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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 26, 2001
REGISTRATION NO. 333-[ ]
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-3
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
ATLANTIC CITY ELECTRIC TRANSITION FUNDING LLC
(Issuer with respect to the Bonds)
(Exact name as specified in registrant's Certificate of Formation)
DELAWARE 51-0408521
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
ATLANTIC CITY ELECTRIC TRANSITION FUNDING LLC
800 KING STREET
WILMINGTON, DELAWARE 19899
(302) 429-3114
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
PETER F. CLARK, ESQ.
GENERAL COUNSEL
CONECTIV
800 KING STREET
P.O. BOX 231
WILMINGTON, DELAWARE 19899
(302) 429-3089
(Name, address, including zip code, and telephone number
including area code, of agents for service)
Copies to:
STEPHEN G. ROONEY GEOFFREY K. HURLEY
LEBOEUF, LAMB, GREENE & MACRAE, L.L.P. LATHAM & WATKINS
125 WEST 55TH STREET 885 THIRD AVENUE
NEW YORK, NEW YORK 10019 NEW YORK, NEW YORK 10022
(212) 424-8000 (212) 906-1200
Approximate date of proposed sale to the public: From time to time
after this Registration Statement becomes effective.
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, 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
PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE AGGREGATE OFFERING REGISTRATION
SECURITIES TO BE REGISTERED BE REGISTERED PER UNIT(1) PRICE(1) FEE
Transition Bonds Issuable in
Series $ 1,000,000 100% $ 1,000,000 $ 250.00
(1) Estimated solely for the purpose of calculating the registration fee.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON ANY 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 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON A DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT
TO SAID SECTION 8(a), MAY DETERMINE.
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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 are not an
offer to sell these securities and are not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED _______, 2001
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED , 2001)
ATLANTIC CITY ELECTRIC TRANSITION FUNDING LLC
Issuer
ATLANTIC CITY ELECTRIC COMPANY
Seller and Servicer
Series 2001-1
$__________ Transition Bonds
THE ISSUER WILL ISSUE:
Class A-1 Class A-2 Class A-3 Class A-4
--------- --------- --------- ---------
Principal Amount........... $ $ $ $
-------- -------- -------- --------
Price...................... $ $ $ $
-------- -------- -------- --------
( %) ( %) ( %) ( %)
------- ------- ------- -------
Underwriters' Discounts and
Commissions........... $ $ $ $
-------- -------- -------- --------
( %) ( %) ( %) ( %)
------- ------- ------- -------
Proceeds to the Issuer..... $ $ $ $
-------- -------- -------- --------
Bond Rate.................. % % % %
------- ------- ------- -------
Interest Paid.............. [Quarterly/ [Quarterly/ [Quarterly/ [Quarterly/
Semiannually] Semiannually] Semiannually] Semiannually]
First Payment Date.........
--------- --------- --------- ---------
Expected Final Payment Date
--------- --------- --------- ---------
Final Maturity Date........
--------- --------- --------- ---------
BEFORE YOU PURCHASE THESE SECURITIES, YOU SHOULD CAREFULLY
CONSIDER THE RISK FACTORS BEGINNING ON PAGE 21
IN THE ACCOMPANYING PROSPECTUS.
- These securities are obligations of Atlantic City Electric Transition
Funding LLC only and are backed only by the assets of Atlantic City
Electric Transition Funding LLC.
- The issuer is a special purpose entity.
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.
There currently is no secondary market for the Series 2001-1 Bonds, and there is
no assurance that one will develop.
MORGAN STANLEY
The date of this prospectus supplement is ________________ , 2001.
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TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
Page
----
WHERE TO FIND INFORMATION IN THESE DOCUMENTS...................................................... 4
SUMMARY OF TERMS.................................................................................. 5
Securities Offered............................................................................ 5
Introduction.................................................................................. 6
The Collateral................................................................................ 8
Interest...................................................................................... 8
Principal..................................................................................... 8
Credit Enhancement............................................................................ 8
Optional Redemption........................................................................... 9
Transition Bond Charge Adjustment Process..................................................... 9
Tax Status.................................................................................... 9
ERISA Considerations.......................................................................... 10
Servicer's and Issuer's Mailing Address and Telephone Number of Principal Executive Office.... 10
RISK FACTORS...................................................................................... 10
THE SERIES 2001-1 BONDS........................................................................... 10
General....................................................................................... 10
Allocations and Payments; Priority of Distributions........................................... 10
Interest Payments............................................................................. 12
Principal Payments............................................................................ 13
Optional Redemption........................................................................... 16
CREDIT ENHANCEMENT................................................................................ 16
Periodic Adjustment of the Transition Bond Charge............................................. 16
Collection Account and Subaccounts............................................................ 17
Issuance of Additional Series................................................................. 21
REPORTS TO HOLDERS OF SERIES 2001-1 BONDS......................................................... 22
THE TRANSITION BOND CHARGES....................................................................... 22
DESCRIPTION OF ACE'S BUSINESS..................................................................... 23
SERVICING......................................................................................... 23
Servicing Fee................................................................................. 23
Servicer Advances............................................................................. 23
UNDERWRITING THE SERIES 2001-1 BONDS.............................................................. 23
The Underwriters' Sales Price for the Series 2001-1 Bonds..................................... 23
No Assurance as to Resale Price or Resale Liquidity for the Series 2001-1 Bonds............... 24
Various Types of Underwriter Transactions That May Affect the Price of the Series 2001-1 Bonds 24
RATINGS FOR THE SERIES 2001-1 BONDS............................................................... 25
GLOSSARY OF DEFINED TERMS......................................................................... 25
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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 21 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 2001-1 BONDS" and "CREDIT ENHANCEMENT" describe the key
structural and credit enhancement features of your series; and
- "THE TRANSITION BOND CHARGES" describes the transition bond 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 transition bond 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.
- --------------------------------------------------------------------------------
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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
THE SERIES 2001-1 TRANSITION BONDS
$_____
- --------------------------------------------------------------------------------
ISSUER: ATLANTIC CITY ELECTRIC TRANSITION FUNDING LLC
SELLER AND SERVICER: ATLANTIC CITY ELECTRIC COMPANY
TRUSTEE: ________________
PRICING DATE: ________________
SERIES ISSUANCE DATE: ________________
CLEARANCE AND
SETTLEMENT DTC/CLEARSTREAM/EUROCLEAR
- --------------------------------------------------------------------------------
INITIAL CLASS PRINCIPAL BALANCE BOND RATE % OF TOTAL SERIES PRINCIPAL
------------------------------- --------- ---------------------------
Class A-1 $_____ __% __%
Class A-2 $_____ __% __%
Class A-3 $_____ __% __%
Class A-4 $_____ __% __%
Servicing Fee for All So long as Atlantic City Electric Company acts
Outstanding Series: as servicer under the servicing agreement, the
issuer will pay to it a monthly servicing fee
with respect to all series of transition bonds
in an amount equal to 1/12th of 0.05% of the
initial principal balance of all series of the
transition bonds. Atlantic City Electric
Company is referred to in this prospectus
supplement and in the accompanying prospectus
as ACE. If a successor servicer is appointed,
the servicing fee will be based on an amount
approved by the New Jersey Board of Public
Utilities, not to exceed a per annum rate equal
to 1.25% of the initial principal balance of
the transition bonds. ACE as servicer will not
be required to remit to the trustee investment
income it receives on the transition bond
charges it collects pending their remittance to
the trustee as well as any late fees paid by
customers to ACE as servicer that are
associated with the transition bond charges.
Anticipated Ratings: S&P[/Fitch] AAA
Moody's Aaa
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Credit Enhancement for Transition bond charge adjustments;
the Series 2001-1 Bonds: overcollateralization, funded over the life of
the Series 2001-1 Bonds and expected to reach
at least 0.5% of the initial principal balance
of the Series 2001-1 Bonds; capital of the
issuer, funded upon the issuance of this series
and equal to 0.5% of the initial principal
balance of the Series 2001-1 Bonds or $_______.
Payment Dates: _____, _____, _____ and _____ of each year or,
if not a business day, the next business day. A
business day is any day other than a Saturday,
Sunday or day on which banking institutions in
the City of New York are required or authorized
by law or executive order to remain closed.
First Payment Date: ___________
Class A-1 Class A-2 Class A-3 Class A-4
Expected Final Payment Date:* ___________ ___________ ___________ ___________
Final Maturity Date: ___________ ___________ ___________ ___________
*The expected final payment date is the date
on which the issuer expects to make the
final payment on your Series 2001-1 Bond.
However, the final payment on your Series
2001-1 Bond may be made after that date, and
your Series 2001-1 Bond will not be in
default unless it is not paid in full by its
final maturity date.
Optional Redemption: All Series 2001-1 Bonds are subject to optional
redemption in whole on any payment date if
either (1) the outstanding principal balance of
the Series 2001-1 Bonds has been reduced to
less than 5% of the initial principal balance
or (2) the sum of the amounts in the
overcollateralization subaccount and the
reserve subaccount for the Series 2001-1 Bonds
equals or exceeds the then outstanding
principal amount of Series 2001-1 Bonds and
there are sufficient transition bond charge
collections to pay accrued and unpaid interest
on the Series 2001-1 Bonds as of the redemption
date.
Record Date: Close of business on the business day prior to any
payment date.
Class A-1 Class A-2 Class A-3 Class A-4
CUSIP Numbers ___________ ___________ ___________ ___________
INTRODUCTION
The New Jersey Electric Discount and Energy Competition Act, referred
to as the Competition Act, was enacted in 1999. It provides, among other things,
for the restructuring of the electric utility industry in New Jersey. Prior to
enactment of the Competition Act, electric utilities such as ACE invested in
various generation-related assets, such as electric generating facilities, and
entered into power purchase contracts with nonutility generators of electricity
to help fulfill their duties to serve the public as regulated utilities. The
electric utilities recovered their investments in these assets and the costs
they incurred under these contracts by charging their customers the regulated
rates approved by the New Jersey Board of
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Public Utilities, referred to as the BPU. A customer is an end user of
electricity that is connected to a utility's transmission and distribution
system and located within a utility's service territory.
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 or to recover all of the costs incurred under power
purchase contracts with nonutility generators of electricity, as market prices
may be below a level that would provide a return on these investments or cover
the costs incurred under these contracts. Accordingly, utilities may incur
losses as a result of the transition from a regulated environment to a
competitive environment for electric generation services.
The Competition Act provides for utilities to recover the anticipated
loss in value of their generation-related assets and the costs incurred under
power purchase contracts with nonutility generators of electricity that are not
recoverable under market rates, including buyouts and buydowns of such
contracts. These costs are known as stranded costs and the Competition Act
provides for their recovery through a charge included in customers' bills known
as a market transition charge. The Competition Act authorizes a utility to
securitize its right to recover stranded costs through the issuance of
transition bonds, securities of the type described in this prospectus
supplement. This right is included in what is known as bondable transition
property. To the extent a utility's right to recover stranded costs is
securitized, a portion of the market transition charge is replaced by an
irrevocable charge included in customers' electric bills known as a transition
bond charge, which is designed to meet the costs of paying the principal of and
interest on the transition bonds and the costs associated with the issuance,
credit enhancing and servicing of the transition bonds.
Bondable transition property was created in favor of ACE by a bondable
stranded costs rate order, referred to as a financing order, issued by the BPU
to ACE on__________ , 2001. The bondable transition property includes the
irrevocable right to collect transition bond charges from customers to recover:
- the aggregate principal amount of the transition bonds described in
this prospectus supplement; and
- an amount sufficient to provide for credit enhancement to fund
reserves and to pay interest, premiums, if any, costs of
defeasance, servicing fees and other fees, costs and charges
relating to the transition bonds.
Transition bond charges are nonbypassable. That means that the charges
will be due from consumers of electricity within ACE's service territory who use
ACE's transmission and distribution system, even those customers who elect to
purchase electric supply from a third-party supplier.
On or about the series issuance date, ACE will sell and assign bondable
transition property to Atlantic City Electric Transition Funding LLC, the issuer
of the transition bonds, under a sale agreement. The issuer will then pledge
this property, and assign its rights under the sale agreement and the servicing
agreement, as well as its rights to the funds held in the collection account and
related rights, to the trustee as collateral for the payment of the transition
bonds under an indenture.
For more information on the Competition Act, bondable transition
property and transition bond charges, you should review the material under "RISK
FACTORS," "THE COMPETITION ACT," "ACE'S RESTRUCTURING" and "THE BPU FINANCING
ORDER AND THE TRANSITION BOND CHARGE" in the accompanying prospectus.
The following is a summary of other specific matters relating to these
securities:
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THE COLLATERAL
The Series 2001-1 Bonds will be secured by the collateral, primarily
consisting of:
- the issuer's right, title and interest in and to the bondable
transition property sold by ACE to the issuer under the sale
agreement between these parties;
- collections of transition bond charges that are remitted to the
trustee under the servicing agreement between the issuer and the
servicer;
- the issuer's rights under the transaction agreements, including the
sale agreement and the servicing agreement; and
- the series subaccounts for the Series 2001-1 Bonds and all amounts
or investment property in these subaccounts, other than cash
amounts payable to the issuer 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 INDENTURE -- SECURITY" 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 Series 2001-1 Bonds are expected to receive
interest at the bond rate for that class set forth on the cover of this
prospectus supplement. Interest on the Series 2001-1 Bonds will be calculated on
the basis of a 360-day year of twelve 30-day months. With respect to the first
payment date, interest will accrue from the issuance date.
You should also review the material under "THE SERIES 2001-1 BONDS --
INTEREST PAYMENTS" in this prospectus supplement.
PRINCIPAL
On each payment date, to the extent of available funds, the trustee
will make principal payments in accordance with the expected amortization
schedule set forth under "THE SERIES 2001-1 BONDS -- PRINCIPAL PAYMENTS" in this
prospectus supplement. The actual amount of principal paid on any payment date
on your Series 2001-1 Bonds may be less than the amount indicated by the
expected amortization schedule for that payment date.
Other than in the case 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.
You should also review the material under "THE SERIES 2001-1 BONDS --
PRINCIPAL PAYMENTS" in this prospectus supplement.
CREDIT ENHANCEMENT
Overcollateralization. Overcollateralization is the pledge by the
issuer of collateral in excess of what is expected to be needed to cover the
repayment of your Series 2001-1 Bond. The overcollateralization for these
securities will be funded over the life of the Series 2001-1 Bonds and is
expected to reach 0.5% of the initial principal balance of this series of
transition bonds.
Additional Credit Enhancement. Capital of the issuer (equal to 0.5% of
the initial principal balance of this series of transition bonds) is available
to make payments on this
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series of transition bonds as described in the accompanying prospectus. In
addition, transition bond charges will be subject to periodic review and
adjustment, as described below under "CREDIT ENHANCEMENT -- PERIODIC ADJUSTMENT
OF THE TRANSITION BOND CHARGE."
For a more detailed discussion of the transition bond charge
adjustments, overcollateralization of the Series 2001-1 Bonds and capital of the
issuer, you should review the material under "CREDIT ENHANCEMENT" in this
prospectus supplement and under "THE TRANSITION BONDS -- CREDIT ENHANCEMENT" and
"THE INDENTURE -- ALLOCATIONS AND PAYMENTS; PRIORITY OF DISTRIBUTIONS" in the
accompanying prospectus.
OPTIONAL REDEMPTION
The Series 2001-1 Bonds may be redeemed in whole on any payment date if
either (1) the outstanding principal amount of the Series 2001-1 Bonds has been
reduced to less than 5% of the initial principal amount or (2) the sum of the
amounts in the overcollateralization subaccount and the reserve subaccount for
the Series 2001-1 Bonds equals or exceeds the then outstanding principal amount
of Series 2001-1 Bonds and there are sufficient transition bond charge
collections to pay accrued and unpaid interest on the Series 2001-1 Bonds as of
the redemption date.
You should also review the material under "THE SERIES 2001-1 BONDS --
OPTIONAL REDEMPTION" in this prospectus supplement.
TRANSITION BOND CHARGE ADJUSTMENT PROCESS
If the transition bond charges that ACE collects as servicer of the
bondable transition property on behalf of the issuer are either insufficient or
greater than necessary to make timely payments on the Series 2001-1 Bonds, to
pay fees, costs and charges associated with the transition bonds or to fund or
replenish the subaccounts to their required levels, ACE will adjust the
transition bond charges it bills to customers, upon approval by the BPU. These
adjustments will continue until the principal of, and interest and premium, if
any, on, all classes of Series 2001-1 Bonds have been paid in full.
For a more detailed description of the transition bond charge
adjustment process, you should review the material under "CREDIT ENHANCEMENT --
PERIODIC ADJUSTMENT OF THE TRANSITION BOND CHARGE" in this prospectus supplement
and the material under "THE BPU FINANCING ORDER AND THE TRANSITION BOND CHARGE
- -- THE TRANSITION BOND CHARGE ADJUSTMENT PROCESS" in the accompanying
prospectus.
TAX STATUS
The issuer and ACE have received a private letter ruling from the
Internal Revenue Service to the effect that, for U.S. federal income tax
purposes, the transition bonds will be classified as debt obligations of ACE.
The issuer will be treated as a division of ACE 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 "MATERIAL INCOME TAX MATTERS" in the accompanying
prospectus.
In addition, in the opinion of _______________________________________,
special New Jersey tax counsel to the issuer and ACE, interest on the transition
bonds received by a person who is not otherwise subject to corporate or personal
income tax in the State of New Jersey will not be subject to these taxes.
Neither residents nor nonresidents of New Jersey will be subject to an
intangible personal property tax in respect of the Series 2001-1 Bonds. See
"MATERIAL INCOME TAX MATTERS -- MATERIAL STATE OF NEW JERSEY TAX MATTERS" in the
accompanying prospectus.
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ERISA CONSIDERATIONS
Employee benefit plans are permitted to purchase transition bonds.
You should also review the material under "ERISA CONSIDERATIONS" in the
accompanying prospectus.
SERVICER'S AND ISSUER'S MAILING ADDRESS AND TELEPHONE NUMBER OF PRINCIPAL
EXECUTIVE OFFICE
The mailing address of ACE is Atlantic City Electric Company, 800 King
Street, Post Office Box 231, Wilmington, Delaware 19899-0231, and its telephone
number is (302) 429-3089. The mailing address of the issuer is 800 King Street,
Wilmington, Delaware and its telephone number is (302) 429-3114.
RISK FACTORS
For a discussion of the material risks associated with an investment in
the Series 2001-1 Bonds, you should review the discussion under "RISK FACTORS,"
which begins on page 21 of the accompanying prospectus.
THE SERIES 2001-1 BONDS
GENERAL
The Series 2001-1 Bonds will be issued under and secured pursuant to a
base indenture to be dated as of _________, 2001 between the issuer and
________, as trustee, as supplemented by the Series 2001-1 supplement to that
base indenture. The Series 2001-1 Bonds will be issued on the series issuance
date in denominations of $1,000 (except for one bond in each class that may have
a smaller denomination) and integral multiples of $1,000. The Series 2001-1
Bonds will consist of the classes listed above under "SUMMARY OF TERMS --
SECURITIES OFFERED."
Some terms used in this prospectus supplement are defined in the
glossary of defined terms located on page S-25 of this prospectus supplement, or
in the glossary of defined terms located on page 114 of the accompanying
prospectus.
The issuer will pay interest and principal relating to the Series
2001-1 Bonds through DTC, or, if the Series 2001-1 Bonds are no longer in
book-entry form, at the offices of _______ at __________. The issuer will make
payments by wire transfer in immediately available funds to the account
designated by DTC or its nominee if the Series 2001-1 Bonds are in book-entry
form. Otherwise, the issuer will make payments by check mailed first-class,
postage prepaid to a Series 2001-1 Bondholder's address as it appears as of the
record date on the register maintained by the trustee. After prior notice to the
Series 2001-1 Bondholders, the issuer will pay the final installment of
principal and premium, if any, only upon presentation and surrender of a Series
2001-1 Bond at a place specified in the notice. A beneficial owner of a Series
2001-1 Bond will receive payments from the securities intermediary through which
it holds the Series 2001-1 Bonds.
ALLOCATIONS AND PAYMENTS; PRIORITY OF DISTRIBUTIONS
The transition bond charge collections will be remitted by the servicer
at least monthly and will be deposited by the trustee into the general
subaccount of the collection account. In addition, investment
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earnings on amounts on deposit in the trust accounts will be deposited into the
general subaccount of the collection account on the business day preceding each
payment date and, if and to the extent necessary to meet monthly fees and
expenses, on the business day preceding each monthly fee disbursement date. In
addition, any indemnity payments received by the trustee will be deposited into
the general subaccount as received. On each transition bond charge adjustment
date, the trustee will determine the total revenue requirements of each series
of transition bonds over the period that begins on that date and ends on the
date immediately preceding the next scheduled transition bond charge adjustment
date.
On the business day preceding each payment date, the trustee will
allocate amounts in the general subaccount of the collection account to each
series in accordance with the proportion of the total revenue requirements a
particular series' revenue requirements bears to the total revenue requirements
for all series as determined on the previous transition bond charge adjustment
date. On each payment date, the trustee will pay as to each series the amounts
described in clauses 1 through 12 below to the extent funds are available in the
general subaccount of the collection account. All series and all classes within
a series will have the same payment dates. In addition, the trustee will pay the
monthly fees and expenses specified in clauses 1 through 5 below on the [__] day
of each month that does not include a payment date, to the extent funds are
available in the general subaccount of the collection account. Each such day is
referred to as a monthly fee disbursement date. See "THE INDENTURE --
ALLOCATIONS AND PAYMENTS; PRIORITY OF DISTRIBUTIONS" in the accompanying
prospectus.
The priorities among payments made on each series are as follows:
1. To the trustee, payment of that series' portion of the
trustee's fee, plus (up to an aggregate amount of $[ ] per
[quarterly/semiannual period] for all series) all expenses of
the trustee and indemnities payable to the trustee;
2. To the independent managers of the issuer, payment of that
series' portion of the managers' fees;
3. To the servicer, payment of that series' portion of the
servicing fee;
4. To the administrator, payment of that series' portion of the
administration fee;
5. To the issuer, payment of that series' portion of the current
operating expenses of the issuer (up to an aggregate amount of
$[ ] per [quarterly/semiannual period] for all series) unless
an event of default under the indenture exists or would result
from the payment;
6. To the transition bondholders:
(A) payment of the interest then due on the transition
bonds of that series and any previously accrued but
unpaid interest;
(B) payment of the principal then due on the transition
bonds of that series, to the extent applicable equal
to the following:
- the unpaid principal amount of any class of
that series upon an acceleration triggered
by an event of default,
- the unpaid principal amount of any class of
that series due on the final maturity date
of that class and
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- the unpaid principal amount of any class of
that series called for redemption; and
(C) payment of principal in the amount that would bring
the aggregate principal amount outstanding for that
series to the level set forth in the expected
amortization schedule for that series for that
payment date.
7. To hedge or interest rate counterparties, payments of any
amounts due under any hedge or swap agreements made with
respect to any class of that series;
8. To the persons entitled thereto, payment of that series'
portion of any remaining unpaid operating expenses, including
any unpaid trustee expenses and indemnity amounts then owed;
9. To the capital subaccount for that series, replenishment up to
the required capital amount;
10. To the overcollateralization subaccount for that series,
allocation of the amount that would bring the amount in that
subaccount to the level set forth in the overcollateralization
schedule for that series on that payment date;
11. To the issuer, so long as no event of default has occurred and
is continuing, release of an amount equal to investment
earnings on amounts in the capital subaccount for that series
since the preceding payment date; and
12. To the reserve subaccount for that series, allocation of any
remaining amount, subject to reallocation of that remainder to
another series in the event of a payment default of the other
series.
After all Series 2001-1 Bonds have been paid, redeemed or defeased, and
all obligations of the issuer with respect to the Series 2001-1 Bonds have been
satisfied, amounts, if any, remaining in the Series 2001-1 Bonds' subaccounts
will be released to the issuer free of the lien of the indenture and will not be
reallocated to the subaccounts of the remaining outstanding series.
INTEREST PAYMENTS
Interest on each class of Series 2001-1 Bonds will accrue from the date
of issuance at the interest rate indicated for that class on the cover of this
prospectus supplement. Beginning _____________, the issuer is required to pay
interest [quarterly/semiannually] on [__________, __________, __________ and
__________] of each year, or, if any such day is not a business day, on the
following business day.
