and a sustainable
energy fund will promote the development and the use of
renewable energy and clean energy technologies, energy
conservation and efficiency which will benefit the
environment;
- consumers will have the opportunity to receive metering and
billing services from competitive suppliers;
- a competitive market for the provider of last resort service
will be established so that non-shopping customers also have
the opportunity to realize bill savings; and
- substantial litigation and its associated costs and
uncertainties will be avoided.
Copies of the Joint Petition, Settlement and Appendices have been
served by West Penn on all parties to the proceeding by overnight mail or hand
delivery. Written notice of the proposed settlement has been provided by letter
to all West Penn customers, as well as posting in offices and on the
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Companies' Internet web page, and by news release. (See Tentative Order,
p. 2, n. 1).
DISCUSSION
COMMENTS OF THE ENVIRONMENTALISTS
A. NET METERING
In their comments, the Environmentalists voice support for the Joint
Petition but propose a substantive change -- that language in the Net Energy
Metering Rider be made consistent with the net metering provisions of the PECO
Energy Company's final order. The Environmentalists state that the language
proposed by the Company at "Metering" (paragraph 19 on page 4-12),
"Self-Generation Competitive Transition Charge" (paragraph 40 on page 4-33) and
"Net Energy Metering Rider" (pages 34-1 through 34-3) differs from the net
metering provisions approved in the previous three settlement agreements in the
following ways:
1. The West Penn rider states that customers with eligible
renewable energy projects are subject to the competitive
transition charge. In the previous cases, these projects
were exempt from the CTC. This provision destroys the
retail-in/retail-out up to net feature of the net
metering tariff.
2. The West Penn rider requires the customer to forfeit any
surplus of generation above generation during the
billing period. In the other settlements, the customer
that is likely to regularly generate a surplus can
choose either the two meter option or the smart meter
option to receive payment for energy its generates in
excess of consumption. The West Penn customer does not
have this option.
3. The West Penn rider does not give the customer the
option of using its existing non-ratcheted,
bi-directional meter. This meter option, present in the
other three settlements, is critical to keep the costs
reasonable.
4. The West Penn rider holds the customer responsible for
the cost of all changes in the distribution system. In
the other three settlements, the customer was not
responsible for the first $1,000 of local distribution
system upgrades.
4
<PAGE> 5
The Environmentalists' Comments, p.2.
The Environmentalists request that the above provisions be changed,
and expressed their willingness to work with the Company for inclusion in its
compliance filing to draft a net metering tariff that is consistent with earlier
settlements.
West Penn, in reply to the Environmentalists' comments, prefaces its
comments by pointing out that the Environmentalists fully participated in the
settlement negotiations, and that in the Agreement signed by the
Environmentalists they agree to support the Settlement Agreement before the
Commission and not to initiate or join in any court challenge of the Settlement
Agreement. (See Paragraph N.5.)
As to the Environmentalists' proposed changes, West Penn states that
it is willing to allow net metering through a non-ratcheted, bi-directional
meter if one is already in place (Item No. 3 on the Environmentalists' list). In
addition, West Penn is willing to allow those kilowatt-hours of customer use
that is supplied by the customer's own generation to be exempt from a CTC, with
the understanding that such treatment does not reduce the total amount of CTC
revenue which West Penn is authorized to collect from customers (Item No. 1 on
the Environmentalists' list).
However, in light of West Penn's contribution of $4 million in
shareholder funds to ECAP for development of conservation services and for
expansion of clean and renewable energy sources, West Penn does not support
adding provisions to the signed Agreement at this late date to incorporate Item
No. 2 (a buy back of customer generation) or Item No. 4 (free distribution
system upgrades) requested by the Environmentalists.
As there is agreement in regard to the Environmentalists' requested
changes regarding the allowance of net metering through a non-ratcheted,
bi-directional meter that is already in place (Item No. 1), and the exemption
from a CTC of those kilowatt-hours supplied for a customer's own use by the
customer's own generation (provided that the practice does not reduce the total
amount of CTC revenue which West Penn is authorized to collect
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<PAGE> 6
from customers)(Item. No. 3), the Commission will direct that these revisions be
made to West Penn's Tariff.
As to the other two proposed changes advanced by the
Environmentalists, the Commission must agree with West Penn. The Joint Petition
provides that any matter not specifically addressed is controlled by the
Commission's May 29, 1998 Order on West Penn Restructuring filing. Joint
Petition, Paragraph M.1. At p. 190 of that Order, the Commission specifically
rejected the Environmentalists' proposal that West Penn be required to purchase
generation from any customer. Accordingly, by the terms of the settlement, this
request cannot be granted.
In regard to the Environmentalists' request that West Penn provide
free distribution system upgrades to self-generators, the Joint Petition and the
Commission's May 29, 1998 orders and subsequent compliance filing orders are
silent. Section 2804(2) of the Act, 66 Pa. C.S. Section 2804(2), directs that
customers should be afforded "reasonable opportunities to self-generate and
interconnect." We believe that West Penn, in providing $4 million in funding to
ECAP's residential energy conservation and renewable resource program, has
sufficiently satisfied the Act's requirement. Therefore, we will deny the
Environmentalists' request for additional expenditures by West Penn relating to
self-generation.
B. IDENTIFICATION OF CITIZEN POWER, INC. AS FUND RECIPIENT
The Environmentalists also request a change to the language at
paragraph D.5 of page 25 of the Joint Petition that would include the
following language:
... West Penn agrees to contribute four million dollars ($4 million)
of shareholder funds to Citizen Power, Inc., the sponsor of the
western division of the Energy Association of Pennsylvania (ECAP), a
licensed aggregator, for a four year program...
The Environmentalists explain that there are two reasons for this
change. The first is that the proposed language more accurately reflects the
current status of ECAP as provided for in an agreement between ECAP and
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<PAGE> 7
Citizen's Power. Second, the proposed language will better preserve the funds
for the purpose described in paragraph D.5 of the Joint Petition. As a
tax-exempt cooperative, ECAP must distribute all residual proceeds to its
members each tax year. Unless the $4 million was totally spent in 1998, the
choice is distribute the remainder of the $4 million to ECAP's members, or for
ECAP to pay income tax on the unspent amount. The plan is to place the funds in
a tax-exempt account of Citizen Power until they are actually used to provide
ECAP services.
In its comment, the Environmentalists state that West Penn has
approved this revision to the Settlement's language and that OCA has no opinion
about the proposed revision. In its reply comments, West Penn reiterates that it
does not object to the addition of the language in Paragraph D.5 if it is
included in the Commission's Final Order. Accordingly, the Commission directs
that the language in Paragraph D.5 is revised as proposed by the
Environmentalists.
COMMENTS OF THE DOLLAR ENERGY FUND; COMMENTS FILED BY JOINT PETITIONERS
REGARDING THE PROVISION OF UNIVERSAL SERVICE.
In its comments, DEF requests that the Commission change language
that appears at Paragraph E.2 of the Joint Petition. This language reads as
follows:
West Penn shall use Community Action Agencies to operate its LIPURP
and Pennsylvania Weatherization Providers Task Force member agencies
to operate its LIURP.
DEF, who was not a participant in West Penn's Restructuring
Proceeding or in the Joint Petition for Settlement, comments that the above
language is restrictive and precludes other qualified community agencies, such
as DEF, from working with West Penn to administer their universal service
programs. DEF requests that generic language be substituted for this restrictive
provision:
E.2. West Penn shall use community-based agencies to operate
its LIPURP and LIURP.
7
<PAGE> 8
Alternate language for this paragraph is offered in comments filed
by those Joint Petitioners who were interested in the Settlement's universal
service provisions -- Office of Consumer Advocate, CAAP, West Penn and the
Environmentalists. OCA explains that it had contacted the other parties and had
worked with DEF to attempt to reach agreement on the language that could be
substituted for original language in Paragraphs D.5.a and E.2.
This substitute language reads as follows:
D.5.a. All ECAP low income and rural programs and services will
be provided through Community Action Agencies and
Pennsylvania Weatherization Task Force member agencies
except where these local providers are not in a position
to or are unwilling to provide the programs and
services.
E.2. West Penn shall use Dollar Energy Fund (Dollar
Energy) and Community Action Agencies to
operate its LIPURP and Pennsylvania
Weatherization Providers Task Force member
agencies to operate its LIURP unless these
agencies are unavailable or unwilling to provide
the programs and services. With respect to LIURP,
Dollar Energy will provide prescreening and
referral. Additionally, 50-75% of all LIURP jobs
will receive quality control inspection from Dollar
Energy.
OCA states that it is authorized to state that CAAP, West Penn, OCA
and the Environmentalists agree that the Settlement should be modified to
incorporate this language, and request that the Commission direct that the
modification be made. OCA also states that DEF has informed the OCA that the
language in Paragraph E.2 would allow DEF to continue providing services in West
Penn service territory and that it would not oppose this language.
In its reply comments, West Penn states that it concurs in the
adoption of the language presented by OCA for Sections D.5.a and E.2 of the
Agreement and extends its appreciation to OCA for its lead role in resolving
universal service issues in a way that will allow DEF to continue providing
service in West Penn's service area.
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In light of the agreement of those Joint Petitioners who are
involved with universal service issues that these amendments to the Joint
Petition should be made, the Commission will direct that these provisions should
be so revised.
COMMENTS OF MAPSA
In its comments(3), MAPSA seeks a clarification as to a specific
portion of the Supplier Coordination Tariff that had been appended to the Joint
Petition as Appendix F. Specifically, MAPSA is concerned with Section 6.2.6 that
provides for the calculation of the percentage of a load attributable to an
electric generation supplier ("EGS"), and the percentage of a load attributable
to West Penn during the phase-in period. MAPSA states that this provision is
silent as to which entity's energy is considered to be the "first through the
meter" for purposes of calculating a customer's shopping credit. MAPSA explains
that because West Penn has a declining block rate structure, the entity whose
energy is considered as being the first through the meter determines the size of
the customer's shopping credit. MAPSA further explains that if a supplier's
energy is considered to be the first through the meter, the customer will have a
larger shopping credit with which to shop, but if the converse is true, namely
if West Penn's energy is calculated to be the first through the meter, the
customer will have a much smaller shopping credit (considering that West Penn's
energy as being first pushes the energy usage used to calculate the shopping
credit out to the lower blocks of the rate schedule, thus creating a smaller
shopping credit for the customer). MAPSA claims that calculating West Penn's
portion of load as being first through the meter discourages customers from
shopping.
MAPSA requests that the Commission clarify Section 6.2.6 of West
Penn's Supplier Tariff and require that an EGS's portion of the load be counted
as "first through the meter" for all purposes. MAPSA notes that the
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(3) In its comments, MAPSA states that with regard to those portions of the
Competitive Safeguards (Appendix G), in particular Articles 5, 6 and 7, it will
communicate with West Penn regarding standards for posting transactions,
offerings to the market, etc., and will attempt to meet with West Penn to
address these issues. MAPSA states that the results of these discussions will be
submitted to the Commission where appropriate.
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Commission approved this provision in PP&L Inc.'s Supplier Coordination Tariff,
and that the PP&L tariff was the basis for discussion of West Penn's tariff.
MAPSA states that West Penn is currently calculating its energy as being first
through the meter and that this practice deprives "commercial and industrial
customers of the benefit of the bargain, and essentially will vitiate the
two-thirds phase-in." For these reasons, MAPSA requests that the Commission
adopt this clarification.
In its reply comments, West Penn states that the "first through the
meter" issue for partial loads has been extensively debated and resolved during
the proceeding. West Penn further states that the issue was initially raised by
WPPII in its comments to West Penn's Compliance Filing of June 18, 1998. In
response to these comments, by order, the Commission directed West Penn to
demonstrate that its methodology for partial loads would not place customers on
a different, less advantageous rate or violate the rate provisions of the Act.
Order entered July 23, 1998 at Docket No. R-00973981, p. 24.
West Penn continues that in its Revised Compliance Filing of August
19, 1998, it demonstrated that it would split charges during the phase-in for
customers with loads being served both by West Penn's EDC and the EGS, assuming
a full enrollment and 66 percent of the load available to shop. The example
submitted with the Compliance Filing shows that the West Penn and the EGS
provide generation at the same overall load factor.
West Penn then states that on September 17, 1998, the Commission
entered an Opinion and Order on the Company's Revised Compliance Filing which
addressed WPPII's concerns for partial load industrial customers. In its
September 17, 1998 Order, the Commission summarized the WPPII contentions with
respect to receiving service at a different, less advantageous rate and
summarized WPPII's contention that West Penn should be directed to implement
phase-in for partial load on a load-following basis. In resolving the
contentions of West Penn and WPPII, the Commission stated that it believed that
the methodology employed by
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West Penn reasonably allocates customers' consumption between the EDC and the
EGS, and further that West Penn's methodology has only a de minimis impact, if
any, on a customer's ability to shop.
