Allegheny Taps W.Va. Environmental Bond Structure

04/05/2007

Allegheny Energy subsidiaries Potomac Power and Monongahela Power have tapped West Virginia regulation to fund planned environmental upgrades via securitized bond deals. Funds collected from customers through an environmental surcharge will be securitized and dedicated to the repayment of the senior secured sinking fund environmental control bonds. Potomac placed $115 million and Monongahela placed $345 million. The proceeds will be used to purchase desulfurization equipment for one coal plant.

“The issue is a first for environmental upgrades,” says Joseph Fichera, ceo at Saber Partners, financial advisor to the Public Service Commission of West Virginia on the transaction. He explains that it is a useful tool for utilities in states using coal generation. Ratepayer-backed bonds have previously been issued to recover stranded costs associated with deregulated markets. While 17 other states authorize securitizations for utility purposes, only West Virginia and Wisconsin allow them for environmental upgrades. An Allegheny spokesman did not make an official available for comment.

Coupons ranged from 4.98% to 5.52% on the notes divided into tranches of four-, 10-, 16-, and 20-year maturities. The notes are the first utility securitization with TRACE eligibility, which allows their secondary market transactions to be reported by the National Association of Securities Dealers’ trade reporting and compliance engine.

First Albany Capital and Loop Capital Markets were bookrunners, while Bear Stearns and Scotia Capital were underwriters. “We put together a team to target different types of investors,” says Fichera. Educating investors was a big job, and a key part of the effort to sell the bonds to a diverse retail base. About half of the bonds are expected to go to overseas investors.

Monongahela will install flue gas desulfurization equipment, or scrubbers, at the 1.1 GW coal-fired Fort Martin Power Station north of Morgantown, W.Va. Potomac’s share of the proceeds will be paid to Monongahela as prepayment for power, who will in turn use it to fund the Fort Martin scrubber. Allegheny’s overall environmental improvement program includes commitments to invest approximately $1.4 billion to reduce emissions over the next few years.