The issuer will pay interest on the Series 2001-1 Bonds prior to paying
principal of the bonds. See "THE TRANSITION BONDS -- INTEREST AND PRINCIPAL" in
the accompanying prospectus. If there is a shortfall in the amount necessary to
make interest payments on all classes of Series 2001-1 Bonds, the trustee will
distribute interest pro rata to each class of transition bonds based on the
amount of interest due on that class. The issuer will calculate interest on the
basis of a 360-day year of twelve 30-day months. Interest on each class of
Series 2001-1 Bonds will accrue from the series issuance date at the respective
bond rates indicated above under "SUMMARY OF TERMS -- SECURITIES OFFERED."
Interest will be payable on each payment date, commencing _____________, to the
persons in whose names the Series 2001-1 Bonds of each class are registered at
the close of business on the business day prior to any payment date, which
business day is referred to as the record date.
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Interest on the Series 2001-1 Bonds, class ___, will be calculated as
follows:
[To be provided, together with the other information described under
"THE TRANSITION BONDS -- FLOATING RATE TRANSITION BONDS"
in the accompanying prospectus, for any class with a floating interest rate.]
PRINCIPAL PAYMENTS
On each payment date, the trustee will, as of the related record date
and subject to the availability of funds, make principal payments on each class
of Series 2001-1 Bonds in accordance with the expected amortization schedule.
To the extent that more than one class of Series 2001-1 Bonds is to
receive payments of principal legally due or scheduled to be paid 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 2001-1 Bonds, Class A-1, until
this class is retired in full;
(2) to the holders of the Series 2001-1 Bonds, Class A-2, until
this class is retired in full;
(3) to the holders of the Series 2001-1 Bonds, Class A-3, until
this class is retired in full; and
(4) to the holders of the Series 2001-1 Bonds, Class A-4, until
this class is retired in full.
The issuer will not, however, pay principal of any class of Series
2001-1 Bonds on any payment date to the extent that doing so would reduce the
principal balance of a class to an amount lower than that specified in the
expected amortization schedule, set forth in Table 1 below, for that class on
that payment date, unless an acceleration of payments following an event of
default or a redemption occurs. The entire unpaid principal amount of each class
of the Series 2001-1 Bonds will be due and payable on the final maturity date
for that class.
Table 1 below sets forth the principal balance from the issuance date
to the expected final payment date that is scheduled to remain outstanding for
each class of the Series 2001-1 Bonds. The expected final payment date for a
class of Series 2001-1 Bonds is the date on which final payment on the class is
expected to be made as set forth in the expected amortization schedule for that
class. The principal balance of a class of Series 2001-1 Bonds means, at any
time, the initial principal balance of that class reduced by the amount of
principal distributed since the date of issuance to the bondholders of that
class in accordance with the terms of the indenture. The table reflects the
scheduled principal balance at each payment date after the payments scheduled to
be made on that date for each class have been made. In preparing the table, it
has been assumed, among other things, that:
1. the Series 2001-1 Bonds are issued on ________;
2. payments on the Series 2001-1 Bonds are made on each payment
date, commencing on __________;
3. the per annum servicing fee for the Series 2001-1 Bonds equals
0.05% of the initial principal balance of the Series 2001-1
Bonds, payable monthly;
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4. the per annum fee paid to the trustee under the indenture for
the Series 2001-1 Bonds equals $[__] payable monthly;
5. the per annum fee paid to the administrator of the issuer for
the Series 2001-1 Bonds equals $[__] per annum, payable
monthly;
6. there are no net earnings on amounts on deposit in the
collection account;
7. per annum operating expenses for the Series 2001-1 Bonds,
including all fees, costs and charges of the issuer and the
trustee, equal to $[___] in the aggregate, accruing in 12
equal monthly amounts, $[__] of which is paid monthly and the
accrued balance of which is payable on each payment date; and
8. all transition bond charge collections are received in
accordance with ACE's forecasts and deposited in the
collection account.
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TABLE 1
EXPECTED AMORTIZATION SCHEDULE
OUTSTANDING CLASS PRINCIPAL BALANCES
Issuance or Payment Date Class A-1 Class A-2 Class A-3 Class A-4 Series 2001-1
Series issuance date......... ___________ ___________ ___________ ___________ ___________
__________................... ___________ ___________ ___________ ___________ ___________
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For various reasons, the actual principal balance of any class of the
Series 2001-1 Bonds may not be reduced to the amounts indicated in the foregoing
table on any payment date. Accordingly, the timing of the actual reductions in
class principal balances may be delayed compared with the timing indicated in
the table. The Series 2001-1 Bonds will not be in default if not paid on the
dates specified in the foregoing table unless the final outstanding principal
balance is not paid on the final maturity date. See "RISK FACTORS" in the
accompanying prospectus for various factors that may, individually or in the
aggregate, affect the rates of reduction of the class principal balances of any
class of the Series 2001-1 Bonds.
OPTIONAL REDEMPTION
The issuer may redeem all of the outstanding Series 2001-1 Bonds, at
its option, on any payment date if either (1) the outstanding principal balance
of the Series 2001-1 Bonds (after giving effect to payments scheduled to be made
on that payment date) has been reduced to less than 5% of the initial principal
balance of the Series 2001-1 Bonds or (2) the sum of the amounts in the
overcollateralization subaccount and the reserve subaccount for the Series
2001-1 Bonds equals or exceeds the then outstanding principal amount of Series
2001-1 Bonds and there are sufficient transition bond charge collections to pay
accrued and unpaid interest on the Series 2001-1 Bonds as of the redemption
date. In the case of redemption, the issuer will pay the Series 2001-1
Bondholders the outstanding principal amount of the Series 2001-1 Bonds and
interest accrued and unpaid to the redemption date. The trustee will give notice
of the redemption to Series 2001-1 Bondholders at least five days and at most 45
days before the redemption date. The Series 2001-1 Bonds will not be redeemed
under any other circumstances.
CREDIT ENHANCEMENT
Credit enhancement for the Series 2001-1 Bonds is intended to protect
you against losses or delays in scheduled payments on your Series 2001-1 Bonds.
PERIODIC ADJUSTMENT OF THE TRANSITION BOND CHARGE
Credit enhancement for the Series 2001-1 Bonds includes mandatory
periodic adjustments by the BPU to the transition bond charge to be billed to
customers upon the petition of ACE, as servicer under the servicing agreement.
These petitions are referred to as adjustment requests. Generally, the amount of
the adjustment will be based on a formula approved by the BPU in its financing
order approving issuance of the transition bonds. The formula is designed to
ensure, among other things, sufficient funds for payments on the Series 2001-1
Bonds in accordance with the expected amortization schedule set forth in Table 1
above. Adjustment requests will take into account amounts available in the
general subaccount and reserve subaccount and amounts necessary to fund the
overcollateralization levels as then scheduled and to replenish the capital
subaccount to its required level, in addition to amounts payable on the
transition bonds and related fees and expenses. The servicer may also request
modification of the methodology used to calculate the transition bond charge to
more accurately project and generate adequate revenues. An adjustment request
that requests such a modification is referred to as a nonroutine adjustment
request.
The servicer will increase or decrease the transition bond charge over
the life of the transition bonds as necessary to adjust for the effects of
several factors, including:
- changes in electricity usage forecasts;
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- changes in payment patterns and charge-off experience (including
defaults by third-party suppliers);
- changes in any ongoing fees, costs and expenses related to the
transition bonds; and
- the amount of unpaid principal of, and interest and premium, if
any, on, the transition bonds including the issuance of any
additional series of transition bonds.
In this way, the transition bond charge collections will be designed so
that there are sufficient amounts available to pay principal, interest and the
other fees and expenses associated with the Series 2001-1 Bonds and any other
series of transition bonds then outstanding and so that the outstanding
principal amount of Series 2001-1 Bonds conforms to the expected amortization
schedule. The adjustments must be made at least annually but may be made
quarterly. If the servicer estimates that the transition bond charge in effect
at any given time will result in collections exceeding the amount necessary to
meet required payments, then the servicer may, by filing an adjustment request
with the BPU, reduce the transition bond charge, absent a determination by the
BPU of manifest error (defined in the BPU financing order as an arithmetic error
evident on the face of the filing). If the servicer estimates that the
transition bond charge in effect at any given time will result in collections
below the amount necessary to meet required payments, then the servicer may, by
filing an adjustment request with the BPU, increase the transition bond charge,
absent a determination by the BPU of manifest error (defined in the BPU
financing order as an arithmetic error evident on the face of the filing). The
adjustments in the transition bond charge will continue until the principal of,
and interest and premium, if any, on, all classes of transition bonds and all
related fees and expenses have been paid in full.
The following table summarizes the adjustment frequency of the
transition bond charges with respect to the Series 2001-1 Bonds:
Adjustment Date
---------------
Annual Adjustments*.....................................
Quarterly Adjustments...................................
* The first annual adjustment will become effective on _____. No
adjustment will be made on _____.
For a more detailed description of the transition bond charge
adjustment process, you should review the material under "THE BPU FINANCING
ORDER AND THE TRANSITION BOND CHARGE -- THE TRANSITION BOND CHARGE ADJUSTMENT
PROCESS" in the accompanying prospectus.
COLLECTION ACCOUNT AND SUBACCOUNTS
The trustee will establish a collection account to hold transition bond
charges remitted by the servicer of the bondable transition property on a
monthly basis (so long as requirements relating to ratings and an absence of
servicer defaults are satisfied). See "THE SERVICING AGREEMENT -- SERVICING
PROCEDURES." The collection account will include a general subaccount into which
the trustee will deposit, on the business day preceding each payment date,
remitted transition bond charge collections and any indemnity amounts remitted
by the servicer to the trustee. The trustee will also establish under the
collection account the following subaccounts relating to the Series 2001-1
Bonds:
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- a series subaccount; and under the series subaccount, the
following subaccounts:
- a capital subaccount;
- an overcollateralization subaccount; and
- a reserve subaccount.
The Capital Subaccount. Upon the issuance of the Series 2001-1 Bonds,
ACE will deposit $[______] or 0.5% of the initial principal balance of this
series of transition bonds in a capital subaccount for the series, representing
the required capital amount for the Series 2001-1 Bonds. On any payment date, if
amounts available in the series subaccount, overcollateralization subaccount and
reserve subaccount for the Series 2001-1 Bonds are not sufficient to make
scheduled payments to the Series 2001-1 Bondholders or to pay such series' share
of expenses, fees and other charges specified in the indenture, the trustee will
draw on amounts in the capital subaccount for the Series 2001-1 Bonds in excess
of $[ ] to make those payments. An amount in the capital subaccount for each
series equal to $[ ] will be set aside to cover other operating expenses not
funded from the transition bond charges. The trustee will, on each payment date
thereafter, replenish any withdrawals from the capital subaccount for the Series
2001-1 Bonds subject to the availability of funds and in accordance with the
allocations and priorities set forth above under " -- ALLOCATIONS AND PAYMENTS;
PRIORITY OF DISTRIBUTIONS." The required capital amount for the Series 2001-1
Bonds has been set at a level sufficient to obtain the ratings on the Series
2001-1 Bonds described below under "RATINGS FOR THE SERIES 2001-1 BONDS."
For a more detailed description of allocations to and payments from the
capital subaccount, see the material under "THE TRANSITION BONDS -- CREDIT
ENHANCEMENT" and "THE INDENTURE -- ALLOCATIONS AND PAYMENTS; PRIORITY OF
DISTRIBUTIONS" and " -- COLLECTION ACCOUNT" in the accompanying prospectus.
The Overcollateralization Subaccount. The amount of
overcollateralization for the Series 2001-1 Bonds is intended to be funded over
the expected life of the series and is expected to reach $[_____] or __% of the
initial principal amount of the series. The calculated overcollateralization
level for each payment date relating to the Series 2001-1 Bonds is set forth in
Table 2 below. Subject to the availability of funds and in accordance with the
allocations and priorities set forth above under " -- ALLOCATIONS AND PAYMENTS;
PRIORITY OF DISTRIBUTIONS," on each payment date, the trustee will deposit in
the overcollateralization subaccount for the Series 2001-1 Bonds an amount that
results in a funding of the subaccount to its then scheduled
overcollateralization level.
Transition bond charges collected and remitted to the trustee will be
allocated by the trustee to fund overcollateralization amounts for different
series of transition bonds in the manner described under "THE INDENTURE --
ALLOCATIONS AND PAYMENTS; PRIORITY OF DISTRIBUTIONS" in the accompanying
prospectus. In addition, if amounts on deposit in the series subaccount and
reserve subaccount described below for the Series 2001-1 Bonds are not
sufficient on a particular payment date to make scheduled payments to the
holders of the Series 2001-1 Bonds, to pay expenses of the trustee, the
independent managers of the issuer, the servicer, the administrator and the
issuer and to meet other specified expenses, the trustee will draw on amounts in
the overcollateralization subaccount to fund such payments as described under
"THE INDENTURE -- ALLOCATIONS AND PAYMENTS; PRIORITY OF DISTRIBUTIONS" in the
accompanying prospectus.
The transition bond charges will be calculated at, and periodically
adjusted to, a level designed to collect the overcollateralization amount over
the expected life of the Series 2001-1 Bonds. The
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overcollateralization amount has been set at a level sufficient to obtain the
ratings on the Series 2001-1 Bonds described below under "RATINGS FOR THE SERIES
2001-1 BONDS."
For a more detailed description of overcollateralization, see the
material under "THE TRANSITION BONDS -- CREDIT ENHANCEMENT" and "THE INDENTURE
- -- ALLOCATIONS AND PAYMENTS; PRIORITY OF DISTRIBUTIONS" in the accompanying
prospectus.
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TABLE 2
CALCULATED OVERCOLLATERALIZATION LEVEL
Issuance or Payment Date Calculated Overcollateralization Level
- ------------------------ --------------------------------------
Series issuance date............. $ 0
....................... $
- ---------- -------
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The Reserve Subaccount. A reserve subaccount for the Series 2001-1
Bonds will be funded with remitted transition bond charge collections, indemnity
amounts remitted by the servicer to the trustee and earnings on remittances by
the servicer to the trustee (other than earnings on deposits in the capital
subaccount) to the extent such amounts are allocable to the Series 2001-1 Bonds.
The reserve subaccount will be funded on each payment date with the excess, if
any, over what is necessary on that payment date:
- to meet such series' share of fees and expenses payable to the
trustee, the independent managers of the issuer, the servicer and
the administrator and other specified expenses of the issuer
attributable to the Series 2001-1 Bonds;
- to make payments of principal and interest on the Series 2001-1
Bonds;
- to replenish the capital subaccount for the Series 2001-1 Bonds;
and
- to fund the overcollateralization subaccount for the Series 2001-1
Bonds.
The transition bond charge will be adjusted to eliminate any excess
amounts that have accumulated in the reserve subaccount for the Series 2001-1
Bonds.
If on any payment date amounts available in the series subaccount for
the Series 2001-1 Bonds are insufficient to pay the series' share of expenses,
fees and other charges specified in the indenture payable on that date, to make
scheduled payments to the Series 2001-1 Bondholders, or to fund the capital
subaccount and overcollateralization subaccount for the series as required on
that date, the trustee will draw on any amounts in the reserve subaccount for
the Series 2001-1 Bonds to make those payments. If on any monthly fee
disbursement date amounts available in the series subaccount for the Series
2001-1 Bonds are insufficient to pay the series' share of monthly fees and
expenses, the trustee will draw on any amounts in the reserve subaccount for the
Series 2001-1 Bonds to make those payments. In addition, if amounts available in
the series subaccount of any other series of outstanding transition bonds are
insufficient to make payments to that series' bondholders, so long as no default
or event of default is caused, the trustee may draw on amounts in the reserve
subaccount for the Series 2001-1 Bonds to make those payments. If on any payment
date funds on deposit in the series subaccount are insufficient to make the
allocations for the series, the trustee will draw from amounts on deposit in the
reserve subaccount, overcollateralization subaccount and capital subaccount for
the series. See "THE INDENTURE -- ALLOCATIONS AND PAYMENTS; PRIORITY OF
DISTRIBUTIONS" in the accompanying prospectus.
For a more detailed description of allocations to and payments from the
reserve subaccount for the Series 2001-1 Bonds and similar subaccounts for
additional series of transition bonds, if any, see the material under "THE
TRANSITION BONDS -- CREDIT ENHANCEMENT" and "THE INDENTURE -- ALLOCATIONS AND
PAYMENTS; PRIORITY OF DISTRIBUTIONS" and " -- COLLECTION ACCOUNT" in the
accompanying prospectus.
ISSUANCE OF ADDITIONAL SERIES
Atlantic City Electric Transition Funding LLC may issue additional
series of transition bonds without the prior approval of the Series 2001-1
Bondholders. Those series may include terms and provisions that are unique to
those series. The transition bond charge and adjustments to it are generally
based on the total principal amount of all transition bonds outstanding. In
addition, a new series of transition bonds may not be issued if the issuance
would result in a reduction or withdrawal of the credit ratings on the Series
2001-1 Bonds. Therefore, it is not expected that the issuance of additional
series would adversely affect the sufficiency of the transition bond charge
collections for payment of the Series 2001-1 Bonds. See "RISK FACTORS -- OTHER
RISKS ASSOCIATED WITH AN INVESTMENT IN THE
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TRANSITION BONDS -- ISSUANCE OF ADDITIONAL SERIES OF TRANSITION BONDS WHOSE
HOLDERS MAY HAVE INTERESTS THAT CONFLICT WITH YOUR INTERESTS" and "THE
TRANSITION BONDS" in the accompanying prospectus.
REPORTS TO HOLDERS OF SERIES 2001-1 BONDS
On or prior to each payment date, the trustee will prepare and provide
statements to the holders of record of the Series 2001-1 Bonds. These statements
will be available to the beneficial owners of the Series 2001-1 Bonds upon
request to the 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 2001-1 Bonds, you should review the material
under "THE INDENTURE -- REPORTS TO TRANSITION BONDHOLDERS" in the accompanying
prospectus.
THE TRANSITION BOND CHARGES
The bondable stranded costs described in the financing order issued by
the BPU on _______________ are to be recovered from customers of ACE through
transition bond charges, subject to certain limitations. See "RISK FACTORS --
UNUSUAL NATURE OF BONDABLE TRANSITION PROPERTY AND SERVICING RISKS" and "THE
COMPETITION ACT -- ACE AND OTHER UTILITIES MAY SECURITIZE STRANDED COSTS" in the
accompanying prospectus. The financing order issued by the BPU to ACE on
____________ is referred to as the BPU financing order.
ACE, in its capacity as servicer of the bondable transition property
under the servicing agreement, will bill the transition bond charges to each
customer. ACE estimates that the transition bond charge will be approximately
$[_______] per kilowatt-hour for all customers on the initial issuance date for
the transition bonds, beginning on the issuance date for the Series 2001-1
Bonds. See "THE BPU FINANCING ORDER AND THE TRANSITION BOND CHARGE -- THE BPU
FINANCING ORDER" in the accompanying prospectus.
The actual collections of the transition bond charges are intended to
be neither more nor less than the amount necessary to pay the principal on the
transition bonds of each series in accordance with the expected amortization
schedule applicable to each series and class of transition bonds, 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 transition bond charges
will be collected, the servicing agreement requires the servicer to seek, and
the Competition Act and the BPU financing order require the BPU to approve,
adjustments to the transition bond charges as of [__________] of each year, at a
minimum. These adjustments will be based on actual collections of the transition
bond charges and updated assumptions by the servicer as to projected future
usage of electricity by customers, expected delinquencies, customer payment
patterns and write-offs and future payments and expenses relating to the Series
2001-1 Bonds and any other series of transition bonds issued. See "THE BPU
FINANCING ORDER AND THE TRANSITION BOND CHARGE -- THE TRANSITION BOND CHARGE
ADJUSTMENT PROCESS" in the accompanying prospectus.
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DESCRIPTION OF ACE'S BUSINESS
For a description of the servicer, you should review the material under
"ATLANTIC CITY ELECTRIC COMPANY" and "THE SERVICER OF THE BONDABLE TRANSITION
PROPERTY" in the accompanying prospectus.
SERVICING
SERVICING FEE
The issuer will pay the servicer a monthly servicing fee with respect
to all series of transition bonds. So long as ACE acts as servicer, the per
annum servicing fee will equal 0.05% of the initial principal amount. If a
successor servicer is appointed, the servicing fee will be based on an amount
approved by the BPU, not to exceed a per annum rate equal to 1.25% of the
initial principal balance of the transition bonds. The monthly servicing fee,
together with any portion of the servicing fee that remains unpaid, will be paid
solely to the extent funds are available for that payment as described under
"THE INDENTURE -- ALLOCATIONS AND PAYMENTS; PRIORITY OF DISTRIBUTIONS" in the
accompanying prospectus. The servicing fee will be paid prior to any amounts in
respect of interest on and principal of the Series 2001-1 Bonds. The servicer
will not be required to remit to the trustee investment income the servicer
receives on the transition bond charges it collects pending their remittance to
the trustee and any late fees paid by customers to ACE as servicer that are
associated with the transition bond charges.
SERVICER ADVANCES
The servicer will not make any advances of interest or principal on the
Series 2001-1 Bonds.
UNDERWRITING THE SERIES 2001-1 BONDS
Subject to the terms and conditions set forth in the underwriting
agreement among the issuer, Morgan Stanley & Co. Incorporated and the
underwriters for whom Morgan Stanley & Co. Incorporated is acting as the
representative, the issuer has agreed to sell to the underwriters, and the
underwriters have severally agreed to purchase, the principal amount of Series
2001-1 Bonds set forth opposite each underwriter's name below:
NAME CLASS A-1 CLASS A-2 CLASS A-3 CLASS A-4 TOTAL
---- --------- --------- --------- --------- -----
Morgan Stanley & Co. Incorporated
In accordance with the underwriting agreement, the underwriters will
take and pay for all of the Series 2001-1 Bonds offered hereby, if any are
taken.
THE UNDERWRITERS' SALES PRICE FOR THE SERIES 2001-1 BONDS
Series 2001-1 Bonds sold by the underwriters to the public will be
initially offered at the initial public offering prices set forth on the cover
of this prospectus supplement. The underwriters propose initially to offer the
Series 2001-1 Bonds to dealers at the initial public offering prices, less a
selling
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concession not to exceed the percentage set forth below, and the
underwriters may allow and dealers may reallow a discount not to exceed the
percentage set forth below.
CLASS SELLING CONCESSION REALLOWANCE DISCOUNT
- ----- ------------------ --------------------
Class A-1......................................
Class A-2......................................
Class A-3......................................
Class A-4......................................
After the initial public offering, the public offering prices, selling
concessions and reallowance discounts may change.
NO ASSURANCE AS TO RESALE PRICE OR RESALE LIQUIDITY FOR THE SERIES 2001-1 BONDS
The Series 2001-1 Bonds are a new issue of securities with no
established trading market. They will not be listed on any securities exchange.
The underwriters have advised the issuer that they intend to make a market in
the Series 2001-1 Bonds, but they 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 2001-1 Bonds.
VARIOUS TYPES OF UNDERWRITER TRANSACTIONS THAT MAY AFFECT THE PRICE OF THE
SERIES 2001-1 BONDS
The underwriters may engage in overallotment transactions, stabilizing
transactions, syndicate covering transactions and penalty bids with respect to
the Series 2001-1 Bonds in accordance with Regulation M under the Exchange Act.
Overallotment transactions involve syndicate sales in excess of the offering
size, which create a syndicate short position. Stabilizing transactions are bids
to purchase the Series 2001-1 Bonds which are permitted, so long as the
stabilizing bids do not exceed a specified maximum price. Syndicate covering
transactions involve purchases of the Series 2001-1 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 2001-1 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 2001-1 Bonds to
be higher than they would otherwise be. None of ACE, the issuer, the trustee or
any of the underwriters represents 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 transactions with the issuer and its affiliates,
including ACE. In addition, each underwriter may from time to time take
positions in the Series 2001-1 Bonds.
Under the terms of the underwriting agreement, the issuer and ACE have
agreed to reimburse the underwriters for some expenses. The issuer and ACE have
agreed to indemnify the underwriters against some liabilities, including
liabilities under the Securities Act.
