FirstEnergy's Pennsylvania Default Service Program

Credit Requirements

CRE 00001
Published On: 10/26/2012

Question: Is there a credit-based tranche bid limit in the Default Service Program auctions?

Answer: No, there is no credit-based tranche bid limit.  There is a load cap that limits the number of tranches any bidder can bid across all products within an auction.

CRE 00002 (revised 05/15/2013)
Published On: 11/02/2012

Question: Bidder applicants are given an option to submit either an LOC or cash for the pre-bid security. Can we propose changes to the LOC and if so when would those be due?

Answer: Yes, during the Part 1 Application process, you can propose redlined changes to the Pre-Bid Letter of Credit. The Word version of the Pre-Bid LOC can be found here: http://www.fepaauction.com/Documents/SupplierDocuments.aspx. The deadline for all Part 1 Application documents for an upcoming auction is announced on the Calendar page of the Information Website: http://www.fepaauction.com/Calendar.aspx.

CRE 00003
Published On: 11/08/2012

Question: What is the timeline for the return of the pre-bid security?

Answer: Once the auction results are approved by the Commission, a pre-bid letter of credit will be marked as canceled and returned, and any pre-bid cash deposit will be transferred to the account designated on the bidder's Part 1 Application.  This will occur as soon as possible if the bidder has won no tranches, or after the winning bidder has signed the Supplier Master Agreement (SMA) and has complied with all creditworthiness requirements of the SMA for the tranches that it has won.

CRE 00004
Published On: 11/26/2012

Question: There are multiple beneficiaries on the Pre-bid Letter of Credit. Can you please confirm that if the Pre-Bid LC is drawn upon, payment will be made to only one account?

Answer: The Companies may do a partial or full drawing in accordance with the terms and conditions specified in the Pre-Bid Letter of Credit.  The Companies would use Annex 2 of the Pre-Bid Letter of Credit for that purpose.  The amount specified in Annex 2 would be directed to a single account.

CRE 00005 (revised 10/10/2014)
Published On: 11/26/2012

Question: (1) With respect to the letter of credit that must be maintained during the term of the Supplier Master Agreement, would each letter of credit have a single EDC beneficiary or would only one letter of credit with multiple EDC beneficiaries be required if the bidder were to be awarded tranches with multiple EDCs to serve full requirements Default Service for those EDCs?

(2) In the event that a bidder is awarded tranches to serve full requirements Default Service under multiple EDC auctions (e.g., for Met-Ed, Penelec, Penn Power, and West Penn Power), will margining be done on an EDC-specific basis (i.e., Total Exposure Amount calculating exposure of that particular EDC only), or would it take into account and aggregate the exposure of all of the EDCs to DS Supplier?

(3) Are the EDCs required by the SMA or any other provision of the Default Service Program to maintain a minimum standard of credit quality (e.g., Minimum Rating as defined in Section 6.4 of the SMA)?

Answer: (1) Each letter of credit that must be maintained during the term of an SMA will have a single EDC beneficiary.

(2) Margining will be done separately for each EDC.

(3) No. The SMAs do not include credit requirements for the EDCs and there is no provision of the Default Service Program requiring the EDCs to maintain a minimum standard of credit quality.

CRE 00006 (revised 07/08/2014)
Published On: 12/03/2012

Question: Can a Pre-Bid LOC be used for consecutive auction events? Our intent would be to instruct the Independent Evaluator in our Part 2 Application for the first event to retain the LOC for the second event if it is allowed.

Answer: Yes, the Pre-Bid Letter of Credit can be kept open for subsequent auctions.  The Expiration Date must be at least thirty days following the date of the last auction for which the LOC will be used.

CRE 00007 (revised 10/10/2014)
Published On: 12/03/2012

Question: How do we deposit cash as pre-bid security?

Answer: Per page 15 of the Part 2 Application, "If you are submitting a cash deposit, you must attach a copy of your W9 (for tax ID) and a copy of your banking information on your company's letterhead, signed and dated."  To make a cash deposit, request the wiring instructions from the Independent Evaluator.  Also on page 15 of the Part 2 Application, you must provide your wiring instructions that will be used to return your cash deposit.  This information is needed so that the cash can be returned promptly to the bidder.