West Penn states further that at the time of negotiations the issue
about partial loads during the phase-in period arose again. West Penn claims
that it was considered in the context of the whole negotiation and settlement,
and that WPPII has agreed to withdraw its appeal relating to partial load as
part of the broader settlement, and submits that the issue has been fully
resolved.
The Commission has considered the merits of these arguments in the
context of this proceeding and agrees with West Penn. The issue has been
considered by this Commission in the context of West Penn's previous compliance
filings and has been resolved. Order entered September 17, 1998 at Docket No.
R-00973981, p. 19. In that order, the Commission found that West Penn's
methodology for allocation of partial customer loads as presented in its
compliance filings had only a de minimis impact on a customer's ability to shop.
We therefore decline to make this clarification.
COMMENTS FROM INDIVIDUAL WEST PENN CUSTOMERS
The individual comments filed by West Penn customers were very
complimentary to West Penn commending its continued reliable service and low
rates(4). Others questioned the amount of transition costs that the Company
would be allowed to recover from customer.
Based on the record before us, we believe that the amount of
stranded costs reached in the settlement is reasonable. West Penn is permitted
to recover a slightly greater amount than authorized in the Commission's
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(4) A couple of comments protested the proposed merger of West Penn with DQE,
Inc. which was the subject of Commission proceedings on the Joint Application of
DQE, Inc. and Allegheny Power System, Inc. and AYP Sub, Inc. for Approval of the
Transfer by Merger of Property and Rights of Duquesne Light Company to Allegheny
Power System, Inc., Dkt. No. A-110150 F.0015. The Commission will not address
this matter here except to point out that the anticipated savings that will
result from the proposed merger will reduce the total amount of stranded costs
that West Penn will be permitted to collect from its customers under the
Settlement from $670 million to $630 million.
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May 29, 1998 Restructuring Order, but customers will obtain a 2.5% rate decrease
during 1999 and have the protection of a rate cap for an extended period of
time. These and other provisions of the settlement package, taken as a whole,
represent a fair and reasonable balance of the competing interests involved in
this matter.
CONCLUSION
The Joint Petition represents a comprehensive settlement of all
issues concerning the restructuring of West Penn Power Company. We are convinced
that a resolution of this proceeding is in the public interest; THEREFORE,
IT IS ORDERED:
1. That the Tentative Opinion and Order entered November 4, 1998, is
hereby, made final, subject to and incorporating herein, the modifications
contained in this Final Opinion and Order.
2. That in consideration of and reliance upon the representations,
mutual promises and undertakings of the parties to this proposed settlement,
including the express agreement of each signatory to be legally bound by its
terms and certification of each signatory that he or she has full authority to
enter into the settlement and act on behalf of their respective parties, the
terms of the proposed full settlement set forth in the Joint Petition and the
Appendices shall be hereby approved as to each and every one of its terms and
conditions, and we hereby reconsider and amend our prior orders in these
proceedings as necessary to implement the terms of the full settlement. Any
issue not specifically addressed in this settlement shall be treated and
resolved in accordance with the resolution of that issue in the Restructuring
Order adopted by the Commission and entered on May 29, 1998, at Docket No.
R-00973981.
3. That the Commission hereby grants, subject to the terms and
conditions set forth in the Settlement, the approvals, licenses and certificates
required under the Public Utility Code regarding the transfer,
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lease or assignment of the Company's generating assets and liabilities,
including but not limited to approvals under Chapter 5, 11, 19, 21 and 28 of the
Public Utility Code.
4. That the recovery of stranded costs by West Penn of $670 million
(or $630 million in the event of a merger with DQE, Inc.) is just and reasonable
and in the public interest.
5. That the tariff supplements appended to the Joint Petition and
all Appendices are hereby approved, being necessary to implement the full
settlement, and shall become effective pursuant to the terms set forth in the
Joint Petition and Appendices.
6. That in the event of divestiture or transfer of West Penn's
generating facilities, it is hereby determined with respect to the divested
generation facilities of the Company that allowing these generation facilities
to qualify as "eligible facilities" under the Public Utility Holding Company Act
of 1935 (1) will benefit consumers, (2) is in the public interest and (3) does
not violate State law.
7. That the Commission's approval of the terms and conditions set
forth in the Joint Petition and Appendices is expressly contingent upon and
shall not become final and enforceable until all appeals and civil actions
required to be dismissed with prejudice as referred to in Part N of the Joint
Petition have been finally withdrawn, discontinued, or dismissed with prejudice
in accordance with the provisions of the settlement.
8. That the Application of West Penn Power Company for the Issuance
of a Qualified Rate Order Under Sections 2808 and 2812 of the Electricity
Generation Customer Choice and Competition Act, 66 Pa. C.S. Section 2808 and
Section 2812, contained in the Joint Petition for Settlement of West Penn Power
Company's Restructuring Plan be, and hereby is, granted, consistent with this
Qualified Rate Order.
9. That to the extent specified in this Qualified Rate Order, West
Penn's filings, testimony and exhibits submitted to the Commission in
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conjunction with West Penn's Restructuring Plan at Docket R-00973981, are hereby
incorporated herein by reference.
10. That it is just and reasonable and in the public interest for
West Penn to recover from its customers, through Intangible Transition Charges
as and to the extent authorized at Paragraph 12 of this Qualified Rate Order, up
to $630 million of Qualified Transition Expenses (or in the event that the
proposed merger of Allegheny Energy, Inc., and DQE, Inc. is not consummated, up
to $670 million in Qualified Transition Expenses) including all Transition or
Stranded Costs approved by the Commission for recovery from customers and other
Qualified Transition Expenses, as defined in Paragraph 12, below. The savings
from securitization and issuance of transition bonds are provided for in the
rates and rate reductions set forth in Section B.1 and Appendix A of the Joint
Petition for Full Settlement of West Penn Power Company's Restructuring Plan and
Related Court Proceedings at Docket No. R-00973981 and further reductions in the
CTC/ITC set forth in Section A.5 of the Joint Petition. The aforesaid rates and
CTC/ITC reductions constitute full compliance with Sections 2808(e) and
2812(b)(2) of the Electricity Generation Customer Choice and Competition Act and
no further rate reduction is required.
11. That this Commission authorizes the issuance of Transition Bonds
in an aggregate principal amount not to exceed $630 million (or not to exceed
$670 million in the event that the merger is not consummated) and finds that the
issuance of such amount of Transition Bonds is in the public interest. Provided
that the rate reductions specified in the Joint Petition are implemented as
provided in Paragraph 13 of this Qualified Rate Order, this Commission hereby
determines that 75% of all savings that may be accomplished through
securitization will be passed on to customers through the rate reductions in
Paragraph 13 and West Penn is not required to pass on additional savings, and no
further rate adjustment is required because the Commission hereby finds that
such additional savings have already been reflected in this Joint Petition.
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12. That this Commission authorizes West Penn to impose on, and to
collect from its customers, either directly or through bills rendered by
electric generation suppliers or any subsequently selected providers of last
resort, through non-bypassable charges applied to the bill of every customer of
electric services within the geographic area that comprises West Penn's
certified service territory on the effective date of the Act, whether such
customer was a customer on the effective date of the Act, or became a customer
after that date, (i) Competitive Transition Charges ("CTCs") as provided in the
Joint Petition in an amount sufficient to permit West Penn to recover the full
amount of its Transition or Stranded Costs as authorized for recovery by the
Commission's approval of the Settlement Petition, and (ii) Intangible Transition
Charges in an amount sufficient to recover the aggregate principal amount of the
Transition Bonds plus a reasonable amount sufficient to provide for any credit
enhancement to fund any reserves, and to pay interest, premiums upon acquisition
or redemption of equity or debt, if any, costs of defeasance, servicing fees and
other fees, costs and charges relating to the Transition Bonds (the Transition
or Stranded Costs, which includes the principal and interest on Transition
Bonds, costs for credit enhancements, the costs of retiring existing debt and
equity, costs of defeasance, servicing fees and other related fees, taxes,
costs, charges and expenses permitted to be recovered through Intangible
Transition Charges, collectively the "Qualified Transition Expenses"). The
Commission finds that such recovery and the imposition of such CTCs and
Intangible Transition Charges are in the public interest and are just and
reasonable. The Commission finds that good cause has been shown to extend the
payment period for imposing the CTCs and the Intangible Transition Charges to
December 31, 2008. The Intangible Transition Charges shall be collected over
periods of time and in such amounts as are necessary to amortize each series and
class of Transition Bonds in accordance with the terms thereof, but in no event
shall be charged to the customers after December 31, 2008. Notwithstanding
anything else in this Qualified Rate Order, the Intangible Transition Charges
shall be collected from customers in an amount sufficient to discharge the
Transition Bonds in accordance with their terms.
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13. Upon the successful issuance of Transition Bonds authorized by
this Qualified Rate Order and the imposition of Intangible Transition Charges
related thereto, West Penn is directed to implement the following adjustments to
its rates: West Penn shall reduce the CTCs imposed on its customers by an amount
equal to the Intangible Transition Charges associated with such Transition Bond
issuance and West Penn shall reduce the CTCs imposed on its customers by an
additional amount necessary to flow through to customers 75% of the net savings
achieved as a result of securitization of its Transition or Stranded costs and
issuance of Transition Bonds. The reductions specified above shall be
implemented on the following terms: (a) upon the issuance of any series of
Transition Bonds, a corresponding reduction shall be calculated and implemented
corresponding to each such series; (b) the rate reduction shall be applied to
bills using the method set forth in the Joint Petition; and (c) the Intangible
Transition Charges associated with the Transition Bonds issued on that date
shall be applied to bills simultaneously with the reduction of the CTCs.
14. That the CTCs and the Intangible Transition Charges shall be
applied to customer bills using the methodology and allocation set forth in West
Penn's QRO Application and its Restructuring Filing, as adjusted by the Joint
Petition. Pursuant to Section 2812(b)(5) of the Act, the Commission authorizes
West Penn to make annual adjustments (each, an "Annual Adjustment") to the
Intangible Transition Charges if collections of such Intangible Transition
Charges fall below the amount necessary to ensure the receipt by the assignee of
the Intangible Transition Property and Financing Party of revenue sufficient to
recover fully the Qualified Transition Expenses consistent with this
Commission's Order; provided, however, that adjustments during the final
calendar year of Intangible Transition Charge collection for any series of
Transition Bonds shall be done quarterly or monthly, if necessary, in order to
ensure full recovery of Intangible Transition Charges. The revenues received by
the assignee of the Intangible Property and the Financing Party through the
Intangible Transition Charges shall be determined to be sufficient for this
purpose if and only if the revenues so received through the Intangible
Transition
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Charges are sufficient to provide for the payment of the principal, interest,
and acquisition or redemption premiums on Transition Bonds, to fund any reserves
and to pay relayed credit enhancement, servicing fees and other related fees,
costs and charges in accordance with the terms thereof and as consistent with
the terms of this Qualified Rate Order and the Joint Petition. For each Annual
Adjustment, West Penn shall file with this Commission: (a) an accounting of
Intangible Transition Charges received by the assignee of the Intangible
Transition Property and the Financing Party for the previous annual period; (b)
a statement of any over- or under-receipts; (c) the charge or credit to be added
to the Intangible Transition Charges to ensure that the Intangible Transition
Charges revenue received by assignee of the Intangible Property and the
Financing Party will be sufficient to amortize the Qualified Transition Expenses
in accordance with the amortization schedule for Transition Bonds to be
determined at the time of issuance of each series of Transition Bonds, and the
corresponding reduction or increase in the CTCs, or if CTCs have not been
imposed, West Penn's distribution rates; and (d) any proposal by West Penn to
modify the reconciliation methodology. Pursuant to 66 Pa. C.S. Section 2812
(b)(5), this Commission shall finally adjudicate all Annual Adjustments within
90 days of West Penn's Annual Adjustment filing.
15. That this Commission determines that the methodology under which
West Penn will recover the Intangible Transition Charges authorized by this
Qualified Rate Order satisfies the provisions of 66 Pa. C.S. Section 2812(g),
which require the methodology not shift inter-class or intra-class costs and
that the methodology maintains consistency with the allocation methodology for
utility production plant used by the Commission in West Penn's most recently
concluded base-rate proceeding.