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RATINGS FOR THE SERIES 2001-1 BONDS
It is a condition of any underwriter's obligation to purchase the
Series 2001-1 Bonds that the Series 2001-1 Bonds be rated "[___]" by Standard &
Poor's Ratings Group, a division of McGraw-Hill Companies, Inc. [and Fitch] and
"[___]" by Moody's Investors Service.
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
rating agency. No person is obligated to maintain the rating on any class of
Series 2001-1 Bonds, and, accordingly, there can be no assurance that the
ratings assigned to any class of Series 2001-1 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 Series 2001-1 Bonds is revised or withdrawn, the
liquidity of that class may be adversely affected. In general, ratings address
credit risk and do not represent any assessment of any particular rate of
principal payments on Series 2001-1 Bonds other than payment in full of each
class of Series 2001-1 Bonds by the applicable final maturity date and the
ability to make timely interest payments.
GLOSSARY OF DEFINED TERMS
Set forth below is a glossary of defined terms used in this prospectus
supplement.
"ACE" means Atlantic City Electric Company.
"BPU" means the New Jersey Board of Public Utilities.
"business day" means any day other than a Saturday, Sunday or day on
which banking institutions in the City of New York are required or authorized by
law or executive order to remain closed.
"Competition Act" means the New Jersey Electric Discount and Energy
Competition Act, enacted in 1999.
"customer" means an end user of electricity that is connected to any
part of ACE's transmission and distribution system and located within ACE's
service territory.
"expected final payment date" means the date on which the issuer
expects to make the final payment on your Series 2001-1 Bond.
"issuer" means Atlantic City Electric Transition Funding LLC.
S-25
26
THE INFORMATION IN THIS PROSPECTUS AND THE ACCOMPANYING PROSPECTUS SUPPLEMENT
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 ARE NOT
AN OFFER TO SELL THESE SECURITIES AND ARE NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED _______, 2001
PROSPECTUS
ATLANTIC CITY ELECTRIC TRANSITION FUNDING LLC
Issuer
ATLANTIC CITY ELECTRIC COMPANY
Seller and Servicer
Up to $____________ of Transition Bonds Issuable in Series
THE ISSUER THE TRANSITION BONDS
- - may periodically issue transition bonds in - will be payable only from assets of the
one or more series with one or more issuer;
classes; and
- will be supported by trust accounts held by
- - will own: the trustee for the transition bonds, and, if
so stated in the applicable prospectus
supplement, other credit enhancement; and
- bondable transition property, which is
the right, created under New Jersey's
Competition Act, to bill and collect - will be issued in series, each of which the
transition bond charges in amounts issuer may issue without the consent of
designed to be sufficient to repay the existing transition bondholders.
transition bonds, to pay other expenses
specified in the indenture and to fund
the trust accounts;
- collections of transition bond charges;
- its rights under the sale agreement and
the servicing agreement;
- trust accounts held by the trustee; and
- if so stated in the applicable prospectus
supplement, other credit enhancement.
CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE 21 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 _______________, 2001.
27
TABLE OF CONTENTS
PROSPECTUS
Page
----
IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS PROSPECTUS.................................................. 1
SUMMARY OF TERMS................................................................................................. 2
The Issuer.............................................................................................. 2
The Seller of the Bondable Transition Property to the Issuer............................................ 2
The Servicer of the Bondable Transition Property........................................................ 2
The Trustee............................................................................................. 2
The Assets of the Issuer................................................................................ 2
Transaction Overview.................................................................................... 3
Primary Steps of the Transaction........................................................................ 4
The Collateral.......................................................................................... 6
Servicing the Bondable Transition Property.............................................................. 7
Payment Sources......................................................................................... 9
Allocations and Payments; Priority of Distributions..................................................... 10
Credit Enhancement and Accounts......................................................................... 15
Prefunding.............................................................................................. 16
State Pledge............................................................................................ 17
Payments of Interest and Principal...................................................................... 18
Optional Redemption..................................................................................... 18
Payment Dates and Record Dates.......................................................................... 19
Servicing Compensation.................................................................................. 19
Tax Status.............................................................................................. 19
ERISA Considerations.................................................................................... 20
RISK FACTORS..................................................................................................... 21
Limited Sources of Payment and Limited Credit Enhancement for the Transition Bonds Could
Cause Payment Delays or Losses ........................................................................ 21
Risks of Judicial, Legislative or Regulatory Action..................................................... 21
Unusual Nature of Bondable Transition Property and Servicing Risks...................................... 24
The Electric Industry Generally......................................................................... 29
Risks Associated with Potential Bankruptcy Proceedings.................................................. 30
Other Risks Associated with an Investment in the Transition Bonds....................................... 33
FORWARD-LOOKING STATEMENTS....................................................................................... 35
GLOSSARY OF DEFINED TERMS........................................................................................ 36
AVAILABLE INFORMATION............................................................................................ 36
INCORPORATION OF DOCUMENTS BY REFERENCE.......................................................................... 37
ATLANTIC CITY ELECTRIC COMPANY................................................................................... 37
THE COMPETITION ACT.............................................................................................. 38
Recovery of Stranded Costs Is Allowed for ACE and Other New Jersey Utilities............................ 39
ACE and Other Utilities May Securitize Stranded Costs................................................... 39
ACE'S RESTRUCTURING.............................................................................................. 42
THE BPU FINANCING ORDER AND THE TRANSITION BOND CHARGE........................................................... 43
The BPU Financing Order................................................................................. 43
The Transition Bond Charge Adjustment Process........................................................... 46
THE SERVICER OF THE BONDABLE TRANSITION PROPERTY................................................................. 47
ACE..................................................................................................... 47
ACE's Customer Classes.................................................................................. 48
28
Electric Revenue, Number of Customers and Consumption................................................... 48
Percentage Concentration Within ACE's Large Commercial and Industrial Customers......................... 49
How ACE Forecasts the Number of Customers and the Amount of Electricity Usage........................... 49
Forecast Variances...................................................................................... 50
Billing Process......................................................................................... 51
ACE Maintains Limited Information on its Customers' Creditworthiness.................................... 51
ACE's Collection Process for Residential Customers...................................................... 52
Termination of Service for Residential Customers in the Winter.......................................... 52
ACE's Collection Process for Governmental Customers..................................................... 52
ACE's Collection Process for All Other Customers........................................................ 52
Referrals of Delinquent Accounts to Third Parties....................................................... 52
Referrals of Delinquent Accounts in Special Circumstances............................................... 53
Loss and Delinquency Experience......................................................................... 53
How ACE Will Apply Partial Payments by Its Customers.................................................... 54
ATLANTIC CITY ELECTRIC TRANSITION FUNDING LLC, THE ISSUER........................................................ 54
USE OF PROCEEDS.................................................................................................. 56
THE TRANSITION BONDS............................................................................................. 56
General................................................................................................. 57
Interest and Principal.................................................................................. 57
Floating Rate Transition Bonds.......................................................................... 58
Redemption.............................................................................................. 59
Credit Enhancement...................................................................................... 59
Prefunding.............................................................................................. 60
Book-Entry Form......................................................................................... 60
Certificated Transition Bonds........................................................................... 63
WEIGHTED AVERAGE LIFE AND YIELD CONSIDERATIONS FOR THE TRANSITION BONDS.......................................... 64
THE SALE AGREEMENT............................................................................................... 65
ACE's Sale and Assignment of the Bondable Transition Property........................................... 65
ACE's Representations and Warranties.................................................................... 66
ACE's Covenants......................................................................................... 70
ACE's Obligation to Indemnify the Issuer and the Trustee................................................ 72
ACE's Obligation to Undertake Legal Action.............................................................. 73
Successors to ACE....................................................................................... 74
Treatment of the Assignment of Bondable Transition Property............................................. 74
THE SERVICING AGREEMENT.......................................................................................... 74
Servicing Procedures.................................................................................... 74
Transition Bond Charge Collections...................................................................... 76
Servicer Advances....................................................................................... 76
Servicer Compensation; Releases......................................................................... 76
Third-Party Suppliers................................................................................... 77
Servicer Duties......................................................................................... 77
Representations and Warranties.......................................................................... 78
Servicer Indemnification................................................................................ 79
Payment Date Statements................................................................................. 79
Compliance Reports...................................................................................... 80
Matters Regarding the Servicer.......................................................................... 80
Servicer Defaults....................................................................................... 81
Rights Upon Servicer Default............................................................................ 82
Termination............................................................................................. 82
THE INDENTURE.................................................................................................... 82
Security................................................................................................ 82
29
Issuance in Series or Classes........................................................................... 83
Collection Account...................................................................................... 84
Allocations and Payments; Priority of Distributions..................................................... 88
Reports to Transition Bondholders....................................................................... 90
Modification of the Indenture........................................................................... 91
Events of Default....................................................................................... 94
Covenants of the Issuer................................................................................. 98
List of Transition Bondholders.......................................................................... 99
Annual Compliance Statement............................................................................. 99
Trustee's Annual Report................................................................................ 100
Satisfaction and Discharge of the Indenture............................................................ 100
Legal Defeasance and Covenant Defeasance............................................................... 100
The Trustee............................................................................................ 102
Governing Law.......................................................................................... 102
HOW A BANKRUPTCY OF ACE OR THE SERVICER MAY AFFECT YOUR INVESTMENT.............................................. 102
MATERIAL INCOME TAX MATTERS FOR THE TRANSITION BONDS............................................................ 106
Income Tax Status of the Transition Bonds.............................................................. 106
General................................................................................................ 106
Tax Consequences to U.S. Holders....................................................................... 107
Tax Consequences to Non-U.S. Holders................................................................... 107
Backup Withholding..................................................................................... 108
Material State of New Jersey Tax Matters............................................................... 109
ERISA CONSIDERATIONS............................................................................................ 109
Plan Asset Issues for an Investment in the Transition Bonds............................................ 110
Prohibited Transaction Exemptions...................................................................... 110
Special Considerations Applicable to Insurance Company General Accounts................................ 111
General Investment Considerations For Prospective Plan Investors in the Transition Bonds............... 111
PLAN OF DISTRIBUTION............................................................................................ 112
RATINGS ........................................................................................................ 113
LEGAL MATTERS................................................................................................... 113
EXPERTS ........................................................................................................ 113
GLOSSARY OF DEFINED TERMS....................................................................................... 114
INDEX TO FINANCIAL STATEMENTS OF ATLANTIC CITY ELECTRIC TRANSITION
FUNDING LLC.................................................................................................... F-1
30
IMPORTANT NOTICE
ABOUT INFORMATION PRESENTED IN THIS PROSPECTUS
You should rely only on information on the transition bonds provided in
this prospectus and in the related prospectus supplement. No dealer, salesperson
or other person has been authorized to give any information or to make any
representations other than those contained in this prospectus and the prospectus
supplement and, if given or made, the information or representations must not be
relied upon as having been authorized by the issuer, ACE, Conectiv, the
underwriters or any dealer, salesperson or other person. Neither the delivery of
this prospectus and the related prospectus supplement nor any sale made
hereunder shall, under any circumstances, create an implication that information
herein is correct as of any time since the date of this prospectus or the
related prospectus supplement. This prospectus and the related prospectus
supplement do not constitute an offer to sell, or a solicitation of an offer to
buy, any security in any jurisdiction in which it is unlawful to make any
similar offer or solicitation.
We include cross-references to sections where you can find further
related discussions. Check the Table of Contents in this prospectus to locate
these sections.
31
SUMMARY OF TERMS
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 the transition bonds in "THE
TRANSITION BONDS" in this prospectus.
CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE 21 OF THIS PROSPECTUS.
The Issuer: Atlantic City Electric Transition Funding LLC, a Delaware
limited liability company wholly owned by Atlantic City
Electric Company (which is referred to as ACE). Atlantic City
Electric Transition Funding LLC is referred to as the issuer.
The issuer was formed solely to purchase bondable transition
property from ACE and to issue one or more series of
transition bonds secured by the bondable transition property.
Each series of transition bonds may be issued in one or more
classes. Bondable transition property is discussed in this
summary under "The Collateral."
The issuer's address is 800 King Street, Wilmington, Delaware
19899 and its telephone number is (302) 429-3114.
The Seller of the Bondable Transition ACE, an operating electric utility incorporated under the laws
Property to the Issuer: of the State of New Jersey on April 28, 1924. As of December
31, 2000, ACE served
approximately 501,000 customers,
covering areas in which
approximately 0.9 million people
reside.
ACE's address is 800 King
Street, Post Office Box 231,
Wilmington, Delaware 19899 and
its telephone number is (302)
429-3089.
The Servicer of the Bondable Transition ACE, acting as servicer, and any successor servicer, will
Property: service the bondable transition property pursuant to a
servicing agreement with the issuer.
The Trustee: ________________ will be the trustee under the indenture
relating to the transition bonds.
The Assets of the Issuer: The issuer will own:
- the bondable transition
property transferred to the
issuer (See "THE SALE
AGREEMENT -- ACE'S SALE AND
ASSIGNMENT OF BONDABLE
TRANSITION PROPERTY" in
this prospectus);
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32
- collections of transition bond charges;
- its rights under the transaction agreements,
including the sale agreement and the servicing
agreement;
- trust accounts held by the trustee; and
- if so stated in the applicable
prospectus supplement,
other credit enhancement.
Transaction Overview: New Jersey law permits public utilities, such as ACE, that
transmit and distribute electricity to end users within the
state (referred to as public electric utilities) to recover
the costs of investments in electricity generation assets and
other obligations that cannot be recovered through
market-based electricity supply rates in a competitive
electricity generation market. These costs are known as
"stranded costs." A public electric utility may recover
stranded costs through an irrevocable nonbypassable charge
called a "transition bond charge" that is assessed on its
electric customers. New Jersey law permits special purpose
entities formed by public electric utilities to issue debt
securities secured by bondable transition property, which
includes the right to bill and collect transition bond 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. See "THE TRANSITION BONDS" and "THE
COMPETITION ACT -- RECOVERY OF STRANDED COSTS IS ALLOWED FOR
ACE AND OTHER NEW JERSEY UTILITIES" in this prospectus.
The following sets forth the primary steps of the transaction
underlying the offering of the transition bonds:
- ACE will sell and assign the bondable transition
property to the issuer from time to time in exchange
for the net proceeds from the sale of a series of the
transition bonds.
- The issuer, whose primary asset will be the bondable
transition property, will sell the transition bonds
from time to time to the underwriters named in the
prospectus supplement for the related series.
- ACE will act as the servicer of the bondable
transition property.
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33
The transition bonds and the bondable transition property
securing the transition bonds are not an obligation of ACE or
of any of its affiliates other than the issuer. The transition
bonds and the bondable transition property are also not
an obligation of the State of New Jersey or any governmental
agency, authority or instrumentality of the State of
New Jersey.
Primary Steps of the Transaction: - What follows is a chart depicting the primary steps of the
transaction and the roles of the various parties:
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34
[TRANSACTION CHART]
THE TRANSACTION
Application, as servicer,
for transition bond charge
adjustments BPU
ATLANTIC CITY ---------------------------------> (STATE AGENCY;
ELECTRIC COMPANY NOT AFFILIATED WITH
(COMPANY) <--------------------------------- ISSUER OR ATLANTIC
Issuance of the BPU orders CITY ELECTRIC
| /'\ | and approval of COMPANY)
| | | adjustments to transition
| | | bond charge
| | |
| | |
| | ----------------------------------------------------------------------
| | |
Bondable transition | | Net proceeds from issuance |
property | | of transition bonds |
| | |
| | Transition bond charge |
| | collections and indemnity |
| | amounts |
| | |
Servicing of bondable | | Servicing fee |
transition property | | |
| | |
V | |
Credit enhancement/ |
ATLANTIC CITY ELECTRIC hedge fees PROVIDER OF CREDIT |
TRANSITION -------------------------------> ENHANCEMENT |
FUNDING LLC OR HEDGE TRANSACTION |
(SPE) (TO BE NAMED, IF ANY) |
|
| /'\ | |
Transition bonds (sold | | Proceeds from issuance | |
pursuant to underwriting | | of transition bonds | |
agreement) | | V |
| | |
V | TRUSTEE |
(ACTS FOR AND ON BEHALF |
UNDERWRITERS OF TRANSITION <---|
BONDHOLDERS PURSUANT
| /'\ TO INDENTURE)
Transition bonds | | Proceeds from issuance
(sold for cash) | | of transition bonds |
| | |
| | |
| | |
V | Payment of principal and |
interest |
TRANSITION BONDHOLDERS <---------------------------------------------|
5
35
The Collateral: The transition bonds will be secured by bondable transition
property, a form of property created under the Competition
Act and the financing order of the New Jersey Board of Public
Utilities, referred to as the BPU. The Competition Act is the
New Jersey Electric Discount and Energy Competition Act, enacted
in February 1999. On ______, the BPU issued to ACE an order
providing, among other things, for the issuance of transition
bonds. This order, and any subsequent orders issued from
time to time by the BPU providing for the issuance of
transition bonds and identified in supplements to this
prospectus, are referred to as the BPU financing order.
In general terms, bondable transition property includes the
irrevocable right to recover, through a nonbypassable transition
bond charge payable by all of ACE's customers within its service
territory who use ACE's transmission and distribution system:
- the principal amount of, and
interest on, the transition
bonds,
- the costs incurred to issue,
service or refinance the
transition bonds, including
accrued interest and
acquisition or redemption
premium; and
- other financing costs and
related fees and charges,
including but not limited to
the costs of selling or
transferring bondable
transition property and the
costs of credit enhancements,
servicing expenses,
overcollateralization,
interest rate caps, swaps or
collars, yield maintenance,
maturity guarantees and
other hedging agreements and
the fees for the servicer,
trustee and administrator.
Bondable transition property also includes the right to obtain
periodic adjustments of the transition bond charge and all
revenues, collections, payments, money and proceeds with respect to
the foregoing. See "THE BPU FINANCING ORDER AND THE TRANSITION BOND
CHARGE -- THE BPU FINANCING ORDER" in this prospectus.
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36
ACE will sell and assign bondable transition property from time to
time to the issuer to support the issuance of a series of the
transition bonds. The sale of bondable transition property is
described in more detail under "THE SALE AGREEMENT -- ACE'S SALE
AND ASSIGNMENT OF THE BONDABLE TRANSITION PROPERTY" in this
prospectus. ACE, as servicer of the bondable transition property,
will collect the transition bond charge from customers within its
service territory on behalf of the issuer. See "THE SERVICER OF
THE BONDABLE TRANSITION PROPERTY" in this prospectus.
The issuer will use the net proceeds from the issuance of the
transition bonds to pay the expenses of issuance and to
purchase the bondable transition property from ACE. ACE will use
these proceeds principally to reduce stranded costs through the
retirement of debt or equity or both, and/or to finance or
refinance the cost of buying down and/or buying out long-term power
purchase contracts from nonutility generators. See
"Transaction Overview" above and "USE OF PROCEEDS" in this
prospectus.
Servicing the Bondable Transition Property: ACE, in its capacity as servicer of the bondable transition
property under the servicing agreement, will assess the
transition bond charge on the bills of each customer. A
customer is an end user of electricity that is connected to
any part of ACE's transmission and distribution system and
located within ACE's service territory. Each customer that
uses ACE's transmission and distribution system must pay the
transition bond charge, even customers that elect to purchase
electricity from another supplier. In limited
circumstances, customers that self-generate may avoid the
transition bond charge, as described under "THE COMPETITION
ACT -- ACE AND OTHER UTILITIES MAY SECURITIZE STRANDED COSTS" in
this prospectus. The transition bond charge is assessed as a per
kilowatt-hour charge against all customers; the amount billed to a
customer depends on the amount of electricity delivered to the
customer through ACE's transmission and distribution
system. See "THE COMPETITION ACT" and "THE BPU FINANCING ORDER AND
THE
7
37
TRANSITION BOND CHARGE" in this prospectus. Third-party suppliers
of electricity to ACE's customers may collect the transition bond
charge from customers within ACE's service area and pay the
transition bond charge to the servicer. These third-party
suppliers must pay ACE any transition bond charge that they
bill to ACE's customers whether or not they receive payments from
those customers.
ACE, as servicer, will calculate the transition bond charge based on
the total amount required to be billed to customers in order
to enhance the likelihood that transition bond charge
collections, including any amounts on deposit in the reserve
subaccount of each series, are neither more nor less than the
amount necessary to make timely payments of principal of and
interest on the transition bonds and the other amounts required
to be paid by the issuer. The charge will be reflected
in each customer's bill. Transition bond charge
collections will vary from projections owing to fluctuations in
usage, number of customers, customer payment patterns, rates of
delinquencies, write-offs and other factors. See "THE SERVICER OF
THE BONDABLE TRANSITION PROPERTY" in this prospectus.
The BPU is required to make periodic adjustments to the transition
bond charge upon petition by ACE, as servicer, or the issuer, to
ensure receipt of revenues sufficient to recover all ongoing
transaction costs, including expected principal amortization of, and
interest on, the transition bonds and other ongoing transaction
costs listed in this summary under "ALLOCATIONS AND PAYMENTS;
PRIORITY OF DISTRIBUTIONS." See "THE BPU FINANCING ORDER AND THE
TRANSITION BOND CHARGE -- THE TRANSITION BOND CHARGE ADJUSTMENT
PROCESS" in this prospectus. For each series of transition bonds, the
adjustments will be designed to result in the outstanding principal
balance of the transition bonds of that series equaling the amounts
set forth in the series' expected amortization schedule. The principal
balance of a class or series refers to the initial principal balance of
that class or series reduced by the amount of principal distributed
since the date of issuance to the bondholders of that class
8
38
or series in accordance with the terms of the indenture. In
addition, the adjustments in the transition bond charge will be
designed to result in (1) the amount in the
overcollateralization subaccount for each series of transition
bonds equaling the required overcollateralization amount for
that series, (2) the amount in the capital subaccount for that
series equaling the required capital level for that series,
and (3) the amount in the reserve subaccount for that series
equaling zero. It is anticipated that the adjustments in the
transition bond charge would be made so that these equalizations
would be achieved by the payment date immediately preceding the
next adjustment.
ACE, as servicer, will petition the BPU to approve such adjustments
in the transition bond charge as are required to make up for any
shortfall or excess in transition bond charge collections. See "THE
SERVICING AGREEMENT -- SERVICER DUTIES" in this prospectus. In this
way, the transition bond charge collections will be designed to
conform to the expected amortization schedule of payments of
principal of, and interest on, and the other costs associated with
the transition bonds. The adjustments must be made at least annually
but may be made quarterly.The date on which an adjustment to the
transition bond charge is made is referred to as a transition bond
charge adjustment date. The servicer may also request modification
of the methodology used to calculate the transition bond charge to
more accurately project and generate adequate revenues. See "THE BPU
FINANCING ORDER AND THE TRANSITION BOND CHARGE -- THE TRANSITION
BOND CHARGE ADJUSTMENT PROCESS" in this prospectus.
Payment Sources: On each payment date, as described in "Allocations and Payments;
Priority of Distributions" below, the trustee will pay amounts due
on the transition bonds from:
- transition bond charge collections remitted by the servicer
to the trustee during the prior collection period as specified in
the prospectus supplement;
9
39
- amounts available from trust accounts held by the trustee.
These accounts are described in greater detail under "THE
INDENTURE -- COLLECTION ACCOUNT" in this prospectus.
Allocations and Payments; Priority of Distributions: The transition bond charge collections will be remitted by the
servicer at least monthly and will be deposited by the trustee
into the general subaccount of the collection account. In addition,
investment earnings on amounts on deposit in the trust accounts
will be deposited into the general subaccount of the collection
account on the business day preceding each payment date and, if and
to the extent necessary to meet monthly fees and expenses, on the
business day preceding each monthly fee disbursement date. In
addition, any indemnity payments received by the trustee will be
deposited into the general subaccount as received. On each
transition bond charge adjustment date, the trustee will determine
the total revenue requirements of each series of transition bonds
over the period that begins on that date and ends on the date
immediately preceding the next scheduled transition bond charge
adjustment date.