CRE 00008 (revised 10/10/2014)
Published On: 07/29/2013

Question: Sections 6.1 of the Supplier Master Agreement (SMA) requires the Default Service Supplier to "inform the Company immediately of any changes in its credit rating or financial condition," and Section 6.8(a) of the SMA requires the DS Supplier to "inform the Company immediately of any changes in its credit rating or financial condition or that of its Guarantor." Can you provide examples of when the Companies want to be notified?

Answer: A couple of examples:  (1) If a Supplier's credit rating from any of the three SMA-referenced rating agencies changes, notification to the Companies is required.  (2) If a material event occurs that detrimentally impacts a Supplier's financial condition, such as what would be reported in an 8-K filing, then the Companies require notification.

CRE 00009 (revised 02/23/2015)
Published On: 12/09/2013

Question: In a follow-up to FAQ CREDIT 00006, may a Supplier request that the pre-bid letter of credit posted for the upcoming auction be held by CRA for future auctions? The Supplier would instruct the bank to amend the letter of credit to $1.00 in between auctions, amending it by increasing to the proper dollar amount at the time of the next auction. The pre-bid letter of credit would not expire for one calendar year hence.

Answer: Yes, CRA can hold the pre-bid letter of credit on file.

CRE 00011
Published On: 10/14/2014

Question: What is the amount per tranche required for the "maximum Pre-Bid Security" discussed in the Part 1 Application, necessary for applicants with foreign guarantors?

Answer: The pre-bid security amount is $250,000 per tranche of desired initial eligibility, regardless of whether there is a foreign guarantor.

CRE 00012
Published On: 10/14/2014

Question: Can you confirm the limit amounts necessary for inclusion in Section 1 of the Guaranty (Appendix G of the Default Service Supplier Master Agreement) for “Option 1” and “Option 2” in that paragraph? Additionally, if we are currently a Default Service supplier and we win any products in the October 2014 DS auction, is it possible to extend the guaranty already in place to cover any new products won, or is a new guaranty required?

Answer: The amounts for Option 1 or Option 2 are at the discretion of the Guarantor.  The Guarantor can issue a guaranty amount up to the Maximum Credit Limit based on the Guarantor's Credit Rating per Appendix A of the Supplier Master Agreement.  If the Total Exposure Amount exceeds the Guaranty amount, then a Margin call may be required per Section 6.5 of the Supplier Master Agreement.  Since this is a new delivery period, the Companies prefer that a new guaranty be issued, which is Appendix G of the Supplier Master Agreement.

CRE 00013
Published On: 02/23/2015

Question: Per the SMA, the Company needs to be notified of any changes to the Supplier's financial stance. Is there a materiality standard? Would you be able to provide examples of what would trigger this requirement?

Answer: Any change in the Supplier's credit rating would require a notice to the Company.  An example of a change in the financial condition that would trigger a notice is a 5% or greater change in the Supplier's Tangible Net Worth.

CRE 00014
Published On: 02/25/2015

Question: In the Sample Default Supplier Letter of Credit (Appendix F to the Supplier Master Agreement), what is the intent and purpose of Annex 5? Per Paragraph 7(iv) of the Letter of Credit (LC), the LC is clearly evergreen (stating that unless sooner terminated, the letter of credit “will be automatically extended without written amendment for successive additional one (1) year periods”). Annex 5 is inconsistent with that Paragraph 7(iv). Is Annex 5 a commitment to issue an LC in replacement of the existing LC, assuming no notice of non-renewal has been sent? As written in Paragraph 1 of the LC, the bank is bound to issue Annex 5 which in the event the LC is automatically renewed becomes a contradiction in the LC terms. Would the bank be issuing a new LC with the same number or a new number? If it is a new number, then the existing LC is still on the books until returned for cancellation. Because the LC has an auto-renewal provision in Paragraph 7, when would Annex 5 be required? And if Annex 5 were used, would the bank be issuing a new LC with the same number or a new number with the existing letter of credit to be returned to the issuing bank at the time the new LC is issued?