16. That this Commission concludes that it is in the public interest
to, and authorizes West Penn and any Assignee to, (a) assign, sell, transfer or
pledge Intangible Transition Property (such term includes all right, title, and
interest of West Penn or any Assignee in this Qualified Rate Order) in an amount
sufficient to recover all its Qualified Transition Expenses and in all revenues,
collections, claims, payments, money or proceeds arising from
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Intangible Transition Charges pursuant to this Qualified Rate Order to the
extent that this Qualified Rate Order and the rates and other charges authorized
hereunder are declared irrevocable and (b) issue, sell and refinance, in
reliance on this Qualified Rate Order, one or more series of Transition Bonds,
each series in one or more classes, secured by Intangible Transition Property
created by this Qualified Rate Order, provided that the final maturity of any
series of Transition Bonds shall not exceed 10 years from the date of issuance
and in no event shall any Transition Bond have a final maturity after December
31, 2008. Notwithstanding the foregoing, West Penn retains sole discretion
regarding whether to assign, sell or otherwise transfer Intangible Transition
Property created hereby or to issue or cause the Transition Bonds to be issued
or refinanced.
17. That West Penn or any Assignee may refinance the Transition
Bonds in a face amount not to exceed the unamortized principal thereof. That, if
West Penn or any Assignee refinances the Transition Bonds, the Intangible
Transition Charges authorized in this Qualified Rate Order shall be adjusted in
accordance with the true-up mechanism described in Paragraph 14 of this
Qualified Rate Order to ensure the receipt by the Transition Bond Assignee of
revenues sufficient to pay for all Transition or Stranded Costs of West Penn
approved by the Commission for recovery under Sections 2804 (relating to
standards for restructuring of the electric industry) and 2808 (relating to
competitive transition charge), through the issuance of Transition Bonds; the
reasonable costs of retiring existing debt or equity capital of the electric
utility or its holding company parent, including accrued interest and premium
upon acquisition or redemption of equity or debt, costs of defeasance, and other
related fees, costs and charges relating to, through the issuance of Transition
Bonds or the assignment, sale, or other transfer of Intangible Transition
Property; and the costs incurred to issue, service or refinance the Transition
Bonds, including accrued interest and acquisition or redemption premium, and
other related fees, taxes, costs and charges, or to assign, sell, or otherwise
transfer Intangible Transition Property. The revenues received by the Transition
Bond Assignee through the Intangible Transition Charges shall be
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determined to be sufficient for this purpose if and only if the revenues so
received through the Intangible Transition Charges provide for the amortization
of Transition Bonds in accordance with the amortization schedule set forth in
any prospectus or other offering document provided to the holders of the
refinanced bonds after payment of interest, reserves, all Transition or Stranded
Costs of West Penn approved by the Commission for recovery under Sections 2804
(relating to standards for restructuring of electric industry) and 2808
(relating to competitive transition charge), through the issuance of Transition
Bonds; the costs of retiring existing debt or equity capital of the electric
utility or its holding company parent, including accrued interest and premiums
upon acquisition or redemption of equity or debt, costs of defeasance, and other
related fees, costs and charges relating to, through the issuance of Transition
Bonds or the assignment, sale or other transfer of Intangible Transition
Property; and the costs incurred to issue, service, or refinance the Transition
Bonds, including accrued interest and premiums upon acquisition or redemption of
equity or debt, and other related fees, costs and charges, or to assign, sell or
otherwise transfer Intangible Transition Property.
18. That this Commission directs that West Penn use the proceeds
from the assignment, sale, transfer or pledge of Intangible Transition Property
and the issuance and sale of Transition Bonds principally to reduce West Penn's
Transition or Stranded Costs as set forth in the Settlement Petition by reducing
related capitalization. The Commission authorizes West Penn to reduce West
Penn's existing capitalization through retirement of outstanding debt and
preferred stock and through stock buy backs, dividends and purchases of common
stock in such proportions as West Penn determines.
19. That West Penn shall file with this Commission, no later than
120 days after the issuance or refinancing of Transition Bonds, a description of
the final structure of each issuance or refinancing of Transition Bonds, a
description of the final structure of each issuance or refinancing of such
Transition Bonds, including the principal amount, the price at which each such
series and/or class of Transition Bonds was sold,
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payment schedules, the 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 such issuance or refinancing shall not be
subject to change or revision by this Commission after the date of such issuance
or refinancing.
20. That to the extent that West Penn, or any Assignee, assigns,
sells, transfers, or pledges any interest in the Intangible Property created
hereby, this Commission authorizes West Penn to contract, for a specified fee,
with such Assignee for West Penn, its successors or assigns 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 the Intangible
Transition Charges contemplated under Paragraph 14 of this Qualified Rate Order,
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). This
Commission also authorizes West Penn to contract with the Assignee and an
alternative party, which may be a trustee, that the alternative party will
replace West Penn under its contract with the Assignee and perform the
obligations of West Penn contemplated in this Qualified Rate Order. The
obligations of West Penn (a) shall be binding upon West Penn, its successors and
assigns and (b) shall be required by this Commission to be undertaken and
performed by West Penn and any other entity that provides transmission and
distribution services to a person that was a customer of West Penn located
within West Penn's certified territory on January 1, 1997, or that became a
customer of electric services within such territory after January 1, 1997, and
is still located within such territory, as a condition to providing service to
such customer or municipal entity providing such services in place of West Penn
by West Penn or such other entity.
21. That this Commission hereby declares that this Qualified Rate
Order shall be irrevocable for purposes of Section 2812 of the Public Utility
Code, 66 Pa. C.S. Section 2812, and accordingly agrees that it will not directly
or
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indirectly, by any subsequent action, reduce, postpone, impair or terminate this
Qualified Rate Order or the Intangible Transition Charges authorized to be
imposed or collected under this Qualified Rate Order. This Commission further
declares that the right, title and interest of West Penn and any Assignee in
this Qualified Rate Order and the Intangible Transition Charges, the rates and
other charges authorized hereby and all revenues, collections, claims, payments,
money or proceeds arising from the same constitutes Intangible Transition
Property. West Penn shall have the irrevocable right to issue Transition Bonds
in accordance with the Qualified Rate Order until December 31, 2008.
22. That West Penn may apply to the Commission for supplements to
this Qualified Rate Order, not inconsistent with the terms and provisions hereof
and the Settlement Petition, as West Penn deems necessary to enable the issuance
of Transition Bonds authorized thereunder.
23. That during some or all of this period during which the
Intangible Transition Charges and the CTCs approved by this Qualified Rate Order
are being collected, the generation component of West Penn's charges to
customers will be limited by the provisions of 66 Pa. C.S. Section 2804(4)
(pertaining to rate caps) and the provisions of the Joint Petition. For purposes
of 66 Pa. C.S. Section 2804(4)(ii), the generation component of West Penn's
charges includes CTCs, Intangible Transition Charges, and other generation
charges. If the combined total of these elements would cause the generation
component of West Penn's charges to exceed the rate cap specified in 66 Pa. C.S.
Section 2804(4) and the Joint Petition, West Penn shall retain whatever right it
may have under existing provisions of the statute as limited by the Joint
Petition to request relief from the rate cap, but if it does not seek such
relief, or if that relief is denied, West Penn shall adjust the nonsecuritized
elements of its generation charges, rather than the Intangible Transition
Charges approved by this Qualified Rate Order, to bring the charges into
compliance with the rate cap provisions of 66 Pa. C.S. Section 2804(4) and the
Joint Petition.
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24. That all regulatory approvals within the jurisdiction of the
Commission that are necessary for the securitization of Qualified Transition
Expenses and all related transactions contemplated in West Penn's Application
for a Qualified Rate Order, including but not limited to any approvals under
Chapter 11 and 19 of the Public Utility Code, are hereby granted.
25. That West Penn is authorized to create a regulatory asset for
the stranded cost recovery values for 1999 through 2002, and the recovery of
that regulatory asset shall be amortized over the years 2003 through 2008 as
shown in Appendix A of the Joint Petition.
26. That consistent with Section B.1 of the Joint Petition, West
Penn is directed to implement its January 1, 1999 rate decrease through a refund
to customers from 1998 revenues in the amount of $25.1 million, and that rate
decrease shall apply to each retail rate classification and customers within
those rate classifications as set forth in Appendices B and K of the Joint
Petition.
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27. That a copy of this Final Opinion and Order shall be served upon
all parties to the instant restructuring proceeding at Docket No. R-00973981.
BY THE COMMISSION,
James J. McNulty
Secretary
(SEAL)
ORDER ADOPTED: November 19, 1998
ORDER ENTERED:
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EXHIBIT 99.2
PENNSYLVANIA
PUBLIC UTILITY COMMISSION
HARRISBURG, PA. 17107-3265
Public Meeting held August 12, 1999
Commissioners Present:
John M. Quain, Chairman
Robert K. Bloom, Vice Chairman
David W. Rolka
Nora Mead Brownell
Aaron Wilson, Jr.
Petition of West Penn Power Company for Issuance of a Docket Number:
Supplemental Qualified Rate Order Under R-00994649
Sections 2808 and 2812 of the Public Utility Code.
ORDER
BY THE COMMISSION:
On April 23, 1999, West Penn Power Company (West Penn) filed the
above-docketed petition (Petition) for the issuance of a supplemental Qualified
Rate Order (QRQ) under Sections 2808 and 2812 of the Public Utility Code, 66 Pa.
C.S. Sections 2808 and 2812. A copy of the Petition was served upon the Office
of Consumer Advocate (OCA), the Office of Small Business Advocate (OSBA), the
Office of Trial Staff, and all active parties in West Penn's restructuring
proceeding at Docket No. R-00973981.
On November 19, 1998, we entered a Final Order at Docket No.
R-00973981 (Final Order), approving the settlement of West Penn's Restructuring
Proceeding under the Electricity Generation Customer Choice and Competition Act
of December 3, 1996 (Competition Act). As part of the Final Order, we issued a
QRO (Initial QRO) authorizing West Penn to issue, through December 31, 2008,
Transition Bonds in an aggregate principal amount not to exceed $670 million (or
not to exceed $630 million in the event of a merger with DQE, Inc.). The Final
Order provided that West Penn may apply to the Commission for supplements to the
initial QRO, not inconsistent with the terms and provisions approved in the
Final Order, as West Penn deemed necessary to enable the issuance of Transition
Bonds.
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In the Final Order, we determined that 75% of all savings that West
Penn accomplished through securitization will be passed on to customers through
rate reductions. The savings arise from the difference between the weighted
average interest rate on the Transition Bonds, and the Commission authorized
11.00 percent weighted average return on unamortized Competitive Transition
Charge (CTC) balances. If the market conditions seem favorable and if the
Transition Bonds have not yet been issued, West Penn may enter into one or more
contracts to lock-in a particular interest rate. If the contracts are entered
into, their effects and associated costs would be reflected in the calculation
of the savings from the issuance of Transition Bonds.
Through the instant Petition, West Penn is seeking to supplement and
clarify certain provisions of the Initial QRO which relate primarily to the
computation, design, and reconciliation of Intangible Transition Charges (ITCs)
that are intended to provide for collection of amounts needed to pay Qualified
Transition Expenses (QTEs) incurred in connection with the issuance of
Transition Bonds. West Penn is also seeking Commission approval for a financing
structure for the Transition Bonds that it believes will be adequate to achieve
a AAA-rating, after reasonable credit enhancements.
On May 13, 1999, the OCA filed an answer to West Penn's Petition.
The Pennsylvania State University (PSU), the West Penn Power Industrial
Intervenors (WPPII), and the Mid-Atlantic Power Supply Association (MAPSA), each
filed a Petition to Intervene in the proceeding on May 12, 1999, May 14, 1999,
and May 17, 1999, respectively. On May 18, 1999, the OSBA filed a Notice of
Intervention in this proceeding. The OCA, PSU, WPPII, MAPSA, and the OSBA will
be collectively known as "the parties". Also, several West Penn customers sent
correspondences commenting on the issuance of Transition Bonds.
The OCA contends in its answer to the Petition, that West Penn's
proposal regarding reconciliation and adjustment may result in a double count of
both uncollectibles and payment lags. The OCA submits that the implications of
West Penn's proposal to address the rate cap, particularly with the deferred
accounting request, are unclear and that the proposal requires further
clarification to ensure consistency with the Final Order and the Act. The OCA
also notes that West Penn has itemized a number of costs and servicer fees, and
submits that these fees and costs should be reviewed at the
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appropriate reconciliation proceeding when the actual costs are known. The OCA
is also concerned that, if the merger between DQE, Inc. and West Penn were to be
consummated, the bond issuance may leave ratepayers paying costs associated with
a bond issuance of an unjustified amount. And finally, the OCA submits that
certain aspects of West Penn's General Account should be clarified to assure
that interest earned on this ratepayer funded account is used to the benefit of
ratepayers.