On the business day preceding each payment date, the trustee will
allocate amounts in the general subaccount of the collection account
to each series in accordance with the proportion of the total revenue
requirements a particular series' revenue requirements bears to the
total revenue requirements for all series as determined on the
previous transition bond charge adjustment date. On each payment date,
the trustee will pay as to each series the amounts as described in
clauses 1 through 12 below, to the extent funds are available in the
general subaccount of the collection account. All series and all
classes within a series will have the same payment dates. In addition,
the trustee will pay the monthly fees and expenses specified in
clauses 1 through 5 below on the [__] day of each month that does not
include a payment date, to the extent funds are available in the
general subaccount of the collection account. Each such day is
referred to as a monthly fee disbursement date. See "THE INDENTURE --
ALLOCATIONS
10
40
AND PAYMENTS; PRIORITY OF DISTRIBUTIONS" in this prospectus.
The priorities among payments made on each series are as follows:
1. To the trustee, payment of that series' portion of the
trustee's fee, plus (up to an aggregate amount specified in
the related prospectus supplement) all expenses of the trustee
and indemnities payable to the trustee;
2. To the independent managers of the issuer, payment of that
series' portion of the managers' fees;
3. To the servicer, payment of that series' portion of the
servicing fee;
4. To the administrator, payment of that series' portion of the
administration fee;
5. To the issuer, payment of that series' portion of the current
operating expenses of the issuer (up to an aggregate amount
specified in the related prospectus supplement) unless an
event of default under the indenture exists or would result
from the payment;
6. To the transition bondholders:
(A) payment of the interest then due on the transition bonds
of that series and any previously accrued but unpaid
interest;
(B) payment of the principal then due on the transition bonds
of that series, to the extent applicable equal to the
following:
- the unpaid principal amount of any class of that
series upon an acceleration triggered by an event of
default,
- the unpaid principal amount of any class of that
series due on
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41
the final maturity date of that class
and
- the unpaid principal amount of any class of that
series called for redemption; and
(C) payment of principal in the amount that would bring the
aggregate principal amount outstanding for that series to
the level set forth in the expected amortization schedule
for that series for that payment date;
7. To hedge or interest rate counterparties, payments of any
amounts due under any hedge or swap agreements made with
respect to any class of that series;
8. To the persons entitled thereto, payment of that series'
portion of any remaining unpaid operating expenses, including
any unpaid trustee expenses and indemnity amounts then owed;
9. To the capital subaccount for that series, replenishment up to
the required capital amount;
10. To the overcollateralization subaccount for that series,
allocation of the amount that would bring the amount in that
subaccount to the level set forth in the overcollateralization
schedule for that series on that payment date;
11. To the issuer, so long as no event of default has occurred and
is continuing, release of an amount equal to investment
earnings on amounts in the capital subaccount for that series
since the preceding payment date; and
12. To the reserve subaccount for that series, allocation of any
remaining amount, subject to reallocation of that remainder to
another series in the event of a payment default of the other
series.
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After all transition bonds of that series have been paid, redeemed or
defeased, and all obligations of the issuer with respect to that
series have been satisfied, amounts, if any, remaining in that series'
subaccounts will either be released to the issuer free of the lien of
the indenture or be reallocated to the subaccounts of the remaining
outstanding series, as specified in the related prospectus supplement.
If so specified in the related prospectus supplement, to the extent
that more than one class of a series of transition bonds is to receive
payments of principal legally due or scheduled to be paid in
accordance with the related expected amortization schedule on any
payment date, the applicable funds will be allocated in a sequential
manner, to the extent funds are available, as specified in that
prospectus supplement.
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[ALLOCATIONS AND DISTRIBUTIONS CHART]
ALLOCATIONS AND DISTRIBUTIONS FOR EACH SERIES
- ----------------
ATLANTIC CITY
ELECTRIC COMPANY
(SERVICER)
- ----------------
remittance of transition bond charge
collections and any indemnity amounts
- ----------------
COLLECTION
ACCOUNT
- ----------------
deposit amounts in general
subaccount
- ---------------- ----------------
GENERAL OTHER SERIES
SUBACCOUNT SUBACCOUNTS,
- ---------------- IF APPLICABLE
application of amounts in general ----------------
subaccount between series deposit earnings on
subaccounts trust account investments
- ----------------
SERIES
SUBACCOUNT
- ----------------
1 2 3 4 5 6
TRUSTEE: INDEPENDENT SERVICER: ADMINISTRATOR: ISSUER: TRANSITION
fee and expenses MANAGERS: BONDHOLDERS:
and indemnities servicing fee administration operating
up to fees fee expenses up to * interest for
capped amount capped amount applicable payment
date(1)
* principal payable as
a result of
acceleration or
12 redemption or
payable on a final
RESERVE maturity date
SUBACCOUNT:
* principal for
all remaining amounts applicable payment
date in accordance
with expected
amortization
schedule
11 10 9 8 7
ISSUER: OVER- CAPITAL ISSUER: HEDGE/SWAP
release of COLLATERALIZATION SUBACCOUNT: COUNTERPARTIES:
investment SUBACCOUNT: all unpaid
earnings on capital replenishment of operating expenses amounts due under
subaccount funding to meet capital required and indemnity hedge agreements
scheduled over- to be maintained amounts (allocated to
collateralization by the Issuer affected class(es)
level only)
- ------------------------
(1) This payment may be supplemented through payments made by a Swap
Counterparty in the case of floating rate bonds. Please refer to the
applicable prospectus supplement.
(2) All payment allocations are made on payment dates. Each series' monthly
portion of fees and expenses set forth in 1-5 are paid monthly; all other
payments are paid on payment dates.
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Credit Enhancement and Accounts: Unless otherwise specified in the related prospectus supplement, the
primary form of credit enhancement for the transition bonds will be
mandatory periodic adjustments to the transition bond charge. In
addition, the transition bond charge collections will fund the
collection account and various subaccounts set forth below.
Collection Account - Under the indenture, the trustee will hold a
single collection account, the amounts held in which will be deposited
into a general subaccount, which will be divided into various series
subaccounts, which series subaccounts will be further divided into
series-specific subaccounts. The primary subaccounts for credit
enhancement purposes are:
- Overcollateralization Subaccount - The prospectus supplement
for each series of transition bonds will specify a funding
level for that series' overcollateralization subaccount. This
amount will be funded over the term of that series of
transition bonds.
- Capital Subaccount - The prospectus supplement for each
series of transition bonds will specify an amount to be
deposited into that series' capital subaccount on the date of
issuance of that series.
- Reserve Subaccount - Any excess amount of transition bond
charge collections and investment earnings allocable to a
series of transition bonds, other than earnings on the
capital subaccount after payments have been made on a payment
date, will be held in the reserve subaccount for that series
of transition bonds.
If on any payment date funds in any series subaccount are insufficient
to make the allocations contemplated above, funds drawn from amounts
on deposit in the following subaccounts of that series will be
available to make payments in the following order up to the amount of
the shortfall:
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- from the reserve subaccount for that series for allocations
in clauses (1) through (11);
- from the overcollateralization subaccount for that series for
allocations in clauses (1) through (6) and (8); and
- from the capital subaccount for that series for allocations
in clauses (1) through (6) and (8).
In addition, in order to avoid a default in the payment of interest or
legally due principal on another series of transition bonds, amounts
held in the reserve subaccount of any series may be used to make
payments in order to avoid such a default or an event of default if
doing so would not cause the series to suffer a default or an event of
default.
If on any monthly fee disbursement date amounts available in a series'
subaccount are insufficient to pay that series' share of monthly fees
and expenses, amounts held in the reserve subaccount of that series
may be used to make these payments.
See "THE INDENTURE -- ALLOCATIONS AND PAYMENTS; PRIORITY OF
DISTRIBUTIONS" in this prospectus.
Any additional forms of credit enhancement for any series will be
specified in the related prospectus supplement. Additional forms of
credit enhancement for any series may include surety bonds, letters of
credit, maturity guarantees, a financial guarantee insurance policy, a
credit or liquidity facility, a repurchase obligation, a third-party
payment or cash deposit. Credit enhancement for the transition bonds
is intended to protect you against losses or delays in scheduled
payments on your transition bonds.
Prefunding: If and to the extent specified in the related prospectus supplement,
the issuer may elect to issue transition bonds in a principal
amount that, on the date of issuance, exceeds the aggregate amount
of bondable transition property created under the BPU financing
order or orders then in effect. The incremental amount of
transition
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bonds issued over the amount of bondable transition property then
created would be issued in anticipation of a subsequent authorization
by the BPU, within a period of time specified in the related
prospectus supplement, of additional bondable transition property in
the same incremental amount. In the event of such an incremental
issuance, the issuer would immediately deposit the bond proceeds from
the sale of this incremental issuance into a separate prefunding
account owned by it and administered by the trustee. ACE may provide
additional credit enhancement for the incremental principal amount of
bonds, as set forth in the related prospectus supplement. Amounts in
the prefunding account would be used, to the extent necessary, to meet
obligations on the transition bonds in the manner set forth in the
related prospectus supplement.
If following such an issuance but within the time period specified in
the related prospectus supplement, the BPU approves the creation of
additional bondable transition property in an amount equal to the
incremental amount of transition bonds issued, ACE will sell that
additional bondable transition property to the issuer and receive as
consideration for it all amounts in the prefunding account. If,
however, the BPU does not approve the creation of additional bondable
transition property in the incremental amount within that time period,
at the end of that period all amounts in the prefunding account will
be applied to redeem the incremental principal amount of transition
bonds and pay accrued interest thereon on the terms set forth in the
related prospectus supplement.
State Pledge: Under the Competition Act, the State of New Jersey pledges and agrees
with the holders of the transition bonds and the issuer not to limit,
alter or impair the bondable transition property or other rights
vested in a public electric utility, or any financing entity, such as
the issuer, or vested in the holders of any transition bonds pursuant
to a bondable stranded costs rate order (such as the BPU financing
order) until the transition bonds are fully paid and discharged except
for the periodic adjustments in the transition bond charge provided
for in the Competition Act and the BPU financing order. See "THE
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COMPETITION ACT -- ACE AND OTHER UTILITIES MAY SECURITIZE STRANDED
COSTS" in this prospectus.
The State of New Jersey may not be required to adhere to its pledge
and agreement if its actions to the contrary were justified as
necessary and reasonable and of a character appropriate to advance an
important public purpose, such as to remedy an important general
social or economic problem or to cope with a great public calamity.
However, there is no existing case law addressing these issues with
respect to transition bonds. Alternatively, the State of New Jersey
may not be required to adhere to its pledge and agreement if it pays
just compensation to the transition bondholders. There is also no
existing case law addressing the issue of just compensation in the
context of transition bonds. See "RISK FACTORS -- RISKS OF JUDICIAL,
LEGISLATIVE OR REGULATORY ACTION" in this prospectus.
Payments of Interest and Principal: Interest on each series or class of transition bonds will accrue at
the interest rate or rates specified in the related prospectus
supplement. On each payment date, the trustee will distribute
interest accrued on each series or class of transition bonds and
the scheduled principal payment for such class, if any, to the
extent funds are available therefor, until the outstanding
principal balance of such class has been reduced to zero.
Failure to pay the entire outstanding amount of the transition bonds
of any series or class by the expected final payment date will not
result in a default with respect to that series or class until the
date the entire unpaid principal amount for the series or class is due
and payable, referred to as the final maturity date for the series or
class. The expected final payment date and the final maturity date of
each series and class of transition bonds are specified in the related
prospectus supplement.
Optional Redemption: Provisions for optional redemption of the transition bonds, if any,
are specified in the related prospectus supplement. If provided in the
related prospectus supplement, a series of transition bonds will be
subject to optional
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redemption in whole on any payment date if the aggregate outstanding
principal amount of transition bonds of that series has been reduced
to an amount below the percentage of the initial principal amount of
that series specified in the prospectus supplement. Any such
redemption would be done on a series basis but would apply, for
practical purposes, only to the classes within that series with the
longest maturities. In addition, if provided in the related prospectus
supplement, a series of transition bonds may be redeemed on a payment
date if the sum of the amounts in the overcollateralization subaccount
and the reserve subaccount for the series equals or exceeds the then
outstanding principal amount of transition bonds of that series and
there are sufficient transition bond charge collections to pay accrued
and unpaid interest on the transition bonds of that series as of the
redemption date. See "THE TRANSITION BONDS -- REDEMPTION" in this
prospectus.
Payment Dates and Record Dates: The payment dates and record dates for each series and class of
transition bonds are specified in the related prospectus supplement.
Servicing Compensation: The issuer will pay the servicer the monthly servicing fee then due
with respect to all series of transition bonds, solely to the extent
that the issuer has funds available to pay this fee. The servicing fee
will be allocated among all series of transition bonds. As long as ACE
acts as servicer, this monthly fee will be one-twelfth of 0.05% of the
initial principal balance of all transition bonds issued to date. If a
successor servicer is appointed, the servicing fee will be based on an
amount approved by the BPU not to exceed a per annum rate equal to
1.25% of the initial principal balance of all transition bonds issued
to date. The servicer will not be required to remit to the trustee
investment income it receives on the transition bond charges it
collects pending their remittance to the trustee, as well as any late
fees paid by customers to the servicer that are associated with the
transition bond charges. See "THE SERVICING AGREEMENT -- TRANSITION
BOND CHARGE COLLECTIONS" in this prospectus.
Tax Status: The issuer and ACE have received a private letter ruling from the
Internal Revenue Service
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to the effect that, for U.S. federal income tax purposes, the
transition bonds will be classified as debt obligations of ACE. In
addition, in the opinion of _____________, special New Jersey tax
counsel to the issuer and ACE, interest on transition bonds received
by a person who is not otherwise subject to corporate or personal
income tax in the State of New Jersey will not be subject to these
taxes.
The issuer will be treated as a division of ACE 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 in the transition bonds. See "MATERIAL
INCOME TAX MATTERS" in this prospectus.
Neither residents nor nonresidents of New Jersey will be subject to an
intangible personal property tax in respect of the transition bonds.
See "MATERIAL INCOME TAX MATTERS -- MATERIAL STATE OF NEW JERSEY TAX
MATTERS" in this prospectus.
If you purchase a transition bond, you agree to treat it as debt of
ACE for United States federal, state and local tax purposes.
ERISA Considerations: Pension plans and other investors subject to ERISA may acquire the
transition bonds subject to specified conditions. The acquisition and
holding of the transition bonds could be treated as an indirect
prohibited transaction under applicable federal pension law,
including but not limited to ERISA. Accordingly, by purchasing
transition bonds, each investor purchasing on behalf of a
pension plan or other investor subject to applicable federal
pension law, including but not limited to ERISA, will be deemed
to certify that the purchase and subsequent holding of the
transition bonds will not constitute a non-exempt prohibited
transaction under applicable federal pension law, including but
not limited to ERISA. For further information regarding the
application of ERISA, see "ERISA CONSIDERATIONS" in this
prospectus.
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RISK FACTORS
You should consider the following risk factors in deciding whether to
purchase transition bonds.
LIMITED SOURCES OF PAYMENT AND LIMITED CREDIT ENHANCEMENT
FOR THE TRANSITION BONDS COULD CAUSE PAYMENT DELAYS OR LOSSES
You may suffer payment delays or losses on your transition bonds if the
assets of the issuer are insufficient to pay the principal amount of the
transition bonds in full. The only source of funds for payments on the
transition bonds will be the assets of the issuer. These assets will be limited
to:
- the bondable transition property including the right to
collect the transition bond charge and to have the transition
bond charge adjusted at least annually;
- contractual rights under the transaction agreements, including
the sale agreement and the servicing agreement;
- trust accounts held by the trustee; and
- if so stated in the applicable prospectus supplement, other
credit enhancement.
The transition bonds will not be insured or guaranteed by ACE (in its
capacity as servicer or otherwise), its parent, Conectiv, or any of their
respective affiliates other than the issuer, or by the trustee or any other
person or entity. Thus, payments relating to the transition bonds will be made
only from collections of the transition bond charge, funds on deposit in the
trust accounts held by the trustee and other credit enhancement, if any,
described in the related prospectus supplement. See "ATLANTIC CITY ELECTRIC
TRANSITION FUNDING LLC, THE ISSUER" in this prospectus.
RISKS OF JUDICIAL, LEGISLATIVE OR REGULATORY ACTION
THE LAW WHICH UNDERPINS THE TRANSITION BONDS MAY BE INVALIDATED BY JUDICIAL
ACTION
The bondable transition property is the creation of the Competition Act
and the BPU financing order issued pursuant to the Competition Act, which was
adopted in February 1999. A court decision or federal or state law might seek to
overturn or otherwise invalidate, preempt or repeal portions of either the
Competition Act or the BPU financing order. If this occurs, you may lose some or
all of your investment or you may experience delays in recovering your
investment. Since the bondable transition property is a creation of statute and
the BPU financing order, any event affecting the validity of the relevant
legislative provisions or the BPU financing order would have an adverse effect
on the transition bonds because the transition bonds are secured primarily by
the bondable transition property. For example, if the provisions of the
Competition Act that establish the bondable transition property as a currently
existing property were invalidated, ACE, as servicer, could lose the right to
collect the transition bond charge. As another example, if the provisions of the
Competition Act and of the BPU financing order establishing the right to obtain
periodic adjustment of the transition bond charge were invalidated, ACE, as
servicer, could be prevented from obtaining the adjustments required to provide
sufficient funds for the scheduled payments on the transition bonds.
There is uncertainty associated with investing in bonds payable from an
asset that depends for its existence on recently enacted legislation because of
an absence of any judicial decisions implementing and interpreting the
legislation. See "THE BPU FINANCING ORDER AND THE TRANSITION
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BOND CHARGE" in this prospectus. If a court were to determine that the relevant
provisions of the Competition Act or the BPU financing order are unlawful,
invalid or unenforceable in whole or in part or in any way impair the security
of the transition bondholders, it could adversely affect the validity of the
transition bonds, the bondable transition property or the issuer's ability to
make payments on the transition bonds. Although a judicial determination of that
kind will cause ACE to indemnify you, the amount of any indemnification may not
be sufficient for you to recover all of your loss on the transition bonds.
In October and November 1999, appeals were filed challenging the
validity of a financing order issued by the BPU to Public Service Electric and
Gas Company, referred to as PSE&G, as well as the BPU order authorizing PSE&G's
related restructuring which was also issued pursuant to the Competition Act,
referred to as the PSE&G restructuring order. On April 13, 2000, the Appellate
Division of the New Jersey Superior Court unanimously rejected the arguments
made by appellants and affirmed the PSE&G restructuring and financing orders. On
May 22, 2000, one of the appellants requested the New Jersey Supreme Court to
review certain aspects of the Appellate Division decision. On July 14, 2000, the
Supreme Court granted that request. On December 6, 2000, by a vote of 4 to 1,
the New Jersey Supreme Court issued its order affirming the judgment of the
Appellate Division. The 10 day period during which a party may request
reconsideration of this order has expired and thus the New Jersey Supreme Court
decision is final. As with any New Jersey Supreme Court decision, a party may
request the court to enlarge this ten day period under its rules. However, the
Company believes that, in light of the language of the court's order determining
that it is in the public interest to expedite the disposition of the appeals,
this relief would be extraordinary and that reconsideration would not be granted
in any event.
Electricity generation deregulation laws similar to the Competition Act
providing for the issuance of bonds for the recovery of stranded costs have been
enacted in such states as Pennsylvania, California, Texas, Massachusetts,
Michigan, Arkansas, Connecticut, Illinois, Montana and New Hampshire. The
validity of the enabling legislation has been upheld in those states where legal
challenges have been fully adjudicated. A court might yet overturn a similar
statute in another state in response to a future claim. Such a decision would
not automatically invalidate the Competition Act or the related BPU financing
order, but it could establish legal principles that would serve as a basis to
challenge the Competition Act. Whether or not a subsequent court challenge to
the Competition Act would be successful would depend on the similarity of the
other statute to the Competition Act and the applicability of the legal
precedent. Therefore, legal activity in other states may indirectly affect the
value of your investment in the transition bonds.
FEDERAL LAW MAY PREEMPT THE COMPETITION ACT OR THE BPU FINANCING ORDER WITHOUT
FULL COMPENSATION FOR THE TRANSITION BONDHOLDERS
Federal preemption of the Competition Act or of the BPU financing order
could prevent transition bondholders from receiving payments on the transition
bonds and cause a loss on their investment. The New Jersey electric industry is
governed by federal law and regulated by the Federal Energy Regulatory
Commission. In the past, bills have been introduced in Congress that would
prohibit the recovery of charges similar to the transition bond charge. Although
the 106th Congress did not enact any law that would do so or that would negate
the existence of bondable transition property, a subsequent Congress could do so
in the future. No prediction can be made as to whether any future bills that
prohibit the recovery of stranded costs or securitized financing for the
recovery of these costs will become law or, if they became law, what their final
form or effect will be. There can be no assurance that the courts would consider
any such prohibition a "taking" from the transition bondholders under the
takings clause of the United States Constitution. Moreover, even if such a
prohibition were considered a "taking" under the United States Constitution for
which the government had to pay just compensation for the bondable transition
property, there is no assurance that the compensation would be sufficient to pay
the full amount of principal of and interest on the transition bonds or to pay
these amounts on a timely basis.
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In addition, the United States Congress has authority to enact federal
bankruptcy laws, including laws that define what constitutes property under
federal bankruptcy law. Any such enactments could negatively affect the value of
the transition bonds in the event of a bankruptcy of ACE. See " -- Risks
Associated with Potential Bankruptcy Proceedings" below and "HOW A BANKRUPTCY OF
ACE OR THE SERVICER MAY AFFECT YOUR INVESTMENT" in this prospectus. Neither the
issuer nor ACE will indemnify you for any changes in federal law that may affect
the value of the transition bonds.
FUTURE STATE LEGISLATIVE ACTION MAY INVALIDATE THE TRANSITION BONDS OR THEIR
UNDERLYING ASSETS
Under the Competition Act, the State of New Jersey has pledged and
agreed not to limit, alter, impair or reduce the value of the bondable
transition property except by the periodic adjustments to the transition bond
charge provided for in the Competition Act and the BPU financing order. For a
description of this pledge and agreement, see "THE COMPETITION ACT -- ACE and
Other Utilities May Securitize Stranded Costs" in this prospectus. Despite this
pledge and agreement, the legislature of the State of New Jersey may attempt in
the future to repeal or amend the Competition Act in a manner that might limit
or alter the bondable transition property so as to reduce its value.
To date, no case addressing these issues in the context of transition
bonds has been decided. However, 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 that supported bonds issued by public instrumentalities
or otherwise reducing or eliminating the security for such bonds. Based on this
case law, in the opinion of LeBoeuf, Lamb, Greene & MacRae, L.L.P., counsel to
ACE and the issuer, the State of New Jersey, including the BPU, could not take
any action of a legislative character, including the repeal or amendment of the
Competition Act, that would substantially limit, alter or impair any bondable
transition property or other rights vested in the transition bondholders
pursuant to the BPU financing order, or that would substantially limit, alter,
impair or reduce the value or amount of the bondable transition property, unless
the action is a reasonable exercise of the State of New Jersey's sovereign
powers and of a character appropriate to a significant and legitimate public
purpose justifying the action, such as to remedy an important general social or
economic problem or to cope with a great public calamity.
Moreover, in the opinion of LeBoeuf, Lamb, Greene & MacRae, L.L.P.,
under the takings clauses of the United States Constitution and the New Jersey
Constitution, the State of New Jersey could not repeal or amend the Competition
Act by way of legislative process, or take any other action in contravention of
the State of New Jersey's pledge and agreement with the transition bondholders
described above, without paying just compensation to the transition bondholders,
as determined by a court of competent jurisdiction, if doing so would constitute
a permanent appropriation of the property interest of the transition bondholders
in the bondable transition property and deprive the transition bondholders of
their reasonable investment-backed expectations arising from their investments
in the transition bonds. There can be no assurance, however, that, even if a
court were to award just compensation, it would be sufficient to pay the full
amount of principal of and interest payable on the transition bonds.
In contrast to California, Massachusetts and other states, the State of
New Jersey does not grant its citizens the constitutional right to adopt or
revise laws by initiative or referendum. Thus, the Competition Act cannot be
amended or repealed by the electorate. However, there can be no assurance that
the Competition Act or portions of it will not be repealed or amended by the New
Jersey state legislature, either of which may be a violation of the State of New
Jersey's pledge and agreement with the transition bondholders. Costly and
time-consuming litigation might ensue, and any such litigation might adversely
affect the price and liquidity of the transition bonds and the dates of payments
of interest on and
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principal thereof and, accordingly, the weighted average lives of the transition
bonds. Moreover, given the lack of judicial precedent directly on point and the
novelty of the security for the transition bonds, the outcome of any such
litigation cannot be predicted with certainty. Accordingly, transition
bondholders could incur a loss of their investment.