Answer: Annex 5 may never be needed due to the auto-renewal provision in Paragraph 7.  Annex 5 does give the Supplier the option of issuing a new Letter of Credit with a new number.

CRE 00015
Published On: 03/11/2015

Question: If a Default Service Supplier is not granted an unsecured line of credit based on its creditworthiness, and is also not granted an unsecured line of credit based on the creditworthiness of a guarantor, is there a minimum security deposit that must be provided when the SMA is executed if the DS Supplier is a winning bidder? Or may such DS Supplier provide no security deposit upon execution of the SMA and instead provide cash or a letter of credit only if and when, during the term of the SMA, the Total Exposure Amount exceeds the Minimum Transfer Amount (assuming that such DS Supplier’s credit limit would be $0), pursuant to a request to post Margin?

Answer: If a bidder wins Industrial tranches and has no unsecured credit, then security of $140,000 per Industrial tranche would be required per Section 6.3 of the Supplier Master Agreement (SMA).  If a bidder wins Residential and/or Commercial tranches, the MTM credit exposure methodology in Appendix B of the SMA is used.  If the Total Exposure Amount exceeds the Minimum Transfer Amount (the bidder has zero unsecured credit), then security would be required at the time the SMA is signed.

CRE 00016 (revised 12/03/2015)
Published On: 09/10/2015

Question: The applicant is not rated. Can we still get some unsecured credit by submitting financials? The financials are not audited.

Answer: Per Section 6.4 of the Supplier Master Agreement, in order to be granted an unsecured line of credit, the Default Supply Supplier or its Guarantor (if the DS Supplier is providing a Guaranty) must be rated by at least two of the following rating agencies: S&P, Moody's, or Fitch.

CRE 00017
Published On: 09/30/2015

Question: If an applicant submits cash as their form of pre-bid security, are they bound to that form of security throughout the entire supply period should they win tranches in the auction? Or is an applicant allowed to use cash for pre-bid security and then execute an approved letter of credit after the auction results are known?

Answer: The pre-bid security is returned to bidders once the auction results are reviewed by the Commission. The form of security chosen if the bidder becomes a Default Service Supplier can differ from the form of pre-bid security.  Section 6.7 of the Supplier Master Agreement lists the acceptable methods for posting security as a Default Service Supplier.

CRE 00018 (revised 03/13/2017)
Published On: 03/13/2017

Question: The Part 1 Application indicates the following:

A potential bidder that had secured approval for an alternate form of guaranty from any previous Default Service procurement auction held by one or more of the Companies and wishes to use the same alternate form of guaranty can renew this by submitting the following:
1. The alternate form of guaranty from any previous Default Service procurement auction by the Companies;
2. The enforceability opinion from any previous Default Service procurement auction by the Companies;
3. A certification that the text of the alternate form of guaranty is exactly the same as the alternate form of guaranty that had been previously approved from any previous Default Service procurement auction by the Companies;
4. A certification that the text of the enforceability opinion is exactly the same as the enforceability opinion that had been previously approved from any previous Default Service procurement auction by the Companies.

Are the Companies requesting that these certifications be provided by in-house legal counsel?

Answer: The only certification from outside counsel is the enforceability opinion. The applicant must provide an enforceability opinion with respect to the alternate form of guaranty from its  counsel. The accompanying enforceability opinion must be from a law firm of national (i.e., United States) standing, must not be weaker than would be industry norm, and must contain only those qualifications that would be typical. The opinion shall name the Companies and explicitly state that the Companies are entitled to rely on the opinion for purposes of the transaction at issue.

FAQs Disclaimer

The information provided in the Frequently Asked Questions (“FAQs”) section of the Site has been prepared by the Companies and its advisors for the purposes of facilitating the auction process. The information presented and distributed here is subject to update, modification and/or amendment. The information is current as of the posting date. The material presented and distributed here is for informational purposes only and is made available with the understanding that any individual accessing it will use it for the sole purpose of participating in the aforementioned auction process. The information is not intended to form any part of the basis of any investment decision, valuation, or any bid that may be submitted during the auction process. This information should not be relied upon, and each recipient should make its own independent assessment of the subject opportunity after making all investigations it deems necessary.

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