PSU and WPPII's concerns deal with the computation, allocation,
design and reconciliation of the ITC, the bond rating for the Transition Bonds,
the sufficiency of funds available to pay the principal and interest on the
Transition Bonds, and the annual reconciliation procedure which will be used by
West Penn.
West Penn and the parties, collectively referred to as the "Joint
Petitioners", have resolved most differences amicably with respect to the
Petition, and as a result, on August 2, 1999, the Joint Petitioners filed a
"Joint Petition for Approval of Settlement Agreement and Presentation of
Outstanding Issue" (Joint Petition). The Joint Petition includes the Settlement
Agreement and the parties' Position Statements setting forth brief legal
argument of their respective positions. Components of the Settlement Agreement
are detailed in the following discussion; however, if an issue resolved in the
Settlement Agreement is not specifically addressed, it is our intent that the
resolution of the issue in the Settlement Agreement prevail.
The Joint Petitioners request expedited consideration and approval
of the Settlement Agreement (attached as Appendix A) and expedited consideration
and resolution of the outstanding issue which deals with the adjustment of the
"shopping credit" in the reconciliation process for ITCs in the event that West
Penn's ITC is in an underrecovery position.
Proposed Transition Bonds
West Penn has designed a financing structure whereby West Penn's
Intangible Transition Property (ITP) will be transferred to a special purpose
company (SPC) formed or acquired by a wholly-owned subsidiary (Newco) of West
Penn. The SPC will then issue the Transition Bonds in one or more series at
different times in
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response to market conditions and other business circumstances. The proceeds
from the Transition Bonds will be transferred to Newco and then to West Penn.
Such transfers will be deemed perfected when the requirements set forth in
Section 2812 of the Public Utility Code and any applicable Commission
regulations are met. West Penn will use the proceeds principally to reduce
stranded costs and related capitalization.
To meet the funding requirements imposed pursuant to the periodic
adjustment mechanism in Section 2812(b)(4) of the Competition Act, which ensures
that the recovery of revenues is sufficient to provide for the payments of
principal, interest, acquisition, or redemption premiums and for other fees,
costs and charges associated with the Transition Bonds, West Penn is proposing
to act as servicer of the bonds by billing and collecting the ITCs for the
account of the SPC. Included in Appendix A of the instant Petition, is a list of
fees and expenses that West Penn expects to incur for the securitization.
Because ITC collections will be the property of the SPC, West Penn will receive
these funds solely as agent for the SPC. West Penn will periodically remit
collections of the ITCs to the SPC. West Penn will measure cash payments of the
ITC as they are collected, and if conditions dictate, West Penn may use a
collections curve as the basis for determining collections forwarded to the SPC.
The list of fees and expenses that West Penn provided in its
Appendix A to the Petition, included no dollar amounts or details about the
categories. The OCA proposes that we not rule on fees and costs until they are
incurred and then West Penn can demonstrate whether they represent incremental
costs to West Penn. Exhibit A of the Settlement Agreement provides a revised
list of expenses which were agreed upon by the parties. Each of these expenses
will be based on actual experience. The parties reserve the right to review the
actual amounts incurred for reasonableness. The Settlement Agreement states that
any adjustments made by the Commission shall be reflected in the ITC
reconciliation process.
West Penn states that the ITC remittances from ratepayers must be
sufficient to permit full payment of all Reconciliation Funding Requirements on
a timely basis over the life of the Transition Bonds. Therefore, the calculation
of West Penn's monthly ITC remittances will reflect both a projection of
uncollectible ITCs and payment lags based upon West Penn's most recent actual
experience. If actual uncollectibles
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realized are less than the assumed amount of uncollectibles, the excess ITC
collections generated by this differential will be used either for
Reconciliation Funding Requirements or be deposited in the Reserve Subaccount
described below. Uncollectible ITCs and payment lags will be projected
separately for each of the three customer classes and will be updated annually.
The SPC will establish a Collection Account, comprised of several
subaccounts, as a trust account to be held by the Trustee as collateral to
ensure the payment of principal and interest on the Transition Bonds and other
Reconciliation Funding Requirements (QTEs including amounts to replenish the
subaccounts) in full and on a timely basis. These subaccounts will be funded by
the ongoing process of the ITC and by a capital contribution from West Penn. If
the ITC remittances to the Trustee are insufficient to make all scheduled
payments of Reconciliation Funding Requirements, these subaccounts will be drawn
down to make up the difference.
The Trustee will deposit the ITC remittances from West Penn into the
General Subaccount. Monies in this subaccount, including interest earned, will
be applied by the Trustee on a periodic basis to pay expenses of the SPC, to pay
principal and interest on the Transition Bonds, and to nieet the funding
requirements of the other subaccounts. When the Transition Bonds and related
expenses have been paid in full, the balance remaining in this subaccount,
including interest earned, will be released to the SPC, and West Penn's
customers will receive a credit equal to that amount through an adjustment to
the CTC or through a temporary reduction in distribution rates.
The Overcollateralization Subaccount will be established to serve as
collateral to ensure timely payment of principal and interest on the Transition
Bonds and other Reconciliation Funding Requirements. To the extent it becomes
necessary to draw on this subaccount to pay those amounts due to a shortfall in
the ITC remittances, it will be replenished through future ITC remittances to
its required level, not expected to exceed 2 percent of the original principal
amount of the Transition Bonds, through the periodic reconciliation process.
Monies in this subaccount will be invested in interest bearing securities and
will be used to pay principal and interest on the Transition Bonds and other
Reconciliation Funding Requirements. When the Transition Bonds and related
expenses have been paid in full, the balance remaining in this subaccount,
including
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interest earned, will be released to the SPC, and West Penn's customers will
receive a credit equal to that amount through an adjustment to the CTC or
through a temporary reduction in distribution rates.
The Capital Subaccount will be funded by a capital contribution from
West Penn expected to equal 0.5 percent of the original principal amount of the
bond issuance. This subaccount will also serve as collateral to ensure timely
payment of principal and interest on the Transition Bonds and other
Reconciliation Funding Requirements. To the extent it becomes necessary to draw
on this subaccount to pay those amounts due to a shortfall in the ITC
remittances, it will be replenished to its original level through future ITC
remittances determined in the periodic reconciliation process. The monies in
this subaccount will be invested in interest bearing securities, and amounts
equal to the interest earnings will be periodically released by the Trustee to
the SPC if not needed during the current period to pay principal and interest on
the bonds or to meet other obligations. Because the Capital Subaccount will be
funded by a West Penn capital contribution, any balance remaining in this
subaccount, including any interest, will revert back to West Penn when the
Transition Bonds and related expenses have been paid in full.
The Reserve Subaccount will hold any ITC remittances and interest
earnings on the Overcollateralization Subaccount. Further, it will hold any
earned interest on the balance within the Reserve Subaccount in excess of the
amounts needed to pay current principal and interest requirements on the
Transition Bonds, and to pay other Reconciliation Funding Requirements. The
payments from this subaccount include, but are not limited to, funding or
replenishing the Overcollateralization and Capital Subaccounts. Any balance in
this subaccount will be treated as an overcollection for reconciliation purposes
and will be reflected as a credit for the periodic ITC adjustments. Like the
other subaccounts, monies in this subaccount will be invested in interest
bearing securities, and will be used to pay principal and interest on the
Transition Bonds and other Reconciliation Funding Requirements. When the
Transition Bonds and related expenses have been paid in full, the balance
remaining in this subaccount, including interest earned, will be released to the
SPC, and West Penn's customers will receive a credit equal to that amount
through an adjustment to the CTC or through a temporary reduction in
distribution rates.
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As mentioned, if the ITC remittances to the Trustee are insufficient
to make all scheduled payments of Reconciliation Funding Requirements, the
Reserve Subaccount, the Overcollateralization Subaccount, and the Capital
Subaccount will be drawn down to make those payments. These subaccounts will be
drawn down without regard to the level of contributions made by each customer
class and each rate schedule. However, the Overcollateralization and the Capital
Subaccounts must be replenished on a periodic basis through the reconciliation
process and that process will reflect draw-downs on a customer class basis as an
undercollection.
CTC and ITC Rate Design
West Penn proposes to reflect the savings from the issuance of the
transition Bonds through CTC reductions and then allocate CTC reductions among
West Penn's retail rate schedules utilizing the same methodology employed to
allocate generation-related stranded cost under the Final Order. The OCA agrees
with the methodology but reserves the right to review the final details of the
allocation when filed.
The Settlement Agreement recommends that West Penn's methodology be
approved, provided that the parties reserve the right to review the final ITCs
when filed. The Settlement Agreement further stated that any subsequent
adjustment by the Commission shall be made in ITC reconciliation proceedings.
Nothing in the Settlement Agreement is intended to limit the imposition of ITCs
sufficient to recover all QTEs on a timely basis.
ITC Reconciliation and Adjustment
In the instant Petition, West Penn states that since the issuance of
the Final Order, it has become apparent from meetings with underwriters and
rating agencies that in order to secure a AAA-rating for the Transition Bonds,
with reasonable credit enhancements, it must implement more detailed
reconciliation procedures than were set forth in its initial QRO application.
West Penn has determined that the reconciliation process described in this
petition eliminates the need for the originally approved mechanisms and requests
that the Commission specifically find that West Penn can implement its proposed
reconciliation process in lieu of that originally approved. West
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Penn claims that if its proposed reconciliation procedures are not approved, it
is likely that its Transition Bonds will not attain a AAA-rating and that costly
additional credit enhancements will be required to attain a AAA-rating. West
Penn maintains that this would significantly reduce the savings that customers
would realize from the issuance of the Transition Bonds.
The QRO approved by the Commission on November 19, 1998, provided
for two tariff supplements relating to the ITC and its reconciliation. One
tariff supplement, the Net Securitization Adjustment (NSA), reflected a
provision for the recovery of all known and estimated QTEs consisting of
transition or stranded costs, expenses associated with the issuance and service
of Transition Bonds, and related recapitalization costs. The NSA was designed to
periodically reconcile only the difference between the revenue requirement
necessary to amortize the QTE principal balance and actual revenues, and to
adjust the ITC rate accordingly. The second tariff supplement, the Transition
Bond Expense Adjustment (TBEA), was a reconciliation mechanism to collect or
refund the difference between the estimated Transition Bond Expenses that have
been incorporated into the Transition Bonds being recovered through the ITC, and
the actual bond expenses.
The major provisions reflected in the Petition for the Supplemental
QRO and subsequent Settlement Agreement that were not included in the original
QRO are: Tariff 37 and Tariff 39, each using a single ITC reconciliation rider
as compared to two, with both the revenue and costs being reconciled through the
same mechanism; the combining of the over/under collections of Tariff 37 with
the over/under collections of the Rate Schedules of Tariff 39 to produce a total
over/under collection for the commercial class; the reforecasting of sales
during the reconciliation process rather than using the sales forecast approved
by the Commission in the Settlement; reflecting projected uncollectible ITCs and
payment lags in the calculation of the ITC rates; grouping the various rate
schedules into three customer classes for reconciliation purposes; the
establishment of collateral accounts by the transferee of the Intangible
Transition Property funded by both West Penn and ITC revenues to ensure the
payment of the QTEs on a timely basis; and a provision for review and audit by
the Commission.
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As mentioned, the instant Petition and Settlement Agreement would
differ from the original QRO in its customer grouping of rate schedules for
reconciliation purposes. West Penn's tariff has approximately 21 rate schedules
and rate riders. In the instant petition, West Penn is proposing a
reconciliation of the ITC by customer class within three principal customer
class groupings: (1) residential; (2) commercial; and (3) industrial, including
street lighting. These three broad customer class groupings are based upon the
various customers conditions of service. Because some rate schedules have only a
few customers and a small delivery base, West Penn believes that it is necessary
to reconcile over/under collections by customer class rather than by individual
rate schedule in order to provide a broad base of deliveries against which to
reconcile, to prevent large rate swings in the reconciliation process, and to
reduce the risk of failure to meet the Reconciliation Funding Requirements. West
Penn states that reconciliation by rate schedule would effectively preclude the
issuance of Transition Bonds for many rate schedules and would significantly
increase the cost of any securitization which could be accomplished.
Although West Penn proposes to aggregate the over/under collection
by customer class, a separate ITC reconciliation credit/charge will be
calculated for each rate schedule based on the cost allocations approved in the
Final Order. Any over/under collection for a particular Customer Class will be
allocated to each individual Rate Schedule within that Customer Class. Such
allocation will be based upon the ratio of the cumulative ITC over/under
collection applicable to the Customer Class to the projected ITC revenues for
the Customer Class for the period during which the ITC reconciliation factor
will be applied. The resulting allocated over/under collection will be reflected
in the ITC rates for each Rate Schedule within the customer class.