ACE will be obligated under the sale agreement to indemnify the issuer
and the trustee for liabilities, obligations, claims, actions, suits or payments
resulting from breaches of its representations and warranties in the sale
agreement and will represent that there are no proceedings or investigations
asserting the invalidity of the basic documentation implementing the financing
transaction. ACE will not, however, be in breach of the sale agreement and will
not be obligated to indemnify you, the issuer or the trustee as a result of a
change in law by legislative enactment or constitutional amendment that renders
any of the representations and warranties contained in the sale agreement
untrue. See "THE SALE AGREEMENT -- ACE's Representations and Warranties" and "
- -- ACE's Obligation to Indemnify the Issuer and the Trustee" in this prospectus.
A repeal of the Competition Act, an amendment voiding the bondable transition
property or the adoption of a federal statute prohibiting the recovery of
bondable stranded costs are examples of changes in law. If any such change in
law were to occur, ACE would be required under the sale agreement to take legal
or administrative action to protect the rights of the holders of the bondable
transition property. See "THE SALE AGREEMENT -- ACE's Obligation to Undertake
Legal Action" in this prospectus. However, there can be no assurance that ACE
would be able to take any such action or that any such action would be
successful, and any litigation resulting from any such change in law may
adversely affect the value of your investment.
BPU ACTION MAY REDUCE THE VALUE OF THE TRANSITION BONDS
Pursuant to the Competition Act, the BPU financing order issued to ACE
is irrevocable upon issuance, and the BPU may not directly or indirectly rescind
or amend the BPU financing order or, except in accordance with the periodic
adjustment mechanism, reduce or impair the amount of bondable stranded costs
authorized under the BPU financing order. The BPU nevertheless might attempt to
revise or rescind any of its regulations or orders in ways that ultimately have
an adverse impact upon the bondable transition property or the transition bond
charge. Apart from the terms of the BPU financing order, the BPU retains the
power to adopt, revise or rescind regulations and orders affecting ACE or a
successor public electric utility. Any new or amended regulations or orders by
the BPU could impede the servicer's ability to collect the transition bond
charges in full and on a timely basis. ACE has agreed to take such legal or
administrative actions as may be reasonably necessary to protect the issuer from
claims of third parties which, if successfully pursued, would result in a breach
of ACE's representations and warranties under the sale agreement. See "THE SALE
AGREEMENT" in this prospectus. However, there can be no assurance that ACE would
be able to take the requisite action or that any such action would be
successful. Future BPU regulations or orders may affect the rating of the
transition bonds, their price or the rate of transition bond charge collections
and, accordingly, the amortization of transition bonds and their weighted
average lives. As a result, you could suffer a loss of your investment.
UNUSUAL NATURE OF BONDABLE TRANSITION PROPERTY AND SERVICING RISKS
INACCURATE FORECASTING OF ELECTRICITY CONSUMPTION, DELINQUENCIES AND WRITE-OFFS
COULD RESULT IN INSUFFICIENT TRANSITION BOND CHARGE COLLECTIONS
Any failure on the part of the servicer to accurately forecast
collected revenues on the basis of projected electricity consumption,
delinquencies, customer payment patterns and write-offs could adversely affect
the timely receipt of transition bond charge collections. Projections are
inherently subject to uncertainties any of which could cause actual results to
differ materially from those projected. These include, among other things,
changes in political, social and economic conditions, weather,
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unexpected demographic trends, catastrophes, legislative and regulatory
initiatives, changes in governmental regulation and litigation, all of which are
beyond the control of the servicer. Past accuracy of ACE's forecasts is not
necessarily indicative of the accuracy of its future forecasts, and there can be
no assurance that actual usage, delinquencies, customer payment patterns and
write-offs will not differ significantly from future forecasts thereof. While
adjustments to the transition bond charge are required to be made under the
Competition Act and the BPU financing order to offset developments such as those
just noted, a shortfall in transition bond charge collections could result in
payments of principal of the transition bonds not being paid according to the
expected amortization schedule, lengthening the weighted average life of the
transition bonds, or payments of principal and interest not being made at all.
For calendar year 2000, actual usage [exceeded/was exceeded by]
forecasted usage by [__]% because of ___________. ACE has no historical
performance data for the collection of the transition bond charge. Although
customer and energy usage records are available, those limited records do not
reflect customers' payment patterns or energy usage in a fully mature
competitive market inasmuch as competition began in August 1999. Competition
could affect usage in ways that cannot now be predicted and that would render
past projections useless as a basis for future projections. Similarly, the
introduction of third-party suppliers providing consolidated billing and
assuming responsibility for payment of the transition bond charges and of
amounts owed to ACE for transmission and distribution service could make past
projections meaningless as a tool in predicting delinquencies and write-offs.
Furthermore, the servicer does not have any experience administering the
transition bond charge or administering any charge on behalf of an independent
issuer.
Changes in the electricity market may also make it desirable to change
the methodology for setting the transition bond charge. That methodology is
established by the BPU, and although ACE, as servicer, may at any time file a
nonroutine adjustment request with the BPU if the methodology then in use
requires modification to more accurately project and generate adequate revenues,
there can be no assurance that the BPU will grant any such request or that a
different methodology will provide more accurate projections and result in the
generation of adequate revenues. If a request to modify the methodology for
determining the amount of transition bond charge is denied, or if a new
methodology is implemented but fails to provide more accurate projections, the
forecasting of electricity consumption, delinquencies, customer payment patterns
and write-offs may continue to be unreliable, which may adversely affect the
value of your investment. See "THE BPU FINANCING ORDER AND THE TRANSITION BOND
CHARGE -- The Transition Bond Charge Adjustment Process" in this prospectus.
Although ACE, as servicer, does not have the right to change the amount
of an individual customer's transition bond charge, it does have the right to
take action that in its judgment will maximize actual collections from a
customer with respect to any utility bill, or to write off any outstanding bill
that it deems to be uncollectible in accordance with its customary practices.
For example, to recover part of an outstanding electricity bill, ACE may agree
to extend a customer's payment schedule or to write off the remaining portion of
the bill. While ACE has no current intention of taking actions that would change
its billing and collection arrangements in a manner that would adversely affect
the collection of transition bond charges, there can be no assurance that ACE or
a successor servicer will not do so in the future. Changes in the electricity
market could require ACE to make changes in its billing and collection
practices. Alternatively, the BPU may require changes to be made in these
practices. See "THE SERVICING AGREEMENT -- Servicing Procedures" and " --
Servicer Duties" in this prospectus.
The restrictions on ACE's ability to change the methodology used for
setting the transition bond charge and the introduction of changes in ACE's
billing and collection practices could result in material delays in payment of,
or losses on, your transition bonds and could materially reduce the value of
your investment.
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ADJUSTMENTS TO THE TRANSITION BOND CHARGE MAY BE DELAYED OR MAY BE INSUFFICIENT
TO PROTECT YOUR INVESTMENT
ACE, as servicer, is required to request from the BPU, on behalf of the
issuer, periodic adjustments to the transition bond charge. These adjustments
are intended to provide for, among other things, timely payment of the principal
of, and interest and any acquisition or redemption premium on, the transition
bonds. However, the frequency of these adjustments is limited. The servicer will
generally base its adjustment requests on any shortfalls during the prior
adjustment period and on projections of future electricity use and the
customers' ability to pay their electric bills in full and on a timely basis,
but unforeseen events such as weather, changes in technology, changes in
economic conditions or market changes owing to increased competition may make
projections inaccurate. Accordingly, the adjustments that the servicer requests
may be insufficient to provide for timely payment of the transition bonds. Also,
the BPU may fail to approve the servicer's requests in a timely fashion. For
instance, the BPU may refuse to permit an adjustment from taking effect on the
grounds that the adjustment contains a "manifest error." One or more of these
factors may prevent the servicer from collecting a sufficient amount of
transition bond charges to repay the transition bonds on a timely basis. This
may materially reduce the value of your investment. See "THE BPU FINANCING ORDER
AND THE TRANSITION BOND CHARGE -- The Transition Bond Charge Adjustment Process"
in this prospectus.
LIMITATIONS ON THE TRANSITION BOND CHARGE MAY LEAD TO INSUFFICIENT REVENUES TO
MAKE PAYMENTS
Under the order issued by the BPU on _______________ providing for the
restructuring of ACE under the Competition Act, referred to as the final
restructuring order, ACE is required, subject to the conditions thereof, to
reduce the electricity rates it charges its customers, compared to those it
charged on July 31, 1999, by 5% by August 1, 1999 (i.e., to no more than
$[____]/kilowatt-hour), by 7% by January 1, 2001 (i.e., to no more than
$[____]/kilowatt-hour) and by 10.2% by August 1, 2002 (i.e., to no more than
$[____]/kilowatt-hour). This limitation on rates, referred to as the overall
rate cap, will remain in effect until July 31, 2003, which date represents the
end of a four-year transition period to electric competition that began on
August 1, 1999. This charge will be a component of the electricity rates that
ACE will charge its customers and so must fall, taken together with other such
charges imposed by ACE, within the overall rate cap. As a consequence, the
servicer may be unable to increase the transition bond charge to an amount that,
together with the other charges, would exceed the overall rate cap. Although ACE
presently believes it will be able to defer the imposition of other charges to
the extent necessary to allow it to implement any increases in the transition
bond charge without exceeding the overall rate cap, has an order from the BPU
authorizing such deferrals, and would undertake to oppose any attempt to rescind
or modify that order in a way that would adversely affect the transition bonds
(or, alternatively, seek relief from the overall rate cap to avoid the same
result), there can be no assurance that the order or the measures to oppose any
rescission or modification of it (or to obtain relief from the rate cap) will be
effective on a timely basis. Consequently, you may experience material delays in
payment of, or losses on, your transition bonds if, because of the maximum
permitted electricity rate established in the final restructuring order, the
servicer is unable to increase the transition bond charge to a level and within
a time period that would enable the issuer to make timely payments on the
transition bonds. No policy has been established regarding the regulation of
electric utility rates in New Jersey following the four-year transition period.
Therefore no assurances can be given that, following the end of that period, the
servicer will not be subject to limitations similar to those currently in place
on its ability to increase the transition bond charges.
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YOUR INVESTMENT RELIES ON ACE OR ITS SUCCESSOR ACTING AS SERVICER OF THE
BONDABLE TRANSITION PROPERTY; PAYMENT DELAYS MAY BE MORE LIKELY UNDER A
SUCCESSOR SERVICER
ACE, as servicer, will be responsible for billing and collecting the
transition bond charge and for filing with the BPU to adjust the charge. See
"THE SERVICER OF THE BONDABLE TRANSITION PROPERTY" in this prospectus. If ACE
were to cease servicing the bondable transition property for any reason, it
might be hard to find a successor servicer. As a result, the timing of recovery
of payments arising from the transition bond charge may be delayed. In addition:
- any successor servicer may have less experience than ACE and
have less capable forecasting, billing and collection systems
than those used by ACE;
- given the complexity of the tasks to be performed by the
servicer and the expertise required, a successor servicer may
experience difficulties in collecting payments arising from
the transition bond charge and determining appropriate
adjustments to the transition bond charge;
- the servicing fee would likely increase under a successor
servicer;
- under current law, a successor servicer may not be able to
invoke the remedy of shutting off service to a customer for
nonpayment of the transition bond charge and may therefore
experience more payment delinquencies; and
- a change in the servicer may cause payment instructions to
change, which may lead to a period of disruption in which
customers continue to remit payment according to former
payment instructions.
Any of the above factors may result in delays in collection that could result in
delays in payment on the transition bonds.
Also, if the servicer defaults under the servicing agreement based upon
the commencement of a case by or against the servicer under the United States
Bankruptcy Code or similar laws, the trustee and the issuer may be prevented
from effecting a transfer of servicing arrangements. Defaults by the servicer
under the servicing agreement are referred to as servicer defaults and are
discussed under "THE SERVICING AGREEMENT -- Servicer Defaults" in this
prospectus. Upon a servicer default resulting from a failure to make required
remittances, the issuer or the trustee would have the right to apply to the BPU
for sequestration and payment of revenues arising from the bondable transition
property. However, federal bankruptcy law may prevent the BPU from issuing or
enforcing such an order. See " -- Risks Associated with Potential Bankruptcy
Proceedings" below.
IT MAY BE MORE DIFFICULT TO COLLECT THE TRANSITION BOND CHARGE FROM THIRD-PARTY
SUPPLIERS THAN FROM ACE'S CUSTOMERS
Customers may pay the transition bond charge to third parties who
supply them with electric power. These third-party suppliers are obligated to
forward the charge to ACE, as servicer. The servicer has the responsibility of
accounting for payments to be remitted to the trustee arising from the
transition bond charge regardless of which entity bills customers for the
charge.
Third-party suppliers will have to pay the servicer the transition bond
charge whether or not they collect the charge from their retail customers, in
effect replacing their retail customers as the obligors for these amounts. The
servicer will have limited rights to collect the transition bond charge directly
from those customers. Therefore, the servicer will be relying on the credit of
the third-party supplier rather
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than on the credit of the customers. If many customers within ACE's service
territory receive bills for their transition bond charges from third-party
suppliers, the issuer may have to rely on a relatively small number of entities
for the collection of a substantial portion of the transition bond charge. This
may adversely affect your investment because third-party suppliers may be less
effective at billing and collecting the transition bond charge from retail
customers and may use more permissive standards in bill collection and credit
appraisal than ACE. A default by a third party that collects transition bond
charges from a large number of retail customers would have a greater impact than
a default by a single retail customer and could affect the timing of receipt of
payments on the transition bonds.
Neither ACE nor any successor servicer will pay any shortfalls
resulting from the failure of a third-party supplier to forward transition bond
charge collections to the servicer. There can be no assurance that the servicer
will be able to mitigate credit risks relating to third-party suppliers in the
manner or to the degree that it mitigates risks relating to its own customers.
In addition, changes in billing and collection regulation of third-party
suppliers might adversely affect the value of the transition bonds and their
amortization and, accordingly, their weighted average lives. For example, these
changes might affect billing terms and the terms of remittances by third-party
suppliers to the servicer. The adjustment mechanism and any third-party credit
enhancement described in any prospectus supplement will be available to
compensate for a failure by a third-party collector to pay the transition bond
charge over to the trustee. However, any adjustment or any credit enhancement
funds may not be sufficient to prevent a delay in payments on the transition
bonds. See "THE BPU FINANCING ORDER AND THE TRANSITION BOND CHARGE -- The
Transition Bond Charge Adjustment Process" in this prospectus.
IF THE SERVICER DEFAULTS OR BECOMES BANKRUPT, IT MAY BE DIFFICULT TO FIND A
SUCCESSOR SERVICER, AND PAYMENTS ON THE TRANSITION BONDS MAY BE SUSPENDED
ACE, as servicer, will be responsible for billing, collecting and
remitting the transition bond charge and for filing with the BPU to adjust this
charge. If it became a party in a bankruptcy proceeding, ACE might be excused
from its contractual obligations as servicer of the bondable transition
property. See "HOW A BANKRUPTCY OF ACE OR THE SERVICER MAY AFFECT YOUR
INVESTMENT -- Bankruptcy of the Servicer" in this prospectus. If ACE ceased
servicing the bondable transition property, it might be difficult to find a
successor servicer and the fees required by a successor servicer would
substantially exceed the fees payable to ACE as servicer. Upon a servicer
default based upon the commencement of a case by or against the servicer under
federal bankruptcy law or similar laws, the trustee and the issuer may be
prevented or delayed from effecting a transfer of servicing. Upon a servicer
default because of a failure to make required remittances, the issuer or the
trustee would have the right to apply to the BPU for sequestration and payment
of revenues arising from the bondable transition property. However, federal
bankruptcy law may prevent the BPU from issuing or enforcing this order. In
either case of a servicer default, payments on the transition bonds may be
delayed or suspended. See " -- THE RISKS ASSOCIATED WITH POTENTIAL BANKRUPTCY
PROCEEDINGS" below.
INABILITY TO TERMINATE SERVICE TO CERTAIN DELINQUENT CUSTOMERS IN WINTER
Under New Jersey law, a winter moratorium prevents ACE from shutting
off service to certain of its delinquent residential customers without special
approval from the BPU from November 15 of each year until at least March 15 of
the following year. See "THE SERVICER OF THE BONDABLE TRANSITION PROPERTY" in
this prospectus. ACE's rights to disconnect service may be further limited by
subsequent changes in New Jersey statutory requirements and in rules and
regulations adopted by the BPU. This inability to shut off service may lead to
an increase in payment delinquencies, which in
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turn could result in delays in transition bond charges collections and,
ultimately, in payment on the transition bonds.
THE ELECTRIC INDUSTRY GENERALLY
UNCERTAINTIES ASSOCIATED WITH CHANGES IN GENERAL ECONOMIC CONDITIONS AND
INDUSTRY TRENDS
General economic conditions and industry trends may significantly alter
electricity consumption and thereby affect payments on the transition bonds.
Examples of such changes include:
- warmer winters or cooler summers, resulting in less
electricity consumption than forecasted;
- general economic conditions being worse than expected, causing
customers to reduce their electricity consumption;
- the occurrence of a natural disaster, such as a hurricane,
flood or blizzard, unexpectedly disrupting electrical service
and reducing consumption;
- problems with energy generation, transmission or distribution
resulting from a change in the market structure of the
electric industry;
- dramatic changes in the price of fuel or of other cost
components of electricity; and
- unexpected deterioration of the economy or the occurrence of a
natural disaster causing greater write-offs than expected or
requiring ACE or a successor public electric utility to grant
additional payment relief to more customers.
The Competition Act contains provisions designed to protect the issuer
against significant reductions in usage. See "THE COMPETITION ACT -- ACE and
Other Utilities May Securitize Stranded Costs" in this prospectus. However, a
substantial reduction in the number of customers from whom transition bond
charges would be collected may also affect payments on the transition bonds.
Factors that could reduce customer usage or customer collections include the
following:
- Large customers could cease business or depart ACE's service
territory.
- Consumption of electricity could be reduced because of
increased conservation efforts or increases in the operating
efficiency of electricity-consuming devices or in the price of
electricity.
- Technological advances in distributed generation could enable
customers to generate electricity through microturbines, fuel
cells, renewable energy sources and similar means on a more
cost-efficient basis. In addition, the increasing use of
computer-based systems and other sensitive loads that require
higher power quality levels could cause customers to seek to
generate more of their own electricity for those needs. Either
of these developments could result in customers bypassing
ACE's transmission and distribution system. See "THE
COMPETITION ACT -- ACE and Other Utilities May Securitize
Stranded Costs" in this prospectus.
- Less creditworthy third-party energy suppliers could be
introduced into the energy markets and assume responsibility
for collecting and remitting payments arising from the
transition bond charge to the servicer on behalf of customers.
See " -- It May Be More Difficult to
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COLLECT THE TRANSITION BOND CHARGE FROM THIRD-PARTY SUPPLIERS
THAN FROM ACE'S CUSTOMERS" above.
- Municipalities could acquire a part of ACE's transmission and
distribution facilities by exercising the right of eminent
domain and form utilities, enabling their residents to bypass
the use of those facilities, although in response to any such
action ACE could seek condemnation awards for its assets,
including consequential and severance damages and other
recoveries of its resulting legitimate, prudent and verifiable
stranded costs under Order 888 of the Federal Energy
Regulatory Commission. In October, 2000, the City of Vineland
commenced condemnation proceedings against ACE with respect to
the possible acquisition of transmission and distribution
facilities in and serving the city. Although the outcome of
the proceedings is uncertain, ACE does not believe that a
municipalization of these facilities would materially and
adversely affect the issuer's ability to make payments on the
transition bonds or that there is a significant risk that
similar actions by other municipalities would materially and
adversely affect the transition bondholders.
Within the time period between issuance and maturity of the transition bonds,
there can be no assurance that developments such as those described above will
not materially reduce the amount of electricity sold and/or delivered by ACE to
its customers through its transmission and distribution systems.
RISKS ASSOCIATED WITH POTENTIAL BANKRUPTCY PROCEEDINGS
BANKRUPTCY OF ACE COULD RESULT IN LOSSES OR DELAYS IN PAYMENTS ON THE TRANSITION
BONDS
The Competition Act and the BPU financing order provide that as a
matter of New Jersey state law:
- bondable transition property constitutes presently existing
property for all purposes;
- ACE may sell, assign and otherwise transfer the bondable
transition property, and the transfers of the bondable
transition property from ACE to the issuer are sales or other
absolute transfers of the bondable transition property, not
pledges of the bondable transition property to secure a
financing by ACE;
- ACE or the issuer may pledge or grant a security interest in
the property as collateral for transition bonds; and
- ACE may act as servicer of the transition bond charges and
commingle collections of those charges with other funds it
collects from its customers without any inference that it owns
those charges.
See "THE COMPETITION ACT" and "THE BPU FINANCING ORDER AND THE TRANSITION BOND
CHARGE" in this prospectus.
A bankruptcy court generally follows state property law on issues such
as those addressed by the provisions described above, although Congress has
authority to enact federal bankruptcy law to define property such as bondable
transition property differently than New Jersey state law does. In addition, a
bankruptcy court has authority not to follow state law if it determines that the
state law is contrary to a paramount federal bankruptcy policy or interests. A
bankruptcy court in an ACE bankruptcy may refuse to enforce one or more of the
state property law provisions described above. For example, a court may rule
that:
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- the sale of the bondable transition property to the issuer was
actually a loan secured by an interest in the bondable
transition property;
- despite the separateness of ACE and the issuer, the two
companies should be substantively consolidated; or
- bondable transition property comes into existence only as
customers use electricity, and that, as a consequence, the
security interest in favor of the transition bondholders would
not attach to the transition bond charge in respect of
electricity consumed after the commencement of the bankruptcy
case.
Such decisions could cause material delays in payment of, or losses on, your
transition bonds and could materially reduce the value of your investment. For
example:
- the trustee might be prevented from exercising any remedies
against ACE on your behalf, from recovering funds to repay the
transition bonds or from replacing ACE as servicer without
permission from the bankruptcy court;
- the bankruptcy court might order the trustee to exchange the
bondable transition property for other property, which might
be of lower value;
- tax or other government liens on ACE's property that arose
after the transfer of the bondable transition property to the
issuer might nevertheless have priority over the trustee's
lien and might be paid from transition bond charge collections
before payments on the transition bonds;
- the trustee's lien might not extend to transition bond charges
with respect to electricity consumed after the commencement of
ACE's bankruptcy case, with the result that the transition
bonds would represent only general unsecured claims against
ACE to the extent of these post-bankruptcy transition bond
charges;
- the trustee's lien might not be properly perfected in
transition bond charge collections commingled with other funds
ACE collects from its customers as of the date of commencement
of ACE's bankruptcy filing, or might not be properly perfected
in all of the bondable transition property, and the lien could
therefore be set aside in bankruptcy, with the result that the
transition bonds would represent only general, unsecured
claims against ACE;
- ACE might not be obligated to make any payments on the
transition bonds during its bankruptcy case;
- ACE might be able to alter the terms of the transition bonds
as part of its plan of reorganization;
- the bankruptcy court might rule that the transition bond
charge should be used to pay a portion of the cost of
providing electric service; or
- the bankruptcy court might rule that the remedy provisions of
the bondable transition property sale agreement are
unenforceable, leaving the issuer with a claim of actual
damages against ACE, which may be difficult to prove or, if
proven, to collect in full.
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ACE AS SERVICER WILL COMMINGLE THE TRANSITION BOND CHARGE WITH OTHER REVENUES
WHICH MAY HARM YOUR INVESTMENT IN CASE OF BANKRUPTCY
ACE will not segregate the transition bond charge from the other funds
it collects from its customers. The transition bond charges will be segregated
only after ACE remits them to the trustee. ACE will be permitted to remit
collections on a monthly basis only if:
- ACE maintains the requisite credit ratings from the rating
agencies; or
- ACE provides credit enhancement satisfactory to the rating
agencies to assure remittance by ACE to the trustee of the
transition bond charge it collects.
