After increasing the estimated construction costs for building an emissions control facility at a West Virginia plant, and adding a novel twist to the deal's structure, Allegheny Energy, Inc. received approval from the Public Service Commission of West Virginia to use asset-backed securities to finance the project.
The ratepayer-backed deal now calls for Allegheny Energy to issue $466.5 million in ABS bonds, which will finance the construction of equipment to remove sulfur dioxide from coal burning emissions at its Fort Martin Power Station near Maidsville, W. Va. The so-called scrubber technology will bring the plant, built in 1960, into compliance with the Environmental Protection Agency's latest emissions control rule. The EPA's Clean Air Interstate Rule calls for 28 states and the District of Columbia to reduce nitrogen oxides and sulfur dioxide emissions from power plants by 2015.
Part of the bond issuance will be collateralized by an environmental control charge that will appear on consumers' utility bills. The surcharge will begin once the bonds are issued. Based on the estimates stated in the order, the charges should amount to about $3.50 per month for a typical residential customer using 1,000 kilowatt-hours of electricity, according to a statement from Allegheny.
The Greensburg, Pa., utility burns about 18 million tons of coal a year to produce energy for its customers in Pennsylvania, Maryland, West Virginia and Virginia. Allegheny expects to finish updating the Fort Martin facility and have the scrubbers and running by the end of 2009. Aside from producing cleaner emissions, Allegheny says the project will allow it to use more coal.
Deal specifics
The construction costs were increased from $338 million to $450 million. Aside from being allowed to securitize the scrubber construction costs, Allegheny can also seek to recoup actual construction costs that exceed $450 million during the period prior to construction being in progress.
The deal uses an unusual structure that allows the Greensburg, Pa., utility to issue the bonds out of a single grantor trust or through two smaller special-purpose subsidiaries named after Potomac Edison and Monongahela Power Co., which serve customers in jurisdictions covered under the financing order. Monongahela Power owns the Fort Martin plant.
PE Environmental Funding will issue debt and use its net proceeds to repay MP Environmental Funding for construction costs and financing fees incurred from upgrading the Fort Martin facility. The utility has the option of issuing bonds out of the grantor trust, but it chose to launch the deal with two issuers to achieve better pricing, according to company officials.
The PSC of West Virginia named New York City-based Saber Partners as its financial advisor, for a deal that is expected to price as early as mid-February. Although Allegheny has not selected its underwriter on the transaction, sources say some 15 firms are vying for varying roles on the deal.
Other utility ABS deals in the queue for this year include a $635 million deferred energy balance ABS deal from Baltimore Gas & Electric; a proposed $365 million transaction from Entergy Texas and a $690 million transaction from Entergy Corp.'s Louisiana division, intended to recoup storm damage costs incurred after Hurricane Katrina.
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