After all QTEs have been paid in full and the Capital Subaccount has
been fully replenished, any overcollection of ITC revenues, including an amount
equal to the balances remaining in the General Subaccount, the
Overcollateralization Subaccount and the Reserve Subaccount, will be reflected
in the reconciliation of the CTC for the calendar year in which the Transition
Bond principal and interest were paid in full or through a temporary reduction
in distribution rates.
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The Commission, in its Order entered April 10, 1997, at M-00960890
F0006, established that the annual ITC reconciliation filings are to be made
within 45 days subsequent to the anniversary date of the QRO. West Penn's
initial QRO was entered on November 19, 1998. The QRO anniversary date is
established by the initial QRO, regardless of the supplemental QRO requested in
the instant petition. West Penn is requesting in Paragraph 28 of the Petition
that the Commission waive this requirement in order to permit it to make annual
reconciliation filings on October 1 of each year, which is 49 days before the
anniversary date of the Commission's initial QRO for West Penn. The Company
states that it is requesting this waiver so that there will be a full 90 day
review period from the proposed annual filing date of October 1 and the proposed
annual effective date of January 1.
We approve West Penn's requested waiver from the annual ITC
reconciliation filing requirements set forth in its April 10, 1997, Order. We
believe that the requested annual filing and ITC adjustment effective dates are
in compliance with Section 2812(b)(4) of the Competition Act. That Section
states that adjustments to the ITC, if required, are to be approved within 90
days of each anniversary of the issuance of the QRO or of each additional
interval provided for in the QRO. The November 19 anniversary date and the
proposed January 1 effective dates are within the 90 day time period prescribed
by the Competition Act. Further, an October 1 filing date and a January 1
effective date, preserve the 90 day review period which the Commission believes
is the intent of Section 2812(b)(4).
West Penn states that the annual reconciliation filings submitted on
October 1 of each year during the bond period will include a schedule of actual
over/under collections for the nine months ended August 31, an estimate of
over/under collections for the three months ending November 30, and a
recalculation of the ITCs based upon the most recent forecasts of annual
deliveries, uncollectibles, payment lags and other expenses for the next
calendar year. On December 15 of each year, West Penn will file actual
over/under collection data as of November 30, replacing the estimated data
submitted on October 1, along with a tariff supplement reflecting the new ITCs
and supporting data for the ITC rates to become effective each January 1. The
annual rate adjustment and reconciliation will become effective for service
rendered on and after January 1 and would remain in effect for one year, except
possibly during the final bond
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year. The Settlement Agreement provides for a similar procedure for annual
changes to the CTC. As a result, annual changes to both the Company's ITC and
CTC would occur January 1 of each year.
In order to facilitate and expedite the review process for the
annual reconciliation, West Penn will file on April 15 and July 15 of each year
an update of its reconciliation data with the Bureau of Audits. These updates
will provide the same information in the same format as the October 1 filing,
but will of necessity rely more heavily on projections. Further, as provided for
in the Settlement Agreement, West Penn will also file an update of its ITC
reconciliation data on January 15 of each year.
During the final 12 months of the bond period, West Penn is
proposing to be permitted to make interim reconciliation filings as often as
monthly in order to minimize any possible over/under collection of the ITC for
the final reconciliation. These interim adjusted ITC rates, which may be monthly
or quarterly as determined by West Penn, would continue until the earlier of the
full payment of all QTEs or December 31, 2008, the last day of the authorized
bond period. Such interim reconciliation filings would become effective on the
first day of the next calendar month, with not less than 15 days' notice.
As previously mentioned, the OCA submitted comments regarding
several items contained in the instant Petition. First, the OCA stated that the
Company's description of the General Subaccount does not mention any credit for
ratepayers relating to the interest earned by that account which is funded with
ratepayer monies. The OCA requested a clarification on the matter. We share the
OCA's concern regarding the use of the interest earned by the subaccounts.
However, it should be noted that each of these subaccounts provide that the
primary use of any interest earned on the balances in the subaccounts is for
paying the principal and interest on the Transition Bonds. Any remaining
interest in the Overcollateralization Subaccount and the Reserve Subaccount will
be used for making the payment on the principal and interest on the Transition
Bonds in a later payment period. The Settlement Agreement provides that interest
earned on the General Subaccount will be treated in the same fashion as interest
on the Overcollateralization Subaccount.
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Regarding the proposed time frame for annual filings, the OCA does
not oppose West Penn's proposed annual filing schedule. The OCA does express a
concern that it may be difficult to completely resolve all issues in the 90 day
time period, October 1 to January 1, particularly if other utilities are on a
similar schedule. As part of the Settlement Agreement, West Penn will submit
monthly updates to its October 1 filing within 15 days following the conclusion
of each calendar month. Following Commission action on West Penn's November 15,
filing, the Company will file, in compliance, actual ITC over/under collections
as of November 30, replacing the previously submitted estimates as well as a
tariff supplement and supporting data setting forth ITC rates to become
effective January 1. We believe such monthly updates, along with the
availability of quarterly reports for review and audit as discussed above, will
allow staff sufficient time to perform a meaningful review of any proposed ITC
rate adjustment and to prepare a report based upon the November 15 filing
update.
The ITC charges will be terminated at the earlier of December 31,
2008, or the time when the Trustee issues a report stating that all required
payments of principal, interest, and other QTEs for the Transition Bonds have
been made and the Capital Account is fully funded. West Penn maintains that
although the ITC charges will be terminated on or before December 31, 2008,
prorated bills issued after such termination will reflect such charges for
service rendered prior to such termination, and that West Penn will continue to
receive customer payments of such charges and prior charges after such
termination. Thus, West Penn is seeking authority to extend the final stated
maturity date of the Transition Bonds to the earlier of ten years after the
issuance date or September 25, 2009, so that such ITC collections may be taken
into account by the rating agencies in determining the rating of the Transition
Bonds. The OCA requests that unless it is shown that the calculation of these
charges and savings will properly reflect the full benefit of the savings for
ratepayers during the CTC period, then the maturity dates of the Transition
Bonds should not be extended.
The Settlement Agreement stipulates that West Penn should be allowed
to extend the legal final maturity of the Transition Bonds to the earlier of ten
years after the issuance date or September 25, 2009. This is to assure that all
ITC charges will be taken into account by the rating agencies and any credit
enhancements in determining the ratings of the Transition Bonds. The scheduled
maturity date of the Transition Bonds will
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be prior to December 31, 2008 and will not be affected by the change in the
legal final maturity date so as not to increase required credit enhancements.
As indicated previously, West Penn is proposing to reforecast its
annual sales during the reconciliation proceedings rather than utilize the sales
forecast contained in the Settlement approved by the Commission in the Final
Order. The Final Order approved a 10 year sales forecast with a pre-established
annual escalator beginning in 1999. Our understanding is that West Penn and the
bond underwriters believe that a 10 year forecast is too long a period to use
for the ITC without risking the potential for large annual over/under
collections and rate swings. In order to mitigate that potential risk, and to
assure a AAA-rating on its bonds, West Penn has proposed that it be permitted to
use an annual reforecasting of its sales in its ITC reconciliation process.
The OCA has commented that it does not oppose the reforecasting of
sales during the reconciliation proceeding, and agrees that this will help
eliminate large over/under collections. However, the OCA has stated that caution
must be utilized in the reforecasting process to assure that the rate caps are
not violated. The Settlement Agreement approves the use of reforecasting
provided that any reforecasting will comply with the rate cap provisions of
Section 2804(4) of the Competition Act. We believe this is a sufficient
guarantee that the rate cap will not be violated.
Exhibit B to the Settlement Agreement sets forth several changes to
the Company's ITC and CTC riders which have been agreed to by the Parties. One
of these changes provides for Commission review and audit of the annual ITC
reconciliation filings. The amended Rider provides that the review and audit
must be concluded on a timely basis so as to permit implementation of changes in
the ITC rates by the January 1, annual effective date. It is our understanding
that the audit is to be completed prior to the implementation of the
recalculated ITC rates in order to assure underwriters that scheduled recoveries
will not be impacted by any potential audit adjustments after the ITC rates have
gone into effect. Without such assurance, it is unlikely that the Transition
Bonds will attain a AAA-rating without costly additional credit enhancements.
We do not believe that the time frame initially proposed in the
company's Petition, a 16 day period from December 15 until January 1, for
auditing the annual
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reconciliation statement ending November 30 would be feasible, particularly if
other ITC filings have the same provision and filing period. However, the ITC
Reconciliation Rider, as proposed in the Petition and amended in the Settlement
Agreement, provides for West Penn to submit quarterly reports to the Commission
within 15 days after the conclusion of each calendar year quarter. We believe
that such quarterly reports would be the basis for the required audit, would
afford adequate audit time, and still provide reasonable assurance of the
accuracy of the over/under collection reflected in the ITC rates to be
implemented on January 1.
West Penn states that it will remit payments of the ITCs to the SPC
on account, based upon the cash payments of the ITC as they are collected.
Should conditions dictate, West Penn proposes using a collections curve as the
basis for determining collections forwarded to the SPC. West Penn asserts that
the purpose of this adjustment is to recognize that not all amounts billed to
customers are paid, or are not paid on time.
The OCA responded to this issue by stating that West Penn's proposed
procedure may result in a double counting of both uncollectibles and payment
lags. It is the OCA's position that uncollectibles associated with the full
amount of West Penn's revenues, including its OCA/ITC revenues, were assigned to
the Transmission and Distribution (T&D) rates in the unbundling process in West
Penn's restructuring proceeding at Docket No. R-00973981. Accordingly, the OCA
contended that West Penn should not be allowed to reduce the amounts paid to the
SPC by an uncollectibles factor, and then seek to recover them in the
reconciliation, since ratepayers are fully compensating West Penn for those
uncollectibles through the T&D rates. The OCA also noted that, under the
Commission's payment ordering rules and West Penn's tariff implementing these
rules, the CTC/ITC is the first item to be paid, other than a pre-retail access
arrearage.
In addition, the OCA stated that West Penn's existing rates were
also set to include the lag in billing and collecting of revenues through an
allowance for cash working capital. The OCA believes that since West Penn's
current rates compensate for this billing lag, it is inappropriate to allow West
Penn to reflect this lag again in calculating its monthly remittance to the SPC.
The OCA submits that the uncollectibles
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and payment lag adjustment may result in a double count of both uncollectibles
and payments lags which are already reflected in rates. The Settlement Agreement
addresses this matter by providing for an offsetting CTC credit equal to any
uncollectible accounts expense included in the ITC.
At paragraph B.5. of the Joint Petition for Full Settlement (1998
Joint Petition) filed November 3, 1998, the parties agreed that the T&D rate cap
of 1.73 cents per KWH includes 1.72 cents per KWH for all existing costs and
services and .01 cents per KWH for the sustainable energy fund during the T&D
rate cap period. Additionally, no new fees shall be proposed or charged during
the T&D rate cap period for a cost of service that is included in the bundled
T&D rate. In the event of a merger with DQE, the T&D rates set forth in Appendix
A of the 1998 Joint Petition will apply.
West Penn's tariff implements procedures for applying partial
payments comply with our guideline relating to partial payments found in the
Final Order Re: Guidelines for Maintaining Customer Services at the Same Level
of Quality Pursuant to 66 Pa. C.S. Section 2807(d), and Assuring Conformance
with 52 Pa. Code Chapter 56 Pursuant to 66 Pa. C.S. Section 2809(e) and (f)
Appendix B, Guideline 3H of Docket No. M-00960890F0011 dated July 10, 1997.
Guideline 3H states:
In regard to application of partial payments, the restructuring
plans should direct how payments which are insufficient to cover all
charges should be applied. For a customer who has a pre-retail
access balance, the payment should be applied by the EDC as follows:
(1) outstanding pre-retail access balance or the installment amount
for a payment agreement on this balance; (2) intangible transition
charge (ITC) and competitive transition charge (CTC); (3) EDC
transmission and distribution charges (T&D); (4) supply charges, and
(5) non-basic service charges. If the customer's account develops a
post-retail access balance, partial payments should be applied to
the pre-retail access balance, according to the terms of the
pre-retail access payment agreement, before being applied to any
other outstanding post-retail access charges. For a customer with no
pre-retail access balance but with a post-retail access balance,
partial payments should be applied as follows: (1) balance due for
prior ITC, CTC and T&D service; (2) ITC and CTC; (3) T&D; (4)
balance due for prior supply charges; (5) supply charges, and (6)
non-basic service charges.