Otherwise ACE will be required to remit collections daily within two business
days of receipt. See "THE SERVICING AGREEMENT -- SERVICING PROCEDURES" in this
prospectus. Despite these requirements, ACE might fail to remit the full amount
of the transition bond charges to the trustee or might fail to do so on a timely
basis. Such a failure could have adverse consequences to the holders of
transition bonds in the event of a bankruptcy of ACE and materially reduce the
value of the transition bonds. See "HOW A BANKRUPTCY OF ACE OR THE SERVICER MAY
AFFECT YOUR INVESTMENT" in this prospectus.
The Competition Act provides that the rights of the issuer to the
bondable transition property are not affected by the commingling of these funds
with ACE's other funds. In a bankruptcy of ACE, however, a bankruptcy court
might rule that federal bankruptcy law takes precedence over the Competition Act
and does not recognize the right of the issuer to collections of the transition
bond charge that are commingled with other funds of ACE as of the date of
bankruptcy. If so, the collections of the transition bond charge held by ACE as
of the date of bankruptcy would not be available to pay amounts owing on the
transition bonds. In that event, the issuer would have a general unsecured claim
against ACE for those amounts, which could result in material delays in payment
or losses on your transition bonds and materially reduce the value of your
investment.
THE SALE OF THE BONDABLE TRANSITION PROPERTY COULD BE CONSTRUED AS A FINANCING
AND NOT A SALE IN A CASE OF ACE'S BANKRUPTCY
The Competition Act provides that a transfer of bondable transition
property that the parties have expressly stated to be a sale or other absolute
transfer in the governing documentation shall not be affected or impaired in any
manner by treatment of the transfer as a financing for federal or state tax
purposes or financial accounting purposes. ACE and the issuer will treat the
transaction as a sale under applicable law, although for financial reporting and
federal and state income and franchise tax purposes the transition bonds will be
treated as a financing transaction and not a sale. In the event of a bankruptcy
of ACE, a party in interest in the bankruptcy could assert that the sale of the
bondable transition property to the issuer was a financing transaction and not a
sale. If a court were to characterize the transaction as a financing, the issuer
would be treated as a secured creditor of ACE in the bankruptcy proceedings.
Although the issuer would in that case have a security interest in the bondable
transition property, it is unlikely that the issuer would be entitled to access
to the transition bond charge collections during the bankruptcy. As a result,
repayment on the transition bonds could be significantly delayed and a plan of
reorganization in the bankruptcy might permanently modify the amount and timing
of payments to the issuer of transition bond charge collections and therefore
the amount and timing of funds available to the issuer to pay transition
bondholders. See "HOW A BANKRUPTCY OF ACE OR THE SERVICER MAY AFFECT YOUR
INVESTMENT" IN THIS PROSPECTUS.
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A BPU SEQUESTRATION ORDER FOR TRANSITION BOND CHARGE COLLECTIONS IN CASE OF
DEFAULT MIGHT NOT BE ENFORCEABLE IN BANKRUPTCY
If ACE defaults on its obligations as servicer, the Competition Act
allows the BPU or any court of competent jurisdiction to order the sequestration
and payment of all transition bond charge collections to the transition
bondholders. The Competition Act states that this BPU or court order would be
effective even if made while ACE or its successor is in bankruptcy. However,
federal bankruptcy law may prevent the BPU from issuing or enforcing this order.
The indenture requires the trustee to request an order from the bankruptcy court
to permit the BPU to issue and enforce the order. However, the bankruptcy court
may deny such a request. This could result in material delays in payment or in
losses on your transition bonds and could materially reduce the value of your
investment.
OTHER RISKS ASSOCIATED WITH AN INVESTMENT IN THE TRANSITION BONDS
RISKS ASSOCIATED WITH THE USE OF INTEREST RATE SWAP TRANSACTIONS
The related prospectus supplement will set forth the risk factors, if
any, associated with any interest rate swap that may be entered into by the
issuer with respect to a series or class of floating rate transition bonds.
ABSENCE OF SECONDARY MARKET FOR TRANSITION BONDS COULD LIMIT YOUR ABILITY TO
RESELL TRANSITION BONDS
The underwriters for the transition bonds may assist in resales of the
transition bonds but are not required to do so. A secondary market for the
transition bonds may not develop. If it does develop, it may not continue or it
may not be sufficiently liquid to allow you to resell any of your transition
bonds. See "PLAN OF DISTRIBUTION" in this prospectus. The transition bonds are
not expected to be listed on any securities exchange.
A CHANGE IN ACE'S RATINGS MAY AFFECT THE MARKET VALUE OF THE TRANSITION BONDS
A downgrading of the credit ratings on the debt of ACE could have an
adverse effect, at least temporarily, on the market value of your transition
bonds.
ISSUANCE OF ADDITIONAL SERIES OF TRANSITION BONDS WHOSE HOLDERS MAY HAVE
INTERESTS THAT CONFLICT WITH YOUR INTERESTS
The issuer may not issue a new series of transition bonds if it would
result in the reduction or withdrawal of the credit ratings on any outstanding
series of transition bonds. See "THE INDENTURE -- ISSUANCE IN SERIES OR CLASSES"
in this prospectus. However, the issuer may issue other series of transition
bonds without your prior review or approval. An additional series may include
terms and provisions that would be unique to that particular series.
Although it is not expected that the issuance of additional series of
transition bonds would adversely affect the sufficiency of transition bond
charge collections for payment of any previously issued series, any such
additional issuance could delay or reduce the payments you receive on the
transition bonds, since the overall rate cap will not be correspondingly
increased with the issuance of an additional series, and that may limit the
ability to increase the transition bond charge. See " -- LIMITATIONS ON THE
TRANSITION BOND CHARGE MAY LEAD TO INSUFFICIENT REVENUES TO MAKE PAYMENTS"
above. If the collections of the transition bond charge are insufficient to pay
interest on and principal of each series of outstanding transition bonds, your
transition bonds will receive only their proportionate share of
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collections. See "THE INDENTURE -- ALLOCATIONS AND PAYMENTS; PRIORITY OF
DISTRIBUTIONS." Although ACE presently believes it will be able to defer the
imposition of other charges to the extent necessary to allow it to implement any
increases in the transition bond charge without exceeding the overall rate cap,
ACE has an order from the BPU authorizing such deferrals, and would undertake to
oppose any attempt to rescind or modify that order in a way that would adversely
affect the transition bonds (or seek relief from the overall rate cap to avoid
the same result), there can be no assurance that the order or the measures to
oppose any rescission or modification of it (or to obtain relief from the rate
cap) will be effective on a timely basis. Consequently, you may experience
material delays in payment of, or losses on, your transition bonds if, because
of the maximum permitted electricity rate established in the final restructuring
order, the servicer is unable to increase the transition bond charge to a level
and within a time period that would enable the issuer to make timely payments on
the transition bonds.
In addition, some matters may require the vote of the holders of all
series and classes of transition bonds. Your interests in these votes may
conflict with the interests of the transition bondholders of another series or
of another class, whose votes could result in an outcome that is materially
unfavorable to you. See "THE INDENTURE -- MODIFICATION OF THE INDENTURE" in this
prospectus.
THE RATINGS ARE NOT AN INDICATION OF THE EXPECTED RATE OF PAYMENT OF PRINCIPAL
ON THE TRANSITION BONDS, ARE NOT A RECOMMENDATION TO BUY AND ARE SUBJECT TO
CHANGE
The transition bonds will be rated by one or more established rating
agencies. The ratings reflect an analysis only of the probability that the
issuer will repay the total principal amount of the transition bonds at final
maturity 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.
Thus, the issuer may repay the principal of your transition bonds earlier or
later than you expect, which may materially reduce the value of your investment.
A rating is not a recommendation to buy, sell or hold transition bonds. The
ratings on the transition bonds may change at any time, as a rating agency has
the authority to revise or withdraw its bond rating based solely upon its own
judgment. See "RATINGS" in this prospectus.
ACE'S OBLIGATION TO INDEMNIFY THE ISSUER MAY NOT BE SUFFICIENT TO PROTECT YOUR
INVESTMENT
If ACE breaches a representation or warranty in the sale agreement, it
is obligated to indemnify the issuer and the trustee on behalf of the transition
bondholders for any liabilities, obligations, claims, actions, suits or payments
resulting from that breach, as well as any reasonable costs and expenses
incurred, subject to limitations. Also, ACE is obligated to indemnify the issuer
and the trustee for principal of and interest on the transition bonds not paid
when scheduled to be paid in accordance with their terms and the amount of any
deposits to the issuer required to have been made that are not made when
required as a result of a breach of a representation or warranty. However, ACE
will not be required to indemnify the issuer or the trustee as a result of any
change in the law by legislative enactment or constitutional amendment or the
State of New Jersey's impairment of the value of the bondable transition
property or transition bond charges after the date that any series or class of
the transition bonds is issued in breach of the pledge of the State of New
Jersey under the Competition Act, and ACE will not be obligated to repurchase
the bondable transition property in the event of a breach of any of its
representations and warranties regarding the bondable transition property, nor
will the trustee or the transition bondholders have the right to accelerate
payments on the transition bonds as a result of any such breach. In addition,
the amount of any indemnification paid by ACE as seller or servicer may not be
sufficient for you to recover your investment in transition bonds. See "THE SALE
AGREEMENT -- ACE'S OBLIGATION TO INDEMNIFY THE ISSUER AND THE TRUSTEE" in this
prospectus.
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In the event that ACE becomes obligated to indemnify transition
bondholders, it is likely that the ratings on the transition bonds will be
downgraded since transition bondholders will be unsecured creditors of ACE with
respect to any of these indemnification amounts.
THE LONGER MATURITIES OF CERTAIN CLASSES OF TRANSITION BONDS INCREASE THE
SIGNIFICANCE OF SOME OF THE RISK FACTORS ENUMERATED ABOVE
The final maturity dates of securities previously issued under
legislation similar to the Competition Act and funded by charges similar to the
transition bond charge typically have not exceeded 17 years from issuance. In
view of the longer period of time over which some of these transition bonds will
remain outstanding, a number of the aforementioned risks will be more
significant relative to a decision whether to purchase these transition bonds
and will warrant greater consideration than is needed in the case of transition
bonds generally. For instance, although a number of these risks are no more or
less likely to arise at any one time than at any other, the likelihood that any
one of them will be realized during the life of a particular class of transition
bonds increases with the length of time over which the bonds in that class are
outstanding. Risks in this category include the judicial, legislative and
regulatory risks identified above under " -- RISKS OF JUDICIAL, LEGISLATIVE OR
REGULATORY ACTION," with the possible exception of those risks having to do with
the novelty of transition bonds (which risks will diminish over time if the
requisite experience with transition bonds develops in due course). Other risks
are inherently more difficult to assess over the long term than over the short
and intermediate terms. The gravity of any such risk is therefore more difficult
to measure in the case of the longer maturity transition bonds. Such risks
include substantially all of those described above under " -- UNUSUAL NATURE OF
BONDABLE TRANSITION PROPERTY AND SERVICING RISKS," which have to do with such
matters as the servicer's ability to forecast, to maintain the transition bond
charge at adequate levels while remaining within the permitted maximum rate at
the time in effect, to shut off service to delinquent customers, and to deal
with third-party suppliers. The risks described above under " -- THE ELECTRIC
INDUSTRY GENERALLY" are also more difficult to assess over the long term
inasmuch as they relate to such factors as climate, economic conditions,
industry market structure, production costs, conservation and technological
advances, whose impact can be more difficult to predict as one considers them
further out in time.
FORWARD-LOOKING STATEMENTS
Some statements contained in this prospectus and the related prospectus
supplement concerning expectations, beliefs, plans, objectives, goals,
strategies, future events or performance and underlying assumptions and other
statements which are other than statements of historical facts, are
forward-looking statements within the meaning of the federal securities laws.
Although ACE and the issuer believe that the expectations and the underlying
assumptions reflected in these statements are reasonable, there can be no
assurance that these expectations will prove to have been correct. The
forward-looking statements involve a number of risks and uncertainties and
actual results may differ materially from the results discussed in the
forward-looking statements. The following are among the important factors that
could cause actual results to differ materially from those anticipated in the
forward-looking statements:
1. state and federal legal or regulatory developments;
2. national or regional economic conditions;
3. market demand and prices for energy;
4. weather variations affecting customer energy usage;
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5. the effect of continued electric industry restructuring;
6. new accounting requirements or new interpretations or
applications of existing requirements;
7. operating performance of ACE's facilities;
8. the payment patterns of customers including the rate of
delinquencies and the accuracy of the collections curves; and
9. alternative sources and/or delivery systems for electricity.
Any forward-looking statements should be considered in light of these important
factors and in conjunction with ACE's documents on file with the SEC.
New factors that could cause actual results to differ materially from
those described in forward-looking statements emerge from time to time. It is
not possible for ACE or the issuer to predict all of these factors, or the
extent to which any factor or combination of factors may cause actual results to
differ from those contained in any forward-looking statement. Any forward-
looking statement speaks only as of the date on which the statement is made and
neither ACE nor the issuer undertakes any obligation to update the information
contained in the statement to reflect subsequent developments or information.
GLOSSARY OF DEFINED TERMS
You can find a glossary of defined terms used in this prospectus
beginning on page 114 in this prospectus.
AVAILABLE INFORMATION
The issuer has filed with the SEC a registration statement under 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 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. Each statement concerning those provisions is qualified in its entirety
by reference to the complete document. For further information, reference is
made to the registration statement and the exhibits thereto, which are available
for inspection without charge at the public reference facilities maintained by
the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549, and at its regional
offices located as follows: Chicago Regional Office, Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661-2511; and New York Regional
Office, 7 World Trade Center, 13th Floor, New York, New York 10048. Copies of
the registration statement and exhibits thereto may be obtained at the above
locations at prescribed rates. Information filed with the SEC can also be
inspected at the SEC site on the World Wide Web at http://www.sec.gov.
The issuer will file with the SEC all periodic reports as are required
by the Exchange Act, and the rules, regulations or orders of the SEC thereunder.
The issuer may discontinue filing periodic reports
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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 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 that also is or is deemed to be incorporated by
reference herein modifies or supersedes that statement. Any statement so
modified or superseded will not be deemed, except as so modified or superseded,
to constitute part of this prospectus or any prospectus supplement.
The issuer will provide without charge to each person to whom a copy of
this prospectus is delivered, on the written or oral request of this person, a
copy of any or all of the documents incorporated herein by reference, except for
the exhibits which are not specifically incorporated by reference in the
documents. Written requests for these copies should be directed to the issuer,
c/o Assistant Treasurer, 800 King Street, Wilmington, DE 19899. Telephone
requests for these copies should be directed to the issuer at (302) 429-3114.
ATLANTIC CITY ELECTRIC COMPANY
ACE is a regulated public electric utility incorporated under the laws
of the State of New Jersey on April 28, 1924 and is a wholly owned subsidiary of
Conectiv, which is a Delaware corporation and a registered holding company under
the Public Utility Holding Company Act of 1935. ACE holds the franchises
necessary to provide regulated electric service in its service territory. ACE is
primarily engaged in purchasing, delivering and selling electricity. As of
December 31, 2000, ACE served approximately 501,000 customers in its service
territory, which covers an area of about 2,700 square miles in the southern
one-third of New Jersey and has a population of approximately 0.9 million. ACE's
customer base consists primarily of residential and commercial customers. In
2000, the percentages of regulated electric retail revenues contributed by
customer class were as follows: residential, 50.4%; commercial, 37.9% and
industrial/other, 11.7%. ACE reported net income after extraordinary items of
$54.4 million on revenue of $968.4 million for the year ended December 31, 2000
as compared with net income after extraordinary items of $5.8 million on revenue
of $1,076.6 million for the year ended December 31, 1999.
ACE's utility business is subject to regulation by the BPU with respect
to its retail electric sales. The Federal Energy Regulatory Commission also has
regulatory authority over certain aspects of ACE's utility business, including
the transmission of electricity, the sale of electricity to municipalities and
electric cooperatives and interchange and other purchases and sales of
electricity involving other utilities. ACE is also subject to regulation by the
Pennsylvania Public Utility Commission in limited respects concerning property
and operations in Pennsylvania.
On March 1, 1998, ACE and Delmarva Power & Light Company became wholly
owned subsidiaries of Conectiv. Before the merger, ACE was owned by Atlantic
Energy, Inc. As a result of the merger, Atlantic Energy, Inc. no longer exists
and Conectiv owns, directly or indirectly, ACE, Delmarva
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Power & Light Company and the nonutility subsidiaries that each merger party had
formerly held. As a registered holding company under the Public Utility Holding
Company Act of 1935, Conectiv is subject to certain restrictions on the
operations of registered holding companies and their subsidiaries. The assets of
ACE comprise approximately 38.3% of Conectiv's consolidated assets, and the
financial condition and results of operations of ACE are significant factors
affecting the financial condition and results of operations of Conectiv.
Conectiv is also the parent of various nonutility businesses.
On February 9, 2001, Conectiv and Potomac Electric Power Company, known
as PEPCO, entered into an agreement and plan of merger. The agreement and plan
of merger contemplates the formation of a new holding company that would own all
of the stock of Conectiv and PEPCO. It is currently contemplated that the merger
will be consummated in the first quarter of 2002. The merger should not
materially affect the structure of any issuance of transition bonds, the
servicing of any bondable transition property or the tax or accounting treatment
of any such issuance.
The electric utility industry is undergoing fundamental restructuring.
See "THE COMPETITION ACT" in this prospectus. In addition to the Competition
Act, in 1996 the Federal Energy Regulatory Commission issued Order No. 888
providing for competition in wholesale generation by requiring that all public
utilities file nondiscriminatory, open-access transmission tariffs.
Where to Find Information About ACE. ACE files periodic reports with
the SEC as required by the Exchange Act. Reports filed with the SEC are
available for inspection without charge at the public reference facilities
maintained by the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549, and 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 periodic reports and exhibits thereto may be obtained at the
above locations at prescribed rates. Information filed with the SEC can also be
inspected at the SEC site on the World Wide Web at http://www.sec.gov.
THE COMPETITION ACT
The New Jersey Electric Discount and Energy Competition Act, referred
to as the Competition Act, signed into law in February 1999, provides, among
other things, for the restructuring of the electric utility industry in New
Jersey. The Competition Act requires the unbundling of electric services into
separate generation, transmission and distribution services with open retail
competition for generation services. While electric utilities will continue to
provide transmission and distribution services, the Competition Act authorizes
third-party electric power suppliers licensed by the BPU, referred to as
third-party suppliers, to provide electric generation services to customers.
Under the Competition Act, third-party suppliers are subject to some limited
financial and other requirements and some customer protection requirements, but
are generally not regulated by the BPU. Electric distribution and transmission
services will remain regulated. Customer choice of third-party suppliers for all
customers commenced on August 1, 1999.
Even with the enactment of the Competition Act, the BPU will continue
to regulate some aspects of the electric industry in New Jersey with respect to
electric distribution companies. The BPU will also establish guidelines
governing customer billing and collection, and metering and disclosure
requirements applicable to third-party suppliers participating in the new market
in New Jersey.
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RECOVERY OF STRANDED COSTS IS ALLOWED FOR ACE AND OTHER NEW JERSEY UTILITIES
Prior to enactment of the Competition Act, electric utilities such as
ACE invested in various generation-related assets, such as electric generating
facilities, and entered into power purchase contracts with nonutility generators
of electricity to help fulfill their duties to serve the public as regulated
utilities. The electric utilities recovered their investments in these assets
and the costs they incurred under these contracts by charging their customers
the regulated rates approved by the BPU.
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 or to recover all of the costs incurred under power
purchase contracts with nonutility generators of electricity, as market prices
may be below a level that would provide a return on these investments or cover
the costs incurred under these contracts. Accordingly, utilities may incur
losses as a result of the transition from a regulated environment to a
competitive environment for electric generation services.
The Competition Act provides for utilities to recover the anticipated
loss in value of their generation-related assets and the costs incurred under
power purchase contracts with nonutility generators of electricity that are not
recoverable under market rates, including buyouts and buydowns of such
contracts. These costs are known as stranded costs and the Competition Act
provides for their recovery through a nonbypassable charge included in
customers' bills known as a market transition charge.
ACE AND OTHER UTILITIES MAY SECURITIZE STRANDED COSTS
The Competition Act authorizes a utility to securitize its right to
recover stranded costs through the issuance of transition bonds, securities of
the type described in this prospectus. This right is included in what is known
as bondable transition property. To the extent a utility's right to recover
stranded costs is securitized, a portion of the market transition charge is
replaced by an irrevocable charge included in customers' electric bills known as
a transition bond charge, which is designed to meet the costs of paying the
principal of and interest on the transition bonds and the costs associated with
the issuance, credit enhancing and servicing of the transition bonds.
The Recovery of Stranded Costs May Be Facilitated by the Issuance of
Transition Bonds. The Competition Act authorizes the BPU to issue "bondable
stranded costs rate orders", such as the BPU financing order, approving, among
other things, the issuance of transition bonds to recover bondable stranded
costs and related expenses of a public electric utility. A utility, a finance
subsidiary of a utility or a third-party assignee of a utility may issue
transition bonds. Under the Competition Act, proceeds of transition bonds are
required to be used to reduce the utility's stranded costs through the
retirement of its debt or equity or both, and/or to finance or refinance the
cost of buying down and/or buying out long-term power purchase contracts from
nonutility generators. Transition bonds are secured by and payable from bondable
transition property and may have an expected amortization schedule of up to: (1)
fifteen years if the proceeds from the transition bonds are to be used to reduce
the stranded costs related to utility-owned generation or (2) the remaining term
of a long-term power purchase contract with a nonutility generator if the
proceeds from the transition bonds are to be used for the buyout or buydown of
such a long-term power purchase contract.
The Competition Act contains a number of provisions designed to
facilitate the securitization of stranded costs and related expenses.
A Bondable Stranded Costs Rate Order Is Irrevocable. Under the
Competition Act, bondable transition property is created by the issuance by the
BPU of a bondable stranded costs rate order such as a
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BPU financing order. The Competition Act provides that each bondable stranded
costs rate order, including the BPU financing order, will become irrevocable
upon issuance and effectiveness of the order. Upon the transfer of the bondable
transition property to an assignee, such as the issuer, and the receipt of
consideration for the sale of the transition bonds, the bondable stranded costs
rate order, the transition bond charge and the bondable transition property
become a vested, presently existing property right, vested ab initio in the
assignee.
Under the Competition Act, neither the BPU nor any other governmental
entity has the authority, directly or indirectly, legally or equitably, to
rescind, alter, repeal, modify or amend a bondable stranded costs rate order, to
revalue, re-evaluate or revise the amount of bondable stranded costs, to
determine that the transition bond charge or the revenues required to recover
bondable stranded costs are unjust or unreasonable, or in any way to reduce or
impair the value of bondable transition property, nor will the amount of
revenues from the transition bond charge be subject to reduction, impairment,
postponement or termination. In addition, under the Competition Act, the State
of New Jersey pledges and agrees with the holders of transition bonds, and with
any assignee or financing entity, such as the issuer, not to limit, alter or
impair the bondable transition property or the other rights vested in a public
electric utility or any assignee or pledgee of the utility or any financing
entity or vested in the holders of any transition bonds pursuant to the bondable
stranded costs rate order until the transition bonds are fully paid and
discharged. In addition, the State pledges and agrees in the Competition Act
that it will not in any way limit, alter, impair or reduce the value or amount
of bondable transition property approved by the bondable stranded costs rate
order except as contemplated by the periodic adjustments to the transition bond
charge authorized by the Competition Act. See " -- The Transition Bond Charge is
Adjusted Periodically" below. See also "RISK FACTORS -- RISKS OF JUDICIAL,
LEGISLATIVE OR REGULATORY ACTION" in this prospectus. A bondable stranded costs
rate order does not constitute a debt or liability of the State of New Jersey,
nor does it constitute a pledge of its full faith and credit. The issuance of
transition bonds does not, directly, indirectly or contingently, obligate the
State of New Jersey to levy or pledge any form of taxation or make any
appropriation for their payment.