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Merger Issues
As noted earlier, if the merger with DQE, Inc. is consummated, West
Penn's stranded cost recovery would be limited to $630 million. In the Petition,
West Penn states that if the merger is consummated, and West Penn has already
issued Transition Bonds in excess of $630 million, the costs of servicing the
entire amount of the Transition Bonds, including interest, principal, and all
other related fees, costs, credit enhancements, and charges, would constitute
QTEs which thereafter would be recovered through ITCs. At the next
reconciliation, West Penn would establish a credit adjustment to customers'
bills to account for the difference between the $630 million and the actual
principal amount of Transition Bonds outstanding.
The OCA submits that West Penn's proposal to recover the expenses
associated with the entire $670 million may be unjust and unreasonable and that
ratepayers will be left paying costs associated with an issuance of an
unjustified amount. In the Settlement Agreement, the parties determined that
West Penn's procedures relating to the merger should be approved, provided that
any credit adjustment to rates necessary to reflect issuance of not more than
$630 million of Transition Bonds include a reduction for all associated costs,
fees, and expenses attributable to the Transition Bonds issued in excess of $630
million. The Settlement Agreement further stipulates that the amounts as
proposed by West Penn will be subject to review and concurrence by the parties
and the Commission.
Adjustment of Shopping Credits
In the Joint Petition for Settlement, the parties advise that there
is one issue which could not be resolved. The agreed-upon statement of this
issue is as follows:
Whether the Pennsylvania Public Utility Commission should permit
West Penn Power Company to adjust (up or down) the yearly level of
the "shopping credit" contained in the Restructuring Settlement
approved by the Commission for over/under collections in Intangible
Transition Charge [ITC] if West Penn proceeds with securitization of
up to 100% of its remaining stranded costs and subsequently
experiences an undercollection or overcollection in its ITC as
reflected in reconciliation.
Petition, p. 2.
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<PAGE> 17
West Penn, OCA, MAPSA and WPPII have submitted position statements in regard to
the above issue. West Penn answers the above issue in the affirmative while the
others address the issue in the negative.
It is West Penn's position that the Competition Act and the Initial
QRO mandate the recovery of stranded costs through the CTC and/or ITCs and
adjustments of the ITCs to ensure recovery of Qualified Rate Expenses sufficient
to pay the Transition Bonds. In so doing, West Penn references Paragraph 23 of
the Initial QRO. West Penn also states that both the Competition Act and the QRO
mandate the inviolability of the ITC (a major factor in rating of Transition
Bonds) and adherence to the rate cap. West Penn concludes that if adjustments to
the ITCs exceed the available CTC, the only solution that will not violate the
rate cap provisions of the Act and the Initial QRO, is that the utility's
shopping credit, i.e. charges for generation, be reduced.
OCA opposes the adjustment of the shopping credit to offset under-or
overcollections of the ITC. OCA does not challenge West Penn's interpretation of
the Paragraph 23, but instead expresses concern that in these circumstances,
wherein West Penn proposes to securitize 100% of its stranded costs, allowing
immediate adjustment of the shopping credit will compromise the intent of the
Restructuring Settlement. OCA submits that West Penn be allowed to securitize
only a portion of its remaining stranded costs, thus allowing the remaining CTC
and savings from securitization to remain available as revenue sources to fund
underrecovered ITC obligations before the necessity of reducing the shopping
credit or seeking a rate cap exception would arise.
In its position statement, WPPII expresses concern that if West Penn
is permitted to reduce the shopping credit, both the customers and the
developing market will be harmed. It states further that the provisions of the
Restructuring Settlement that require that securitization be pursued under
reasonable terms and conditions will not be satisfied where West Penn is
permitted to securitize 100% of its stranded costs.
MAPSA also opposes the adjustment of shopping credits. It claims
that the shopping credits are mandatory and there is no discretion on the part
of any party to modify the system average shopping credit. MAPSA also claims
that West Penn's ability
17
<PAGE> 18
to securitize is a discretionary act and its proposal to adjust the shopping
credit is a violation of the express terms of the Restructuring Settlement.
Upon consideration of all of the arguments presented, the Commission
believes that the express language of the Initial QRO read in light of the
Section 2804(4)(ii) rate cap and other provisions of its Commission's May 29,
1998 Order(1) permits adjustment of the shopping credit when necessary.
Paragraph 23 of the QRO reads as follows:
That during some or all of this period during which the
Intangible Transition Charges and the CTCs approved by this Qualified
Rate Order are being collected, the generation component of West
Penn's charges to customers will be limited by the provisions of 66
Pa. C.S. Section 2804(4) (pertaining to rate caps) and the provisions
of the Joint Petition. For purposes of 66 Pa. C.S. Section 2804
(4)(ii), the generation component of West Penn's charges includes
CTCs, Intangible Transition Charges and other generation components.
If the combined total of these elements would cause the generation
component of West Penn's charges to exceed the rate cap specified in
66 Pa. C.S. Section 2804(4) and the Joint Petition, West Penn shall
retain whatever right it may have under existing provisions of the
statute as limited by the Joint Petition to request relief from the
rate cap, but if it does not seek such relief, or if that relief is
denied, West Penn shall adjust the non-securitized elements of its
generation charges, rather than the Intangible Transition Charges
approved by this Qualified Rate Order, to bring the charges into
compliance with the rate cap provisions of 66 Pa. C.S. Section 2804
(4) and the Joint Petition.
Initial QRO, p. 24, Paragraph 23 (emphasized order).
The emphasized language expressly permits West Penn to adjust other
non-securitized elements of the generation component in order to recover costs
associated with transition bonds. The shopping credit for consumers shopping for
generation from other suppliers is undeniably an element of the generation
component as it was carved out of this component in the Commission's May 29,
1998 Order on Joint
- --------
(1) In the West Penn Restructuring Petition for Settlement, the Parties
agreed that the Commission's Restructuring Order dated May 29, 1998, the
Reconsideration Order entered July 21, 1998 and Compliance Orders entered July
21, 1998 and September 17, 1998 should be controlling of any issue not
specifically addressed in the settlement and related agreements. Joint Petition
for Full Settlement of West Penn Power Company's Restructuring Plan and Related
Court Proceedings, p. 41 Paragraph M.
18
<PAGE> 19
Settlement of West Penn's Restructuring Plan. Specifically, the Commission
determined that the shopping credit would be the remainder after the CTC was
subtracted from the generation component of West Penn's rates. Final Order at
pp. 168, and 170. Accordingly, the shopping credit, as a non-securitized element
of the generation component, may be adjusted when circumstances warrant, and the
combined total of West Penn's CTCs, ITCs and other generation charges will not
exceed the rate cap specified in 66 Pa. C.S. Section 2804(4). The outstanding
issue presented is thus answered in the affirmative.
Nevertheless, we agree that OCA, WPPII and MAPSA raise some valid
concerns regarding the potential effect of securitizing 100% of West Penn
stranded costs, particularly when a portion of the stranded costs has already
been recovered during 1999. While the Initial QRO and Joint Settlement do allow
West Penn to securitize 100% of its stranded costs, the Commission urges that
West Penn management exercise good judgment regarding its final plans for
securitization so as to minimize the risk of jeopardizing the level of shopping
credits and competitive alternatives for its customers. The Commission notes
that neither PECO Energy, Inc. nor PP&L, Inc. securitized 100% of their stranded
costs. In this way, PP&L and PECO left a CTC in place to act as a source of
funds so that any underrecovery in ITC collections can be addressed through the
remaining CTC and securitization savings before disturbing the level of shopping
credits set forth in their settlements. In this fashion, the remaining CTC can
act as a cushion such that the shopping credit would be used for reconciliation
purposes only in extraordinary circumstances. The Commission believes that this
approach better preserves the benefits of the Joint Settlement for all parties,
especially for a company like West Penn where the shopping credits are already
the lowest among the major electric utilities.
Conclusion
West Penn's Petition for a Supplemental QRO has undergone scrutiny
of the intervenors and the Commission staff. The Parties and West Penn spent a
great deal of time resolving some important issues, and then entered into the
Settlement Agreement. This Order gives West Penn the authority it needs to take
another step forward into the competitive energy industry.
19
<PAGE> 20
Upon full consideration of the instant Petition and the Settlement
Agreement and appendices, we find that this approval is in the public interest;
THEREFORE,
IT IS ORDERED:
1. That the "Petition of West Penn Power Company for issuance of a
Supplemental Qualified Rate Order under Sections 2808 and 2812 of the Public
Utility Code" (Petition) as modified by the Settlement Agreement among the
parties, and in accordance with Paragraph 22 of the Qualified Rate Order entered
on November 19, 1998 by the Commission at Docket No. R-00973981 (Initial QRO) is
hereby granted.
2. That the Petitions to Intervene filed by The Pennsylvania State
University, Mid-Atlantic Power Supply Association, and West Penn Power
Industrial Intervenors are hereby granted.
3. That this Commission hereby declares that the Supplemental
Qualified Rate Order (Supplemental QRO) issued on behalf of West Penn Power
Company (West Penn) shall be irrevocable for purposes of Section 2812 of the
Public Utility Code. Furthermore, this Commission agrees that it will not
directly or indirectly, by any subsequent action, reduce, postpone, impair or
terminate this Supplemental QRO or the Intangible Transition Charges (ITCs)
authorized to be imposed or collected under this Supplemental QRO or the Initial
QRO. This Commission further declares that Intangible Transition Property (ITP)
includes the right, title, and interest of West Penn and any Assignee in this
Supplemental QRO, the Initial QRO, the ITCs, the rates and other charges
authorized hereby and thereby and all revenues, collections, claims, payments,
moneys or proceeds of or arising from the same. West Penn and its Assignee shall
have the right to issue or cause to be issued Transition Bonds in accordance
with this Supplemental QRO and the Initial QRO, as clarified, supplemented, and
further delineated hereby until December 31, 2008.
4. That the clarifications, supplements and further delineations
contained herein are designed primarily to enhance the prospects that the
Transition Bonds will be assigned a AAA-rating, or the highest possible
comparable rating from one or more nationally recognized statistical rating
agencies, with reasonable credit enhancements,
20
<PAGE> 21
and, thereby, maximize savings for the mutual benefit of West Penn and its
customers which the Commission determines is just and reasonable and in the
public interest.
5. That the transactions explained and proposed in Section B,
Paragraphs 10 through 14 of the Petition, as modified by the Settlement
Agreement among the parties, are hereby approved, and the results of the
proposed transactions shall be reflected in calculations of West Penn's ITCs and
in reconciliation adjustments to West Penn's ITCs in the manner and to the
extent explained therein.
6. That savings derived from the issuance of Transition Bonds shall
be calculated in the manner described in Section A, Paragraph 9 of the Petition.
7. That 75 percent of the net savings derived from the issuance of
Transition Bonds, which constitutes the percentage to be flowed through to
customers pursuant to the Final Order, shall be calculated in the manner
described in Section A, Paragraphs 6 and 9 of the Petition.
8. That West Penn shall design ITCs and CTCs associated with the
issuance of Transition Bonds using the methodology explained in Section C,
Paragraphs 15 through 19 of the Petition, as modified by the Settlement
Agreement among the parties.
9. That the reconciliation procedures for ITCs set forth in Section
D, Paragraphs 20 through 34 of the Petition, as modified by the Settlement
Agreement among the parties and resolution by the Commission set forth in
Paragraph 12 of the Settlement Agreement, are approved, and West Penn and any
successor Servicer of the ITP shall follow these procedures in its periodic
reconciliation filings to adjust the ITCs. These procedures shall be followed by
West Penn in lieu of the less specific "Transition Bond Expense Adjustment" and
"Net Securitization Adjustment" reconciliation procedures set forth in West
Penn's Application for a QRO presented as Appendix E to the "Joint Petition for
Full Settlement of West Penn Power's Restructuring Plan and Related Court
Proceedings" that was filed with the Commission on November 3, 1998.
Specifically, West Penn is authorized to file an ITC reconciliation filing on
October 1 of each year. West Penn will thereafter file updates of its October 1
filing within 15 days
21
<PAGE> 22
following the conclusion of each calendar month until the Commission issues its
order authorizing a change in rates to reflect the annual reconciliation, and
West Penn will, in addition, file quarterly updates with the Bureau of Audits on
each January 15, April 15, and July 15.
10. That West Penn is hereby authorized to file a tariff supplement
which contains the reconciliation language set forth in Appendix B to the
Petition, as modified by the Settlement Agreement among the parties, and
includes the applicable ITCs and reduced CTCs, calculated on the basis of the
methodology explained in Section C, Paragraphs 15 through 19 of the Petition, to
become effective upon at least three days' notice based upon actual data to the
extent that actual data are available. West Penn and any successor Servicer of
the ITP shall reconcile any differences between estimated data used to calculate
ITCs and CTCs set forth in the tariff supplement to be filed pursuant to the
authority granted by this Ordering Paragraph in the first annual ITC
reconciliation filed after such actual data become available.
11. That West Penn shall apply ITCs in the manner described in
Section E, Paragraphs 36 through 38 of the Petition, as modified by the
Settlement Agreement among the parties. If not terminated on an earlier date,
ITCs may be charged for service rendered through December 31, 2008.
12. That the corporate structure set forth in Section B, Paragraph
10 and Section F) Paragraph 39 is approved, and a certificate of public
convenience is hereby issued to West Penn authorizing it to establish or acquire
a subsidiary or subsidiaries, direct and/or indirect, of West Penn, to serve as
the issuer of the Transition Bonds (Issuer).
13. That the transfers of the ITP by West Penn to Newco, which will
be a wholly-owned subsidiary of West Penn, and by Newco to the SPC (Issuer)
constitute "transactions" and "true sales" as provided in section 2812(e) of the
Competition Act. Such transfers of the ITP by West Penn to Newco and by Newco to
the SPC shall be deemed perfected when the requirements set forth in Section
2812 of the Public Utility Code and any applicable Commission regulations are
met.
22
<PAGE> 23
14. That West Penn may apply to the Commission for supplements to
this Supplemental QRO, not inconsistent with the terms and provisions hereof and
the Settlement Agreement among the parties and the Initial QRO, as West Penn
deems necessary to enable the issuance of Transition Bonds authorized hereunder
and thereunder with a AAA-rating or the highest possible comparable rating from
one or more nationally-recognized statistical rating agencies.
15. That the request that the Transition Bonds have a legal final
maturity date of the earlier of ten years from the date of issuance or September
25, 2009 as set forth in Section E, Paragraph 37 of the Petition is approved.
16. That the procedure for issuance and treatment of Transition
Bonds in the event of a merger with DQE, Inc. set forth in Section D, Paragraph
35, as modified by the Settlement Agreement among the parties, is approved.
17. That, with this Supplemental QRO and the approvals granted
herein and heretofore in the Final Order, including the Initial QRO contained
therein, West Penn has obtained all regulatory approvals required from this
Commission for the issuance of Transition Bonds and all of the transactions
explained in the Petition and in the Application for a QRO presented as Appendix
E to the "Joint Petition for Full Settlement of West Penn Power Company's
Restructuring Plan and Related Court Proceedings" that was filed with the
Commission on November 3, 1998.
18. That this Commission concludes that it is in the public interest
to, and authorizes West Penn and any Assignee to: (a) assign, sell, transfer, or
pledge Intangible Transition Property (such term includes all right, title, and
interest of West Penn or any Assignee in this Supplement QRO or the Initial QRO)
in an amount sufficient to recover all Qualified Transition Expenses and in all
revenues, collections, claims, payment, money, or proceeds arising from
Intangible Transition Charges pursuant to this Supplemental QRO or the Initial
QRO to the extent that this Supplemental QRO or the Initial QRO and the rates
and other charges authorized hereunder are declared irrevocable and (b) issue,
sell and refinance, in reliance on this supplemental QRO or the Initial QRO, one
or more series of Transition Bonds, each series in one or more classes, secured
by Intangible Transition Property created by this Supplemental QRO or the
23
<PAGE> 24
Initial QRO; provided that the legal final maturity of any series of Transition
Bonds shall not exceed 10 years from the date of issuance and in no event shall
any Transition Bond have a legal final maturity date after the earlier of 10
years after the date of issuance or September 25, 2009. Notwithstanding the
foregoing, West Penn retains sole discretion regarding whether to assign, sell,
or otherwise transfer Intangible Transition Property created hereby or thereby
or to issue or cause the Transition Bonds to be issued or refinanced.
19. That a copy of this Supplemental QRO shall be served on all
parties of record and all active parties in West Penn's restructuring proceeding
at Docket No. R-00973981.
BY THE COMMISSION,
James J. McNulty
Secretary
(SEAL)
ORDER ADOPTED: August 12, 1999
ORDER ENTERED: August 12, 1999
24
<PAGE> 25
APPENDIX A
Page 1 of 4
BEFORE THE
PENNSYLVANIA PUBLIC UTILITY COMMISSION
Petition of West Penn Power Company for
Issuance of a Supplemental Qualified Rate Order
under Sections 2808 and 2812 of the Public Utility Docket No. R-00994649
Code
SETTLEMENT AGREEMENT
WHEREAS, on April 23, 1999, West Penn Power Company ("West Penn")
filed with the Pennsylvania Public Utility Commission ("PUC" or the
"Commission") a Petition for Issuance of a Supplemental Qualified Rate Order
("Petition") at the above-captioned docket; and
WHEREAS, on May 12, 1999, The Pennsylvania State University filed a
Petition to Intervene in this proceeding; and
WHEREAS, on May 13, 1999, the Office of Consumer Advocate filed an
Answer in this proceeding; and
WHEREAS, on May 14, 1999, the West Penn Power Industrial Intervenors
filed a Petition to Intervene in this proceeding; and
WHEREAS, on May 17, 1999, the Mid-Atlantic Power Supply Association
filed a Petition to Intervene in this proceeding; and
WHEREAS, on May 18, 1999, the Office of Small Business Advocate
filed a Notice of Intervention in this proceeding; and
WHEREAS, the above parties, desiring to resolve their differences
amicably, have discussed possible settlement of this proceeding; and
<PAGE> 26
APPENDIX A
Page 2 of 4
WHEREAS, as a result of these discussions, the parties have reached
a settlement of all but one of the issues which they now present for approval as
part of the Commission's final order in this proceeding;
NOW THEREFORE, intending to be legally bound, the parties agree as
follows:
1. With the modifications and revisions set forth below in this
Settlement Agreement, West Penn's Petition should be approved, subject to the
resolution of the outstanding issue set forth at Paragraph 12 hereof.
2. West Penn's request in Paragraph 24 of the Petition to reforecast
deliveries should be approved; provided, however, that any reforecasting will
comply with Section 2804(4) of the Electricity Generation Customer Choice and
Competition Act (the "Act"), 66 Pa.C.S.A. Section 2804(4) and the Commisson's
final order approving the settlement in West Penn's restructuring proceeding at
Docket No. R-00973981. Compliance with the above-referenced rate cap provision
and Commission Order shall be subject to review by the parties, in accordance
with the reconciliation procedures set forth in Paragraphs 20-38 of the
Petition.
3. The parties agree that the principal amount of the Transition
Bonds West Penn will issue will reflect a reduction for the amount of
Competitive Transition Charges ("CTCs") collected between January 1, 1999 and
the date the Intangible Transition Charges ("ITCs") associated with the
Transition Bonds become effective; however, West Penn may include Qualified
Transition Expenses ("QTEs") in the principal amount as permitted by the QRO.
4. In order to implement Paragraph 20 of the Petition that
Competitive Transition Charge ("CTC") adjustments be implemented simultaneously
with Intangible Transition Charge ("ITC") adjustments, West Penn proposes that
it will file CTC reconciliation statements. based on reforecasts of deliveries
as for the ITC, for the twelve months ended each July 31 with the Commission on
or before each August 30, with public hearings to occur on or before each
October 29 and a final order to be issued on or before each December 28. The
parties agree that this procedure to establish a January 1 effective date for
annual changes in both the ITC and the CTC should be approved.
5. West Penn's request in Paragraph 25 of the Petition to include a
provision for uncollectible accounts in calculating ITCs should be approved;
provided, however, that West Penn agrees to credit CTCs as part of the annual
reconciliation of CTCs in an amount equal to any uncollectible accounts expense
included in ITCs. In
<PAGE> 27
APPENDIX A
Page 3 of 4
addition, West Penn will make monthly payments of ITCs collected to the Bond
Trustee; however, West Penn agrees to credit CTCs as part of the annual
reconciliation of CTCs in an amount appropriate to reflect payment lags.
6. In Paragraphs 28-32 of the Petition, West Penn proposes a
schedule for filing of information to perform an annual ITC reconciliation. West
Penn's proposal should be approved; provided, however, that West Penn will file
monthly updates to its October 1 filing within 15 days following the conclusion
of each calendar month until the Commission issues its order authorizing a
change in rates to reflect the annual reconciliation. West Penn will also file
quarterly updates with the Bureau of Audits on each January 15, April 15, and
July 15.
7. Interest earned on the General Subaccount, discussed in Paragraph
13a of the Petition, shall be treated in the same fashion as interest on the
Overcollateralization Subaccount, discussed in Paragraph 13b of the Petition.
8. West Penn's proposed allocation of ITCs to customer classes and
rate schedules shall be approved; provided, however, the parties reserve the
right to review the final ITCs when filed to determine that they in fact follow
the methodology proposed by West Penn in the Petition. Any subsequent adjustment
by the Commission shall be made in ITC reconciliation proceedings. Nothing in
this paragraph or elsewhere in this Settlement Agreement is intended to limit
the imposition of ITCs sufficient to recover all Qualified Transition Expenses
on a timely basis.
9. Appendix A to the Petition sets forth a list of expenses
associated with the issuance and maintenance of the Transition Bonds. Exhibit A
to this Settlement Agreement revises the listed expenses as agreed by the
parties. Each of these expense
<PAGE> 28
APPENDIX A
Page 4 of 4
items will be based on actual experience. The parties agree that these
categories of expense are reasonable and appropriately recovered from customers,
but the parties reserve the right to review the actual amounts incurred for
reasonableness. Any adjustment made by the Commission shall be reflected in the
ITC reconciliation process.
10. West Penn's request in Paragraph 37 of the Petition to extend
the legal final maturity date of the Transition Bonds to the earlier of ten
years after the issuance date or September 25, 2009 should be approved in order
to assure that all ITC charges will be taken into account by the rating agencies
and any credit enhancers in determining the ratings of the Transition Bonds. The
scheduled maturity date of the Transition Bonds will be prior to December 31,
2008 and will not be affected by the change in the legal final maturity date so
as not to increase required credit enhancements.
11. Exhibit B to this Settlement Agreement sets forth several
technical changes to the ITC tariff supplement (Appendix B to the Petition) and
to the CTC tariff supplement (Original Page No. 5-4, Appendix B to the joint
Petition). The parties agree that these changes are reasonable and should be
approved by the Commission and reflected in the compliance tariff filed by West
Penn when the Transition Bonds are issued.
12. The parties agree that the issue of adjustments to West Penn's
generation rates in reconciliation of the ITC shall be separately submitted to
the Commission for decision.
13. Paragraph 35 of the Petition addresses action to be taken with
respect to the Transition Bonds if the proposed merger with DQE, Inc. is
consummated. The procedure proposed by West Penn should be approved; provided,
however, that any credit adjustment to rates necessary to reflect issuance of
not more than $630 million of Transition Bonds shall include a reduction for all
associated costs, fees, and expenses attributable to the Transition Bonds issued
in excess of $630 million. These amounts as proposed by West Penn will be
subject to review and concurrence by the parties and the Commission.
14. Appendix D of the Petition sets forth a Proposed Form of Order
for the Supplemental Qualified Rate Order. The parties agree that this proposed
order should be revised to reflect this Settlement Agreement and to provide
additional "true sale" and third party interest findings for further transfers
of Intangible Transition Property. A proposed revised Supplemental Qualified
Rate Order is provided as Exhibit C to this Settlement Agreement.
<PAGE> 1
EXHIBIT 99.3
INTERNAL REVENUE SERVICE
Index Numbers:
61.00-00 61.03-00
61.43-00 451.01-00 Department of the Treasury
Washington, DC 20224
Person to Contact:
Thomas M. Preston (ID No. 50-08511)
Regis F. Binder Telephone Number:
Treasurer 202-622-4443
West Penn Power Company Refer Reply To:
800 Cabin Hill Drive CC:DOM:FI&P:2/PLR-106944-99
Greensburg, PA 15601 Date: JULY 23 1999
Legend
Parent = Allegheny Energy, Inc.
= EIN: 13-5531602
Company = West Penn Power Company
= EIN: 13-5480882
Issuer = Business Trust
State A = Pennsylvania
State B = Delaware
State C = Maryland
Statute = Title 66 Pa. Consolidated Statutes, Section
2801, Electricity Generation Customer Choice
and Competition Act
Date 1 = November 19, 1998
Date 2 = December 31, 2008
Year 1 = 1996
a = $670 million
b = .5%
c = 2%
Dear Mr. Binder:
This letter is in reply to the letter dated April 6, 1999, requesting a
ruling on the proposed transaction described below.
<PAGE> 2
2
FACTS
Parent is a State C corporation that is the common parent of an affiliated
group of corporations which includes Company and which files a consolidated
return with Company. Company, an accrual based State A corporation, is an
investor-owned electric utility engaged in the generation, transmission,
distribution and sale of electricity to residential, commercial, industrial, and
governmental customers within all or part of 23 counties in State A. As such,
Company is subject to regulation by both the Public Utility Commission (PUC)
and the Federal Energy Regulatory Commission.