The Transition Bond Charge is Adjusted Periodically. The Competition
Act requires each bondable stranded costs rate order to provide for mandatory
adjustment of the transition bond charge, at least once a year, upon petition of
the public electric utility or its assignee or financing party. Such adjustments
are based on formulas designed to provide for the full recovery of bondable
stranded costs, including without limitation the timely payment of the principal
of, and interest and acquisition or redemption premium on, the transition bonds
in accordance with the expected amortization schedule. ACE agrees in the
servicing agreement to file with the BPU each proposed adjustment calculated in
accordance with the formula. ACE may also file a nonroutine adjustment request
with the BPU to modify the formula to more accurately project and generate
adequate revenues. See "THE BPU FINANCING ORDER AND THE TRANSITION BOND CHARGE
- -- THE BPU FINANCING ORDER" in this prospectus.
Customers Cannot Avoid Paying the Transition Bond Charge. The
Competition Act provides that a transition bond charge is "nonbypassable," which
means that the charge will be payable by consumers of electricity within a
utility's service territory who use a public electric utility's transmission and
distribution system, even if those customers elect to purchase electric supply
from a third-party supplier. Also, whenever an on-site generation facility
produces power that is not consumed by the on-site customer, and that power is
delivered to off-site customers in New Jersey, the transition bond charge will
apply to the sale or delivery of that power to the off-site customer. The
transition bond charge will not be imposed on power consumed by an on-site
customer that is derived from an on-site generation facility installed or
substantially committed to prior to February 9, 1999 (the effective date of the
Competition Act). However, the transition bond charge will be imposed on on-site
customers who receive power from on-site generation facilities installed
subsequent to August 1, 1999 (the starting date
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of retail competition under the Competition Act) to the extent such facilities
displace customer purchases from the utility by an amount that reduces in
aggregate the utility's kilowatt-hour distribution to 92.5% or less of its 1999
kilowatt-hour distribution.
The Competition Act Protects the Transition Bonds' Lien on Bondable
Transition Property. The Competition Act provides procedures for assuring that
the transfer of the bondable transition property from ACE to the issuer will be
perfected under New Jersey law and that the security interest granted by the
issuer to the trustee in the bondable transition property will be perfected
under New Jersey law. The Competition Act provides that a transfer of bondable
transition property will be perfected against any third party when:
1. the BPU has issued its bondable stranded costs rate order with
respect to such bondable transition property;
2. the agreement to transfer the property has been executed and
delivered by the public electric utility or its assignee; and
3. a financing statement with respect to the transfer has been
filed in accordance with the New Jersey Uniform Commercial
Code.
The Competition Act provides that security interests in the bondable transition
property are perfected only by means of a separate filing under the Uniform
Commercial Code of New Jersey. Upon perfection, a security interest under the
Uniform Commercial Code attaches to bondable transition property, whether or not
the revenues or proceeds thereof have accrued. The Competition Act provides that
priority of security interests in bondable transition property will not be
defeated or adversely affected by:
1. commingling of revenues received from transition bond charge
collections with other funds of the utility or its assignee;
or
2. the periodic adjustment of the transition bond charge under
the Competition Act.
The Competition Act Characterizes the Transfer of Bondable Transition
Property as a Sale or Other Absolute Transfer. The Competition Act provides that
a transfer by a public electric utility or its assignee of bondable transition
property will be treated as a sale or other absolute transfer of the
transferor's right, title and interest and not as a borrowing secured by the
bondable transition property if the parties expressly state in governing
documents that a transfer is to be a sale or other absolute transfer. The
characterization of the transfer as a sale is not affected or impaired by the
fact that:
1. the transferor or assignor retains or acquires a pari passu
equity interest in the bondable transition property or the
fact that only a portion of the bondable transition property
is transferred;
2. the transferor or assignor retains or acquires a subordinated
equity interest or other credit enhancement provisions or
terms commensurate with market practices;
3. the public electric utility acts as collector or servicer of
the related transition bond charge;
4. the transferor or assignor retains bare legal title to the
bondable transition property for servicing or supervising
services and collections relating to the bondable transition
property; or
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5. the transfer is treated as a financing for federal, state or
local tax purposes or financial accounting purposes.
See "RISK FACTORS -- RISKS ASSOCIATED WITH POTENTIAL BANKRUPTCY PROCEEDINGS" in
this prospectus.
ACE'S RESTRUCTURING
The Stipulation and Restructuring Order. On June 9, 1999, ACE and a
number of other parties filed a stipulation of settlement with the BPU,
detailing a proposal for ACE's implementation of full customer choice under the
Competition Act. The parties to the stipulation agreed, among other things, that
ACE should be permitted to recover 100% of its net stranded costs, that the
stranded costs associated with generation assets should be determined as a
result of divestiture of the generating facilities and that ACE should be
permitted to issue transition bonds in order to securitize 100% of the net
stranded costs associated with the divested generation assets and with
restructuring, buyout, or buydown of nonutility generation power contracts. The
New Jersey Division of the Ratepayer Advocate and others, in opposition to the
stipulation, submitted an alternative joint proposal. The BPU found the
stipulation submitted by ACE, subject to certain modifications, to be a
reasonable framework for resolution of the proceedings and issued its summary
order, dated July 15, 1999. The summary order also allowed ACE to transfer its
non-base-load generating assets to a separate corporate entity at book value.
The BPU's more detailed decision and order was issued on ___________, 2001 and
is referred to as the restructuring order.
The Divestiture Orders. On November 23, 1999 and February 9, 2000, ACE
filed petitions with the BPU seeking approval to divest its nuclear and fossil
base-load generating assets. As part of the proceedings to review these
petitions, the determination of recoverable stranded costs relating to these
generating assets was litigated. On ____________, ______________,
________________ and ______________, the BPU issued its decisions and orders
approving the divestiture of the nuclear and fossil base-load generating assets
and establishing the level of recoverable stranded costs associated with each
asset group. Additionally, the BPU found that ACE may seek approval under the
Competition Act to issue transition bonds in a principal amount up to the amount
of these recoverable stranded costs.
ACE Unbundled Its Electric Rates. On August 1, 1999, ACE unbundled its
retail electric rates into charges for distribution, transmission and generation
services, as well as market transition, net nonutility generation, societal
benefits and regulatory asset charges. To the extent ACE's right to recover its
stranded costs is securitized, a portion of the market transition charge is
replaced by a transition bond charge. Customers began receiving bills in
December 1999 showing separate line items for each of these charges. All
customer bills will have a footnote stating that a transition bond charge is
being collected on behalf of the issuer. If a customer chooses a third-party
electric power supplier for generation services, the customer may receive
separate billings for those generation services directly from the third-party
electric power supplier or they may receive combined billings for all charges,
either from ACE or, if permitted by the BPU, from the third-party electric power
supplier pursuant to an agreement between ACE and the third-party electric power
supplier. If the third-party electric power supplier bills the combined charges,
it must remit to ACE the amount it bills to customers on behalf of ACE. See "THE
BPU FINANCING ORDER AND THE TRANSITION BOND CHARGE -- THE BPU FINANCING ORDER --
OTHER ENTITIES MAY IN THE FUTURE PROVIDE METERING AND BILLING SERVICES" in this
prospectus. ACE has not yet entered into any agreements with third-party
electric power suppliers for billings and collections.
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ACE May Collect a Societal Benefits Charge. Under the Competition Act,
an electric public utility is permitted, with BPU approval, to collect a
nonbypassable societal benefits charge from all of its retail customers in order
to recover:
- Nuclear plant decommissioning costs,
- Demand side management program costs,
- Customer education program costs,
- Certain environmental remediation costs, and
- Previously approved social program costs such as costs for
programs to assist customers unable to pay their utility bills
in full and on time.
The BPU restructuring order provided that ACE may impose a societal
benefits charge commencing August 1, 1999.
ACE Must Reduce its Electric Rates. Pursuant to the stipulation and the
BPU restructuring order, ACE is required, subject to the conditions thereof, to
reduce the electricity rates it charges its customers, compared to those it
charged on July 31, 1999, by 5% by August 1, 1999 (i.e., to no more than
$[_____]/kilowatt-hour), by 7% by January 1, 2001 (i.e., to no more than
$[_____]/kilowatt-hour) and by 10.2% by August 1, 2002 (i.e., to no more than
$[_____]/kilowatt-hour). These requirements function as an overall rate cap, and
under the Competition Act will remain in effect until July 31, 2003, which date
represents the end of a four-year transition period to electric competition that
began on August 1, 1999. The transition bond charge will be a component of the
electricity rates that ACE will charge its customers and so must fall, taken
together with other charges imposed by ACE, within the overall rate cap. See
"RISK FACTORS -- UNUSUAL NATURE OF BONDABLE TRANSITION PROPERTY AND SERVICING
RISKS -- LIMITATIONS ON THE TRANSITION BOND CHARGE MAY LEAD TO INSUFFICIENT
REVENUES TO MAKE PAYMENTS" in this prospectus.
Third Party Electric Power Suppliers. Pursuant to the Competition Act
and the BPU restructuring order, customers may choose to purchase power from
third-party electric power suppliers and later return to ACE as their supplier
of basic generation service until July 31, 2002, after which date ACE is
authorized to bid out this responsibility to third parties. Any third-party
electric power supplier will be required to provide the servicer with total
monthly kilowatt hour usage information for each customer in a timely manner so
that the servicer can fulfill its obligations.
THE BPU FINANCING ORDER AND THE TRANSITION BOND CHARGE
THE BPU FINANCING ORDER
ACE's Petition and the BPU Financing Order. On ________, 2001, ACE
filed a petition with the BPU requesting the issuance by the BPU of a financing
order under the Competition Act to allow ACE, among other things, to recover up
to $_____ billion of its bondable stranded costs, plus $____ million of
associated transaction costs and the cost of retiring equity and debt securities
of ACE. These costs are recoverable through the issuance of up to $_____ billion
of transition bonds and the imposition of a transition bond charge. The petition
also requested authorization to transfer to an approved financing entity the
bondable transition property embodying the right to charge, collect and receive
such charge. In response to the petition, the BPU issued a financing order on
_________, 2001. ACE may file additional
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petitions with the BPU from time to time in connection with the recovery of
additional stranded costs should the need arise.
The BPU Authorized ACE to Issue Transition Bonds. Consistent with the
final restructuring order and the petition, the BPU financing order authorizes
the issuance of transition bonds in an aggregate principal amount not to exceed
$_____ billion, secured by bondable transition property. The transition bonds
may have scheduled amortizations upon issuance (1) not exceeding 15 years from
the date of issuance in the case of transition bonds the proceeds of which will
be used to reduce stranded costs related to utility-owned generation and (2) not
exceeding the remaining term of a long-term power purchase agreement with a
nonutility generator, in the case of transition bonds the proceeds of which will
be used to buydown or buyout that power purchase agreement; the last of these
power purchase agreements is scheduled to expire on January 1, 2025.
The final structure, pricing and other terms of the transition bonds
will be subject to the approval of the BPU or its designee. BPU approval will be
obtained prior to any sale of transition bonds. The BPU financing order permits
ACE to enter into hedge agreements to protect ACE's customers against interest
rate exposure in connection with the sale of transition bonds.
The BPU Authorized ACE to Impose the Transition Bond Charge. Under the
BPU financing order, the BPU authorized ACE to impose, meter, charge, bill,
collect and receive from customers, the transition bond charge in an amount
sufficient to recover the principal amount of transition bonds in accordance
with a scheduled amortization and interest thereon, plus an amount sufficient to
provide for any credit enhancement, to fund any reserves, and to pay acquisition
or redemption premiums, if any, and any servicing fees and other expenses
relating to the transition bonds.
The BPU granted ACE, as servicer, the authority to use the formula
specified in the BPU financing order for the calculation and subsequent
adjustment of the transition bond charge and, subject to the review and approval
of the BPU, to make "nonroutine" filings seeking an adjustment in the
methodology for calculating and adjusting the transition bond charge in the
event that ACE, as servicer, or any successor to ACE as servicer, determines
that the methodology in use at the time requires modification to more accurately
project and generate adequate revenues.
The transition bond charge will be a per kilowatt-hour charge assessed
against all customers on a monthly basis as part of their regular monthly
billings. ACE will set the initial per kilowatt-hour transition bond charge
based upon the formula approved in the BPU financing order. The transition bond
charge and the related charge for taxes will be reflected in each customer's
bill with an explanation on the bill that the transition bond charge is being
collected on behalf of the issuer, the owner of the bondable transition
property.
The BPU financing order provides that ACE's anticipated rate filing
with the BPU for rates to be effective on August 1, 2002 must include data
showing the relative effects of the timing of customer payments of transition
bond charges to ACE and of the timing of ACE's remittances of those collections
to the trustee. These data are to include a calculation of (1) daily customer
remittances of transition bond charges, (2) the timing of remittances to the
trustee and (3) the short-term interest rate then applicable to determine the
amount of interest income earned by ACE as servicer on collections before these
remittances. If upon review the BPU determines that ACE retained interest income
over and above its servicing fee, it may calculate the amount of that income and
impute interest on it in determining fair and reasonable rates going forward
from the date of review.
The transition bond charge will be assessed on all customer bills and
will be prorated in the case of the first bill after issuance of a series of
transition bonds to account for any partial month since the date
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of issuance. For instance, if a particular series issuance date is August 15,
bills that include current charges for services provided before August 15 will
not be assessed the transition bond charge for the period prior to August 15
with respect to that series. Upon each adjustment of the transition bond charge
or issuance of additional series of transition bonds, the adjusted transition
bond charge will be assessed in the same manner. Adjustment dates will be the
same for all series.
The initial transition bond charge will be calculated on the basis of:
- the principal amount of transition bonds issued in the first
series;
- the projected total payments required in relation to the
transition bonds during the period commencing on the date of
issuance of the transition bonds and ending approximately
twelve months thereafter; and
- the estimated amount of kilowatt-hours of electricity
delivered, billed and collected for that period.
The periodic adjustments to the transition bond charge are designed to
ensure that transition bond charge collections are not more or less than the
amount necessary to meet all required payments with respect to the transition
bonds and all related costs and expenses and to maintain the required balances
in the overcollateralization subaccount and the capital subaccount for each
series. In requesting periodic adjustments, the servicer is required to take
into account updated projections of consumption levels and timing of collections
and any amounts held in the reserve subaccounts for all series.
Other Entities May in the Future Provide Metering and Billing Services.
Under the Competition Act, the BPU may establish standards for metering, billing
and other activities by third-party suppliers participating in the new market in
the State of New Jersey. Any third-party suppliers billing and collecting
amounts in respect of transition bond charges for usage by ACE's customers will
have to comply with all applicable BPU billing and collection requirements. In
addition, the BPU financing order provides that, in order for a third-party
supplier to be permitted to bill and collect the transition bond charge with
respect to power sold by it:
- the third-party supplier must agree to remit the full amount
of all charges it bills to customers for services provided by
ACE, together with amounts related to the transition bond
charge, within 15 days of the bill for those charges,
regardless of whether it receives payments from those
customers;
- the third-party supplier must agree to provide ACE (or a
successor servicer) with total monthly kilowatt-hour usage
information for each customer;
- the third-party supplier must permit ACE (or a successor
servicer), within seven days after it defaults in remitting
any charges payable to ACE (or its successor), including
amounts related to the transition bond charge, to assume
responsibility for billing all charges for services ACE
provides, including the transition bond charge, or to transfer
that billing responsibility to a qualifying third-party; and
- if and so long as the third-party supplier does not maintain
at least a "BBB" (or the equivalent) long-term unsecured
credit rating from either Moody's Investors Service or
Standard & Poor's Ratings Group, it must lodge with ACE (or a
successor servicer) a cash deposit or comparable security
equal to two months' maximum estimated collections of all
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charges payable to ACE, as agreed upon by ACE (or a successor
servicer) and the third-party supplier.
In the event of a default in the remittance of any such amounts by a third-party
supplier, any shortfall in the third-party supplier's transition bond charge
collections would be included in subsequent adjustments to the transition bond
charge. See "THE SERVICING AGREEMENT -- SERVICING PROCEDURES" and "THE BPU
FINANCING ORDER AND THE TRANSITION BOND CHARGE -- THE TRANSITION BOND CHARGE
ADJUSTMENT PROCESS" in this prospectus. While a third-party supplier collecting
the transition bond charge may request termination of service to delinquent
customers, only ACE or a successor public electric utility may disconnect or
reconnect a customer's distribution service.
The BPU May Designate a Replacement Servicer. The Competition Act
provides that in the event of a default by a public electric utility in respect
of charging, collecting and receiving revenues derived from transition bond
charges, and upon the application by a secured party, such as the trustee, or an
assignee of the bondable transition property, such as the issuer, the BPU or any
court of competent jurisdiction must designate a trustee or other entity to act
in the place of the public electric utility to impose, meter, charge, collect
and receive transition bond charges for the benefit and account of the secured
party or assignee. In addition, the BPU may in its discretion establish criteria
for the selection of any successor servicer upon the default or other material
adverse change in the financial condition of the public electric utility. The
BPU financing order provides that if ACE defaults under the servicing agreement
or is required to discontinue its billing and collection functions, the trustee
and the issuer may immediately appoint a successor servicer, subject to the
approval of the BPU, and that the successor servicer will promptly assume
billing and collection responsibilities for the transition bond charge. The BPU
financing order further provides that the BPU act on an expedited basis within
30 days with respect to the proposed successor but that it not approve any
appointment of a successor servicer unless it has determined that the credit
ratings on the transition bonds will not be withdrawn or downgraded.
THE TRANSITION BOND CHARGE ADJUSTMENT PROCESS
The servicing agreement requires the servicer to seek adjustments to
the transition bond charge in order to enhance the likelihood that transition
bond charge collections, including any amounts on deposit in the reserve
subaccount, are neither more nor less than the amount necessary to amortize the
transition bonds of each series in accordance with the related expected
amortization schedule, to pay interest which in the case of interest on any
floating rate class of any series will be calculated at the applicable gross
fixed rate, to fund or replenish the series overcollateralization subaccount to
the amount required to be on deposit in the series overcollateralization
subaccount, to replenish any shortfalls in the series capital subaccount, and to
pay the trustee's fee, the servicing fee and the other expenses and costs
included in bondable stranded costs.
The servicer will increase or decrease the transition bond charge over
the life of the transition bonds, as a result of several factors, including:
- changes in electricity sales forecasts;
- changes in payment patterns and charge-off experience
(including defaults by third-party suppliers);
- changes in any ongoing fees, costs and expenses related to the
transition bonds;
- the unpaid principal of, and interest and premium, if any, on,
the transition bonds; and
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- the issuance of any additional series of transition bonds.
These adjustments are designed to achieve each of the above goals by the payment
date immediately preceding the next date on which the transition bond charge is
adjusted, taking into account any amounts on deposit in the reserve subaccount
of each series. If at the time of issuance of a series, the servicer determines
any additional adjustments are required, the dates for these adjustments will be
specified in the prospectus supplement for the series.
The BPU financing order provides that the servicer will file adjustment
requests periodically as follows:
- the servicer will file a routine adjustment request with the
BPU at least annually prior to each _______________, with
resulting adjustments to increase or decrease the transition
bond charge to become effective on an interim basis 30 days
after filing (or on such later date as may be specified in the
request) and, absent a determination of manifest error
(defined in the BPU financing order as an arithmetic error
evident on the face of the filing) by the BPU, to become final
and nonappealable 60 days thereafter;
- the servicer may file a routine adjustment request with the
BPU before the end of any calendar quarter with resulting
adjustments to increase or decrease the transition bond charge
to become effective on the first day of the next succeeding
calendar month absent a determination of manifest error by the
BPU or on such later date as may be specified in the request
and final and nonappealable 60 days thereafter;
- the servicer will file an adjustment request if it issues a
new series of transition bonds;
- the servicer will file an adjustment request with the BPU on
any additional dates specified in the prospectus supplement
for any series of transition bonds; and
- the servicer will file a nonroutine adjustment request with
the BPU if the method it uses to calculate the transition bond
charge requires modification to more accurately project and
generate adequate revenues, with the modifications becoming
effective when reviewed and approved by the BPU, which is to
occur within 60 days after filing.
In the case of a finding of manifest error by the BPU, the BPU will issue an
order correcting such manifest error before the adjustment becomes final 60 days
after filing.
Adjustment requests will take into account amounts available in the general
subaccount and reserve subaccounts for each series, and amounts necessary to
fund the overcollateralization subaccounts for each series and to replenish the
capital subaccounts for each series to its required level, in addition to
amounts payable on the transition bonds and related fees and expenses.
THE SERVICER OF THE BONDABLE TRANSITION PROPERTY
ACE
ACE is both the seller and the servicer of the bondable transition
property. See "ATLANTIC CITY ELECTRIC COMPANY" in this prospectus.
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ACE'S CUSTOMER CLASSES
ACE's customer base is divided into three classes: residential,
commercial (including public street and highway lighting and railroad) and
industrial. The commercial customer class consists primarily of retail,
services, governmental and casino-hotel customers. Mining, refining, and
manufacturing customers are examples of customers included in the industrial
customer class. Several rate classes are included within each customer class
differentiated by type and level of service.
ELECTRIC REVENUE, NUMBER OF CUSTOMERS AND CONSUMPTION
The following table shows the amount of billed electric revenue per
customer class for the past five years and the percentage that each customer
class bears to the total amount of the total billed revenue.
TABLE 1
BILLED REVENUE ($000)
FOR THE YEAR ENDED
------------------------------------------------------------------------------------------------
12/31/96 12/31/97 12/31/98 12/31/99 12/31/00
-------- -------- -------- -------- --------
% of % of % of % of % of
$ (000s) Total $ (000s) Total $ (000s) Total $ (000s) Total $ (000s) Total
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Residential
Commercial
Industrial
Total
The following table shows the average number of customers in each
customer class for the past five years and the percentage that each customer
class bears to the total number of customers.
TABLE 2
AVERAGE NUMBER OF CUSTOMERS (CUSTOMER BILLS)
FOR THE YEAR ENDED
-------------------------------------------------------------------------------------------------
12/31/96 12/31/97 12/31/98 12/31/99 12/31/00
-------- -------- -------- -------- ---------
Avg. # of % of Avg. # of % of Avg. # of % of Avg. # of % of Avg. # of % of
Customers Total Customers Total Customers Total Customers Total Customers Total
--------- ----- --------- ----- --------- ----- --------- ----- --------- -----
Residential 418,766 88.02 422,967 87.94 427,590 87.89
Commercial 55,958 11.76 56,975 11.85 57,926 11.91
Industrial 1,012 0.21 1,018 0.21 1,005 0.21
Total 475,736 100.00 480,960 100.00 486,521 100.00
The following table shows the total billed electric consumption in
gigawatt-hours (i.e., millions of kilowatt-hours), referred to as gWh, for the
past five years for each customer class and the percentage each customer class
bears to the total consumption.
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TABLE 3
BILLED ELECTRIC CONSUMPTION (gWh)
FOR THE YEAR ENDED
-----------------------------------------------------------------------------
12/31/96 12/31/97 12/31/98 12/31/99 12/31/00
-------- -------- -------- -------- --------
% of % of % of % of % of
gWh Total gWh Total gWh Total gWh Total gWh Total
--- ----- --- ----- --- ----- --- ----- --- -----
Residential 3,587 42.98 3,455 41.63 3,544 41.10
Commercial 3,545 42.47 3,590 43.26 3,771 43.73
Industrial 1,214 14.55 1,253 15.10 1,309 15.18
Total 8,347 100.00 8,298 100.00 8,623 100.00
PERCENTAGE CONCENTRATION WITHIN ACE'S LARGE COMMERCIAL AND INDUSTRIAL CUSTOMERS
For the period ended December 31, 2000, the ten largest single site
electric customers represented approximately [x.x]% of ACE's kilowatt-hour
sales. The ten largest commercial and industrial customer concentrations as
determined by standard industrial classification codes and based on information
as of June 30, 1999 (the latest date for which such data are available)
represented approximately [x.x]% of ACE's kilowatt-hour sales. In both cases the
customers are in the commercial and industrial customer classes. Casino-hotels
are included in the commercial class and represent approximately [xx.x]% of
ACE's kilowatt-hour sales for the period ended December 31, 2000. There are no
material concentrations in the residential class.