State A is deregulating its electric utility industry. As a result,
Company's customers will be allowed to contract directly with alternative
suppliers of electricity, and Company will compete with other parties to sell
electricity. The Statute was enacted in December of year 1 to provide for the
restructuring of the electric utility industry in State A through the unbundling
of electric services into separate generation, transmission and distribution
services with open retail competition for generation. Electric distribution and
transmission services will remain regulated by the PUC.
The Statute requires utilities to submit to the PUC restructuring plans
that address "stranded costs" resulting from competition. Stranded costs include
regulatory assets, nuclear decommissioning costs and long-term purchased power
commitments, for which full recovery is allowed, and other costs, including
investment in generating plants, spent-fuel disposal, retirement costs and
reorganization costs, for which an opportunity for recovery is allowed in an
amount determined by the PUC as just and reasonable. These costs, after
mitigation by the utility, are to be recovered through a competitive transition
charge (CTC) approved by the PUC and collected from distribution customers for
up to nine years, or for an alternate period determined by the PUC for good
cause shown.
As a mechanism for the mitigation of CTCs and the reduction of customer
rates, the Statute authorizes an electric utility to securitize its stranded
costs through the issuance of bonds (Transition Bonds) either directly by the
utility, or by a finance subsidiary or third party assignee of the utility. The
Statute facilitates this securitization by creating, as security for the
Transition Bonds, a property right designated intangible transition property
(ITP), which represents the irrevocable right to recover from a utility's
jurisdictional customers, amounts sufficient to recover the utility's stranded
costs, as well as amounts to cover the expenses of issuing and servicing the
Transition Bonds, and the funding of any necessary reserve accounts, which are
collectively defined as qualified transition expenses (QTEs). ITP is created
through the issuance of a qualified rate order (QRO) by the PUC that is declared
irrevocable. Although the PUC may approve periodic adjustments to the ITC in
accordance with the Statute and the QRO, once a QRO is declared irrevocable, it
may not be modified by the Company,
<PAGE> 3
3
the PUC, the State or any instrumentality thereof. The Statute provides that the
transfer of ITP to a subsidiary or assignee of the utility pursuant to an
irrevocable QRO shall be treated as an absolute transfer of the utility's right,
title and interest as in a true sale, and not as a pledge or other financing
other than for state income and franchise tax purposes.
Transition Bonds will be repayable from intangible transition charges
(ITCs). ITCs are non-bypassable charges imposed on a utility's jurisdictional
customers to recover the utility's authorized QTEs. Jurisdictional customers are
those located in the utility's certificated territory, whether or not the
customers purchase electricity from the electric utility. The ITC will be
calculated as a percentage of expected total base rate revenue to be collected
by customer rate class, the collection of which will likely be dependent on,
inter alia, a utility's ability to forecast the usage, delinquencies,
charge-offs, and payment lags of customers in each rate class.
PROPOSED TRANSACTION
Company will form a wholly owned domestic corporation (Newco). Company will
contribute the ITP to Newco in exchange for Newco stock. Newco will form the
Issuer, as a remote, wholly owned State B limited liability company. The Issuer
will not elect to be treated as an association taxable as a corporation under
section 301.7701-3(b)(1) of the Procedure and Administration Regulations.
Newco will sell the ITP and associated ITC revenues created by the QRO
adopted on Date 1 to the Issuer. The Issuer will issue Transition Bonds in the
aggregate principal amount of up to a secured by the ITP and associated ITC
revenues. The net proceeds from the issuance of the Transition Bonds will be
transferred to Newco as payment for the ITP.
The ITC will be a specified dollar amount on each customer bill determined
by applying certain rates per kilowatt hour of usage and, in some cases, per
kilowatt hour of demand, to each customer's bill. The rates applicable to each
will initially be based on various rate schedules that group customers into
billing categories. Generally, it is anticipated that the ITC will be adjusted
based on which of three classes (industrial, commercial or residential) the
customer is in. The collection of the ITC will likely depend, inter alia, on the
number of customers and/or usage, delinquencies and charge-offs and payments
lags.
Newco will contribute as equity to the Issuer, cash equal to at least b of
the initial aggregate principal amount of the Transition Bonds to be issued. The
Issuer will deposit that amount into a Capital Subaccount and it will be
invested in financial
<PAGE> 4
4
instruments that are issued by parties unaffiliated with Company and that can
be readily converted into cash.
Additionally, the QTE's to be recovered through the ITC will include an
additional amount intended as credit enhancement for the Transition Bonds.
Collections of this additional amount will be deposited into an
Overcollaterization Subaccount. The balance in the Overcollateralization
Subaccount will be expected eventually to reach at least b of the original
principal amount of the Transition Bonds. ITC collections will be scheduled
with the expectation that this balance will be collected ratably over the
expected term of the Transition Bonds.
The issuer will issue Transition Bonds in the form of debt securities. The
Transition Bonds may be issued in one or more series. Different series may have
different maturities and coupon rates, and each series may have classes with
different maturities and coupon rates. Each series will be entitled to recover,
through the ITC approved by one or more QROs, the QTEs based upon a specified
principal amount of Transition Bonds for such series, including interest at the
coupon rate or rates applicable to such series. The Transition Bonds will be
recourse to the Issuer and will be secured on a pari passu basis by the ITP,
associated ITC revenues, the equity and all other assets of the Issuer.
Each of the Transition Bonds will have an expected maturity date by which
principal is expected to have been repaid in full and a legal final maturity
date by which it must be repaid in full. The legal final maturity date will be
after the expected maturity date due to the lack of certainty concerning cash
available for principal payments, and because the ITC is calculated based on
estimates of variables such as levels of charge-offs, delinquencies and levels
of usage. The legal final maturity date in each case will occur within three
years after the expected maturity date. Under the QRO, the legal final maturity
date may not be later than Date 2.
Interest on the Transition Bonds will be payable quarterly or semiannually
at rates that are based on yields commensurate with similarly rated debt
obligations of comparable weighted average lives. The Transition Bonds are
expected to be sold at or near par value. Each class of Transition Bonds will
have a schedule of principal payments to be made on the interest payment dates.
Moveover, scheduled principal payment on any one class of Transition Bonds and
in the aggregate may vary significantly from period to period.
The Transition Bonds may be subject to an optional clean-up call, i.e.,
early payment of all outstanding principal and accrued interest, when the
outstanding principal of the series declines to a specified percentage of the
original principal amount of the series.
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Initially, the Company will service the consumer accounts that are subject
to the ITCs under the Servicing Agreement between Company and the Issuer. As
servicer, Company will bill and collect ITCs and retain all books and records
regarding the ITCs subject to the Issuer's right of inspection. Company will,
on at least a monthly basis, remit all collected ITCs to the Collection Account
maintained by the indenture trustee for the benefit of the Transition
Bondholders. Only in the event that Company fails satisfactorily to perform its
servicing functions or is subject to certain insolvency events will Company be
subject to replacement as servicer. Company's ability to resign as servicer
will be restricted; however, Company may subcontract with other companies to
carry out some of its servicing responsibilities, so long as the rating of the
Transition Bonds are neither reduced nor withdrawn. Company will be entitled to
compensation, in the form of a servicing fee, for its servicing activities and
reimbursement for certain of its expenses in the manner set forth in the
documentation applicable to each series. The servicing fee will be set at an
annual level of not more than c of the outstanding amount of Transition Bonds.
As additional servicing compensation, Company will retain all investment income
earned on the ITCs between the time they are collected and the time they are
remitted to the Collection Account.
Either quarterly or semiannually, the Issuer will pay out of the
Collection Account the Issuer's fees, trustee fees, servicing fees,
administrative costs, operating expenses, accrued but unpaid interest on all
classes of the Transition Bonds, and principal (to the extent scheduled) on the
outstanding Transition Bonds. Any remaining balance in the Collection Account
will be used to restore the Capital Subaccount, fund and replenish the
Overcollateralization Subaccount (to the extent scheduled) and then be added to
the Reserve Subaccount.
If the ITCs collected in any period are insufficient to satisfy the
Issuer's payment obligations on the Transition Bonds, including operating
expenses and fees, the Issuer may draw first on amounts in the Reserve
Subaccount, next on the Overcollateralization Subaccount and finally on the
Capital Subaccount (except for amounts set aside to ensure payments of the
Issuer's expenses).
If the ITCs deposited in the Collection Account differ from the ITCs
projected to be collected, Company, as servicer, will file for an adjustment
with the PUC and the PUC will provide for such an adjustment at least annually.
Adjustments during the final calendar year of the ITC collection for any series
will occur quarterly, or as frequently as monthly, to ensure full recovery of
the QTEs. All adjustments will be designed so that, at the end of the following
period, the Capital Subaccount will (if necessary) be restored, the
Overcollateralization Subaccount will be replenished (if necessary) and brought
to its scheduled level, and the Reserve Subaccount will be zero.
Investment income earned on amounts in the Collection Account, the Capital
Subaccount, the Overcollateralization Subaccount and the Reserve Subaccount will
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generally be treated in the same manner as current ITC collections. However,
some of this investment income that is not needed for other purposes and would
otherwise be deposited into the Reserve Subaccount will be released to the
Issuer and may be distributed to Newco.
The Transition Bonds will provide for the following events of default: (1)
a default of five days or more in the payment of accrued interest on any class
of Transition Bonds; (2) a default in the payment of outstanding principal as
of the legal final maturity date; (3) a default in payment of the redemption
price following an optional clean-up call as of the redemption date; (4)
certain breaches of covenants, representations or warranties by the Issuer in
the indenture under which the Transition Bonds are issued; and (5) certain
events of bankruptcy, insolvency, receivership or liquidation of the issuer. In
the event of payment default, the indenture trustee or holders of a majority in
principal amount of all series then outstanding may declare the principal of
all classes of the Transition Bonds to be immediately due and payable.
Company expects virtually all of the Transition Bonds to receive a rating
of AAA by at least two nationally recognized statistical rating agencies.
After repayment of any series of the Transition Bonds, any balances in the
various accounts relating to that series will be released to the Issuer and may
be distributed by the Issuer to Newco.
ISSUES
(1) Does the issuance of the QRO authorizing the collection of the CTC, or
the issuance of Transition Bonds, result in gross income to Company or to Newco?
(2) Are the Transition Bonds obligations of Newco?
LAW
Section 61 of the Internal Revenue Code generally defines gross income as
"income from whatever source derived", except as otherwise provided by law.
Gross income includes income realized in any form, whether in money, property,
or services. Section 1.61-1(a) of the Income Tax Regulations. This definition
encompasses all "accessions to wealth, clearly realized, and over which the
taxpayers have complete dominion" Commissioner v. Glenshaw Glass Co., 348 U.S.
426, 431 (1955), 1955-1 C.B. 207.
The right to collect the CTC is of significant value in producing income
for Company, and State A's action in making the CTC rights transferable has
enhanced
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that value. Generally, the granting of a transferable right by the government
does not cause the realization of income. Rev. Rul. 92-16, 1992-1 C.B. 15
(allocation of air emission rights by the Environmental Protection Agency does
not cause a utility to realize gross income); Rev. Rul. 67-135, 1967-1 C.B. 20
(fair market value of an oil and gas lease obtained from the government through
a lottery is not includible in income).
The economic substance of a transaction generally governs its federal tax
consequences. Gregory v. Halvering, 293 U.S. 465 (1935), XIV-1 C.B. 193.
Affixing a label to an undertaking does not determine its character. Rev. Rul.
97-3, 1997-2 I.R.B. 5. An instrument secured by property may be an obligation
of the taxpayer or, alternatively, may be a disposition of the underlying
property by the taxpayer. Cf. id. (the Small Business Administration is the
primary obligor of certain guaranteed payment rights that are created under its
participating security program).
CONCLUSIONS
Based on the facts as represented, we rule as follows:
(1) Neither the issuance of the QRO financing order authorizing the
collection of the CTC nor the issuance of Transition Bonds, result in gross
income to Company or to Newco.
(2) The Transition Bonds are obligations of Newco.
Except as specifically ruled on above, no opinion is expressed or implied
regarding the federal tax consequences of the transaction.
This ruling is directed only to Company. Under section 6110(k)(3) of the
Code, this ruling may not be used or cited as precedent.
A copy of this letter should be attached to the federal income tax return
of Company for the taxable years that include the transaction described in this
letter.
Sincerely yours,
Assistant Chief Counsel
(Financial Institutions & Products)
By: /s/ Marshall Feiring
---------------------------
Marshall Feiring
Senior Technician Reviewer,
Branch 2