HOW ACE FORECASTS THE NUMBER OF CUSTOMERS AND THE AMOUNT OF ELECTRICITY USAGE
Accurate projections of the number of customers, usage and retail
electric revenue are important in setting, maintaining and adjusting the
transition bond charge. The transition bond charge must be sufficient to pay
interest and principal of the transition bonds, to fund the scheduled series
overcollateralization levels, to replenish withdrawals from any series capital
subaccounts and to pay the trustee's fee, the manager's fee, the servicing fee,
the administration fee and the other fees, expenses and costs included in
bondable stranded costs. See "THE BPU FINANCING ORDER AND THE TRANSITION BOND
CHARGE -- THE BPU'S TRANSITION BOND CHARGE ADJUSTMENT PROCESS" AND "RISK FACTORS
- -- UNUSUAL NATURE OF BONDABLE TRANSITION PROPERTY AND SERVICING RISKS" in this
prospectus.
The energy usage forecasting process starts with a set of assumptions,
including economic, demographic, price, marketing, major customers, demand-side
management, private plant/cogeneration and technology impact assumptions.
The residential energy usage forecast is primarily based on a forecast
of southern New Jersey population growth. The usage per customer is not modeled
stochastically, but rather is the quotient of the sales and customer forecasts,
and is used to evaluate those forecasts. Short-term variation in usage levels is
primarily a result of the season and of weather fluctuations, while long-term
trends in usage are driven by economic and demographic factors. The level of
residential sales is forecasted using variables representing growth in the
number of air conditioners, southern New Jersey income per household, energy
efficiency improvements and ACE's average electric price.
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The commercial energy usage forecast is modeled by using such variables
as [total personal income], nonmanufacturing employment, ACE's real average
electric price realizations, a forecast of floor space [in use for ________],
the total number of buildings in ACE's service territory and seasonal
variability. The casino-hotel forecast is adjusted to account for known
activities in the casino-hotel market such as the expansion of existing
casino-hotels and the opening and construction of new casino-hotels and the
multiplier effect that such new construction has demonstrated in the past.
The specific economic and demographic variables on which the industrial
energy forecast is based include manufacturing employment, the industrial
production index and employment productivity for New Jersey, the average ACE
real electric price realizations and industrial natural gas and fuel oil prices.
Natural gas and fuel oil prices are used as a proxy for competitive energy
prices. The industrial forecast is adjusted to account for major known
activities in the industrial market such as maintenance shutdowns, cogeneration
and private plant installations and significant changes in operating
characteristics.
ACE uses economic forecasts, prepared by an independent economic
forecasting and consulting firm employed by ACE, as inputs to its forecasting
models. Weather inputs to the forecasting models are based on normal weather
conditions, which are developed from historical averages. While demand-side
management impacts are not explicitly modeled for the sales forecast, any
demand-side management impacts are implicit in the history of actual sales and
are therefore reflected in the forecast.
FORECAST VARIANCES
Actual consumption of electricity can deviate from forecasted
consumption of electricity for many reasons, including the general economic
climate in ACE's service territory as it impacts net migration of customers;
weather as it impacts air conditioning and heating usage; levels of business
activity; and the availability of more energy efficient appliances, new energy
conservation technologies and the customer's ability to acquire and utilize
these new products.
The table below compares actual usage in gWh for a particular year to
the related forecast prepared during the previous year. For example, the annual
1996 variance is based on a forecast prepared in 1995 There can be no assurance
that the future variance between actual and expected consumption will be similar
to the historical experience set forth below.
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TABLE 4
ANNUAL FORECAST VARIANCE OF THE AMOUNT OF ELECTRICITY CONSUMED (gWh)
1996 1997 1998 1999 2000
---- ---- ---- ---- ----
Residential Customers Consumption
Forecasted 3,578 3,525 3,631
Actual 3,587 3,455 3,544
Variance 0.3% (2.0)% (2.4)%
Commercial Customers Consumption
Forecasted 3,553 3,655 3,738
Actual 3,443 3,590 3,771
Variance (0.2)% (1.8)% 0.9%
Industrial Customers Consumption
Forecasted 1,168 1,255 1,264
Actual 1,214 1,253 1,309
Variance 3.9% (0.1)% 3.5%
Total
Forecasted 8,299 8,435 8,634
Actual 8,346 8,298 8,623
Variance 0.57% (1.62)% (0.12)%
If actual consumption of electricity is higher than forecast, there
will most likely be an excess of transition bond charge collections. Similarly,
if actual consumption of electricity is lower than forecast, there will most
likely be insufficient transition bond charge collections.
BILLING PROCESS
ACE operates on a continuous billing cycle, with an approximately equal
number of bills being distributed each business day. For the year ended December
31, 2000, ACE mailed out to its customers an average of xx,xxx bills daily. The
normal billing period is for approximately 30 days, ending one or two days prior
to the mailing of the bill. For accounts with potential billing error
exceptions, reports are generated for manual review. This review examines
accounts that have abnormally high or low bills, potential meter-reading errors
and possible meter malfunctions. Subject to statutory and legal requirements,
ACE may change its billing policies and procedures from time to time. It is
expected that any changes would be designed to enhance ACE's ability to make
timely recovery of amounts billed to customers. In order to implement customer
choice and to appropriately bill the individual rate components required by the
Competition Act and the restructuring order, ACE has needed to make numerous
modifications to its billing system. These changes were implemented and
unbundled bills, in which the individual rate components were set forth, were
first sent to customers in December 1999.
Under the Servicing Agreement, any changes to customary billing and
collection practices instituted by ACE will apply to the servicing of bondable
transition property so long as ACE is the servicer.
ACE MAINTAINS LIMITED INFORMATION ON ITS CUSTOMERS' CREDITWORTHINESS
Under New Jersey law, ACE is obligated to provide service to new
customers. New residential and non-residential customers are required to post a
security deposit equal to two months of estimated electricity usage when they
apply for electric service. These new customers may avoid the security
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deposit requirement if they can demonstrate creditworthiness or were previously
a customer of ACE with a satisfactory payment history. The principal means of
establishing creditworthiness is by a letter from another utility indicating a
satisfactory payment history. To help prevent fraud, ACE may use EquifFax
identification process for new applicants. ACE receives approximately XX% of its
total bill payments via U.S. mail. Approximately XX% of bill payments are
received at local offices and other third party pay offices. ACE receives the
remainder of payments via electronic payment and field collection.
ACE'S COLLECTION PROCESS FOR RESIDENTIAL CUSTOMERS
Customer bills for residential customers are due 20 days after mailing.
If a customer has an overdue balance in excess of $100.00 and is overdue in
paying his or her next bill, ACE will mail a notice stating that ACE will shut
off electricity service within 10 days if the customer does not pay or make an
arrangement for payment.
On the date of service termination, the ACE service representative must
knock on the customer's door. If no one answers the door, or if the customer
does not make a payment or does not agree to pay the overdue amount to ACE's
satisfaction, ACE terminates electricity service.
TERMINATION OF SERVICE FOR RESIDENTIAL CUSTOMERS IN THE WINTER
Power is not customarily disconnected if the delinquent customer is
subject to a BPU mandated winter moratorium on termination of service. Under the
BPU winter moratorium, when a customer advises ACE that he or she is unable to
pay his or her bill in full and makes a good faith payment to ACE, ACE does not
shut off the customer's service during the period from [November 15] of each
year through March 15 of the following year. Currently, delinquent residential
accounts are managed during the winter moratorium through a combination of
letters, proactive telephone contacts and negotiated payment plans.
ACE'S COLLECTION PROCESS FOR GOVERNMENTAL CUSTOMERS
The accounts from customers in either federal, state or local
government have 20 days to pay their electricity charges from the date the bill
is mailed. Service termination is generally not used as a means of collection
for government accounts. Some government accounts have difficulty paying within
the 20 days due to cash flow, payment approval and other factors. Government
accounts that are frequently delinquent are referred to a collection
representative that specializes in the collection of overdue amounts from
governmental accounts.
ACE'S COLLECTION PROCESS FOR ALL OTHER CUSTOMERS
Customer bills for commercial and industrial customers are due 20 days
after the bill is mailed. If the customer does not pay the bill, collection
action can begin on the twenty-first day with a 10-day service termination
notice delivered via U.S. mail, if ACE cannot contact the customer by telephone.
If the overdue balance is not paid within 10 days, an order is issued to
disconnect the service or collect the bill in full.
REFERRALS OF DELINQUENT ACCOUNTS TO THIRD PARTIES
Residential accounts are referred to a collection agency 60 days after
the final bill is mailed. The collection agency manages this account for a total
of six months. Unpaid account balances are written off 120 days after the final
bill is mailed, providing no payments are being received and the customer has no
other active service accounts with ACE. If any unpaid balance remains after six
months of collection
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activity, the matter is referred to a credit bureau as long as no payments or
arrangements on the bill have been made.
REFERRALS OF DELINQUENT ACCOUNTS IN SPECIAL CIRCUMSTANCES
In some cases, service termination may be difficult owing to factors
such as medical illness of a customer or an inaccessible meter. These
difficulties are handled by representatives in ACE's credit area who are
specifically trained and assigned to do this type of collection. Certain
commercial accounts may also be deemed sensitive, such as nursing homes, daycare
centers and hospitals. In these cases, ACE will refer the entire overdue amount
to an ACE commercial account representative.
LOSS AND DELINQUENCY EXPERIENCE
The tables below set forth the delinquency and net write-off experience
ACE has had with residential and non-residential customers, for each of the
periods indicated. Such historical information is presented because ACE's actual
experience with respect to write-offs and delinquencies may affect the timing of
transition bond charge collections. Write-off and delinquency data are affected
by factors such as the overall economy, weather and changes in collection
practices. ACE does not expect that its delinquency or write-off experience with
respect to transition bond charge collections will differ substantially from its
historical experience with respect to collections of other charges. However,
there can be no assurance that this write-off and delinquency experience will be
similar to ACE's previous experience. For example, changes in the retail
electric market, including, but not limited to, the introduction of third-party
suppliers who may be permitted to provide consolidated billing to ACE's
customers could mean that delinquency and write-off ratios will vary from those
presented in the tables below.
TABLE 5
DELINQUENCIES AS A PERCENTAGE OF TOTAL BILLED REVENUES
FOR THE YEAR ENDED
------------------------------------------------------------------
12/31/96 12/31/97 12/31/98 12/31/99 12/31/00
-------- -------- -------- -------- --------
RESIDENTIAL
30-59 Days 0.55% 0.56% 0.64%
60-89 Days 0.19 0.20 0.29
90+ Days 0.16 0.15 0.22
NON-RESIDENTIAL
30-59 Days 0.45% 0.47% 0.52%
60-89 Days 0.05 0.06 0.07
90+ Days 0.04 0.05 0.06
TABLE 6
NET WRITE-OFF AS A PERCENTAGE OF BILLED RETAIL ELECTRIC REVENUES
FOR THE YEAR ENDED
----------------------------------------------------------------
12/31/96 12/31/97 12/31/98 12/31/99 12/31/00
-------- -------- -------- -------- --------
RESIDENTIAL 0.76% 0.56% 0.53%
NON-RESIDENTIAL 0.11 0.08 0.13
TOTAL 0.42 0.30 0.32
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Net write-offs include amounts recovered by ACE from deposits,
bankruptcy proceedings and payments received after an account has been written
off either to ACE or one of its external collection agencies.
HOW ACE WILL APPLY PARTIAL PAYMENTS BY ITS CUSTOMERS
The BPU financing order requires that ACE allocate partial payments of
electricity bills for any period in the following order:
1. to sales taxes (which ACE collects as trustee for the State of
New Jersey and not for its own account or for that of the
issuer) until all such amounts are paid; and then
2. pro rata to the transition bond charge and ACE's other charges
and taxes, where any such charges are in arrears, based on
their proportion to ACE's total charges assessed for that
period until all such amounts are paid; and then
3. pro rata to the transition bond charge and ACE's other charges
and taxes, where any such charges are current charges, based
on their proportion to ACE's total charges assessed for that
period.
ATLANTIC CITY ELECTRIC TRANSITION FUNDING LLC, THE ISSUER
Atlantic City Electric Transition Funding LLC, the issuer of the
transition bonds, was formed as a Delaware limited liability company on March
28, 2001 pursuant to a limited liability company agreement, with ACE as its sole
member. The assets of the issuer are principally limited to the bondable
transition property that was sold to the issuer, collections of transition bond
charges, its rights under the transaction agreements including the sale
agreement and the servicing agreement, trust accounts held by the trustee and,
if so stated in the applicable prospectus supplement, other credit enhancement.
The BPU financing order and the indenture provide that the bondable transition
property, as well as other collateral described in the BPU financing order and
the indenture, will be pledged by the issuer to the trustee. Pursuant to the
indenture, the transition bond charge collections remitted to the trustee by the
servicer must be used to pay the transition bonds and other obligations of the
issuer specified in the indenture. As of the date of this prospectus, the issuer
has not carried on any business activities and has no operating history. Audited
financial statements of the issuer are included as an exhibit to this
prospectus.
The Issuer's Purpose. The issuer has been created for the sole purpose
of:
1. purchasing and owning the bondable transition property;
2. issuing from time to time one or more series of transition
bonds, each of which may consist of one or more classes;
3. pledging its interest in the bondable transition property and
other collateral to the trustee under the indenture in order
to secure the transition bonds; and
4. performing activities that are necessary, suitable or
convenient to accomplish these purposes.
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The Interaction Between ACE and the Issuer. On the issuance date for
each series, except in the event of a refinancing of outstanding transition
bonds, ACE will sell and assign to the issuer, without recourse, bondable
transition property pursuant to the sale agreement between ACE and the issuer.
ACE will service the bondable transition property pursuant to a servicing
agreement with the issuer. ACE and any successor in the capacity of servicer are
referred to as the servicer.
The Issuer's Management. The issuer's business will be managed by five
managers, referred to as the managers, appointed from time to time by ACE or, in
the event that ACE transfers its interest in the issuer, by the new owner or
owners of the issuer. The issuer will at all times following the issuance of the
initial series of the transition bonds have at least two independent managers
who, among other things, are not and have not been for at least five years from
the date of their appointment:
1. a direct or indirect legal or beneficial owner of the issuer
or ACE or any of their respective affiliates;
2. a relative, supplier, employee, officer, director, manager,
contractor or material creditor of ACE or the issuer or any of
their respective affiliates; or
3. a person who controls ACE or its affiliates described in 1. or
2. above.
The remaining managers will be employees of ACE.
The managers will devote the time necessary to conduct the affairs of
the issuer. The following are the managers as of the date of this prospectus:
NAME AGE POSITION AT ACE
Howard E. Cosgrove 57 Chairman of the Board
John C. van Roden 51 Chief Financial Officer
Peter F. Clark 47 General Counsel and Secretary
None of the managers has been involved in any of the types of legal
proceedings specified in Item 401(f) of the SEC's Regulation S-K.
The Managers' Compensation and Limitation on Liabilities. The issuer
has not paid any compensation to any manager since the issuer was formed. The
managers other than the independent managers will not be compensated by the
issuer for their services on behalf of the issuer. The independent managers will
be paid monthly fees from the revenues of the issuer and will be reimbursed for
their reasonable expenses. These expenses include without limitation the
reasonable compensation, expenses and disbursements of such agents,
representatives, experts and counsel as the independent managers may employ in
the exercise and performance of their rights and duties under the issuer's
limited liability company agreement, the indenture, the sale agreement, the
servicing agreement and the administration agreement. The limited liability
company agreement provides that the managers will not be personally liable under
any circumstances except for:
1. liabilities arising from their own willful misconduct or gross
negligence;
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2. liabilities arising from the failure by any of the managers to
perform obligations expressly required of them in the issuer's
limited liability company agreement; or
3. taxes, fees or other charges, based on or measured by any
fees, commissions or compensation received by the managers in
connection with the transactions described in this prospectus.
The limited liability company agreement further provides that, to the fullest
extent permitted by law, the issuer will indemnify the managers against any
liability incurred in connection with their services as managers for the issuer
except in the cases described in clauses 1 through 3 above.
The Issuer is a Separate and Distinct Legal Entity. Under the issuer's
limited liability company agreement, the issuer may not file a voluntary
petition for relief under the United States Bankruptcy Code without a unanimous
vote of its managers, including the independent managers. ACE has agreed that it
will not cause the issuer to file a voluntary petition for relief under the
United States Bankruptcy Code. The limited liability company agreement requires
the issuer to:
1. take all reasonable steps to continue its identity as a
separate legal entity;
2. make it apparent to third persons that it is an entity with
assets and liabilities distinct from those of ACE, other
affiliates of ACE, the managers or any other person; and
3. make it apparent to third persons that, except for federal and
state tax purposes, it is not a division of ACE or any of its
affiliated entities or any other person.
The principal place of business of the issuer is 800 King Street,
Wilmington, Delaware 19899 and its telephone number is (302) 429-3114.
Administration Agreement. The administrator, [_________________], will
provide administrative services for the issuer pursuant to an administration
agreement between the issuer and the administrator. The issuer will pay the
administrator a market rate fee for performing these services.
USE OF PROCEEDS
As required by the Competition Act, the issuer will use the net
proceeds from the issuance of the transition bonds to pay the expenses of
issuance and to purchase the bondable transition property from ACE. ACE will use
these proceeds principally to reduce stranded costs through the retirement of
debt or equity or both, and/or to finance or refinance the cost of buying down
and/or buying out long-term power purchase contracts from nonutility generators,
including transactions completed before the date of the sale of the transition
bonds, and to pay related expenses.
THE TRANSITION BONDS
The transition bonds will be issued under and secured by the indenture
between the issuer and the 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 the indenture and the
related indenture supplement. The following summary describes some general terms
and provisions of the transition bonds. The particular terms of the transition
bonds of any series offered by any prospectus supplement will be described in
the prospectus supplement.
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GENERAL
The transition bonds may be issued in one or more series, each made up
of one or more classes. The terms of a series may differ from the terms of
another series, and the terms of a class may differ from the terms of another
class of the same series. The terms of each series and class will be specified
in the related prospectus supplement.
The indenture requires, as a condition to the issuance of each series
of transition bonds, that the issuance 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
the servicer, the trustee and the issuer that a particular action will not
result in a reduction or withdrawal is referred to as the satisfaction of the
rating agency condition with respect to that action.
The Issuer's Transition Bonds Will be Maintained in Book-Entry Format.
The related 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 The Depositary Trust Company, or its nominee, together
referred to as DTC. The transition bonds will be available for purchase in
initial denominations specified in the related prospectus supplement, which will
be not less than $1,000 with the exception of one transition bond in each class
that may have a smaller denomination. 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
DTC participants. In addition, all references in this prospectus to payments,
notices, reports and statements to transition bondholders will refer to
payments, notices, reports and statements to DTC, as the registered holder of
each series of transition bonds. DTC will receive these payments, notices,
reports and statements for payment to the beneficial owners of the transition
bonds in accordance with DTC's procedures with respect thereto. See " --
BOOK-ENTRY FORM" and " -- CERTIFICATED TRANSITION BONDS" below.
INTEREST AND PRINCIPAL
Interest will accrue on the principal balance of transition bonds of a
series or class at the interest rate specified in or determined in the manner
specified in the related prospectus supplement. The principal balance of a class
or series refers to the initial principal balance of that class or series
reduced by the amount of principal distributed since the date of issuance to the
bondholders of that class or series in accordance with the terms of the
indenture. Interest will be payable to the transition bondholders of the series
or class on each payment date, commencing on the payment date specified in the
related prospectus supplement. All series will have the same payment dates. On
each payment date, the issuer will generally make principal payments on each
series until the outstanding principal balance thereof has been reduced to the
principal balance specified for that payment date in the expected amortization
schedule for that series on that payment date, but only to the extent funds are
available for that series as described in this prospectus. Accordingly,
principal of the series or class of transition bonds may be paid later, but not
sooner, than reflected in the expected amortization schedule therefor, except in
a case of any applicable optional redemption or acceleration upon default. See
"RISK FACTORS -- OTHER RISKS ASSOCIATED WITH AN INVESTMENT IN THE TRANSITION
BONDS" and "RISK FACTORS -- UNUSUAL NATURE OF BONDABLE TRANSITION PROPERTY AND
SERVICING RISKS" in this prospectus.
The expected final payment date for a class or series of transition
bonds is the date on which final payment on the class is expected to be made as
set forth in the expected amortization schedule for that class or series. The
indenture provides that failure to pay the entire outstanding principal amount
of the
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transition bonds of any class or series by the expected final payment date will
not result in an event of default under the indenture until after the final
maturity date for the class or series.
On each payment date, the amount required to be paid as principal on
any series of transition bonds, from transition bond charge collections,
earnings on investments, indemnity amounts and, as necessary, from the reserve
subaccount for that series, the overcollateralization subaccount for that series
and the capital subaccount for that series, will equal:
1. the unpaid principal amount of any transition bonds of that
series upon an acceleration following an event of default;
plus
2. the unpaid principal amount of any class of any series due on
the final maturity date of that class; plus
3. the unpaid principal amount of any transition bonds of that
series called for redemption; plus
4. the principal scheduled to be paid on the transition bonds of
that series on that payment date.
The entire unpaid principal amount of the transition bonds will be due
and payable if:
1. an event of default under the indenture occurs and is
continuing; and
2. the trustee or the holders of a majority of the principal
amount of the transition bonds of all series then outstanding,
voting as a group, have declared the transition bonds to be
immediately due and payable.
See "THE INDENTURE -- EVENTS OF DEFAULT" and "WEIGHTED AVERAGE LIFE AND YIELD
CONSIDERATIONS FOR THE TRANSITION BONDS" in this prospectus.
FLOATING RATE TRANSITION BONDS
In connection with the issuance of a class or of more than one class 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:
- the material terms of that transaction;
- the identity of the counterparty or counterparties;
- any payments under that hedge or swap transaction to be made
by or to the issuer or to the trustee, as assignee of the
issuer;
- deposits in and withdrawals from any subaccount of the
collection account with respect to that class or those classes
of floating rate transition bonds and that transaction;
- the formula for calculating the floating rate of interest of
that class or those classes prior to termination of that
transaction; and
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- the rights of transition bondholders with respect to the
termination of or specified other events related to that
transaction.
- the U.S. federal income tax consequences to the issuer and the
transition bondholders of entering into any swap or hedge
transaction.
REDEMPTION
Redemption provisions, if any, for a series of transition bonds will be
specified in the related prospectus supplement, including the premiums, if any,
payable upon redemption. Unless the context requires otherwise, all references
in this prospectus to principal of the transition bonds of a series insofar as
it relates to redemption includes any premium that might be payable thereon if
transition bonds of the series are redeemed, as described in the related
prospectus supplement. The redemption price will, in each case, include accrued
and unpaid interest to the date of redemption. Notice of redemption of any
series of transition bonds will be given by the trustee to each registered
holder of a transition bond by first-class mail, postage prepaid, mailed at
least five days and at most 45 days prior to the date of redemption or in
another manner or at another time as may be specified in the related prospectus
supplement. Notice of redemption may be conditioned upon the deposit of moneys
with the trustee before the redemption date and this notice will be of no effect
unless these 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 trustee at that time, and will no
longer be considered "outstanding" under the indenture. The transition
bondholders 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 trustee.
If provided in the related prospectus supplement, a series of
transition bonds will be subject to optional redemption in whole on any payment
date if the aggregate outstanding principal amount of transition bonds of that
series has been reduced to an amount below the percentage of the initial
principal amount of transition bonds of that series specified in the prospectus
supplement. Any such redemption would be done on a series basis but would apply,
for practical purposes, only to the classes with the longest maturities. In
addition, if provided in the related prospectus supplement, a series of
transition bonds may be redeemed in whole on a payment date if the sum of the
amounts in the overcollateralization subaccount and the reserve subaccount for
the series equal or exceed the then outstanding principal amount of transition
bonds of that series and there are sufficient transition bond charge collections
to pay accrued and unpaid interest on the transition bonds of that series as of
the redemption date. See "THE TRANSITION BONDS -- REDEMPTION" in this
prospectus.
CREDIT ENHANCEMENT
Credit enhancement with respect to the transition bonds of each series
will be provided principally by adjustments to the transition bond charge and
amounts on deposit in the reserve subaccount, the overcollateralization
subaccount and the capital subaccount for that series. In addition, for any
series of transition bonds or one or more classes thereof, additional credit
enhancement may be provided. The amounts and types of credit enhancement, if
any, and the provider of any such credit enhancement with respect to each series
of transition bonds or one or more classes thereof will be described in the
related prospectus supplement. Additional credit enhancement may be in the form
of:
- an additional reserve subaccount;
- subordination by one series for the benefit of another;
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- additional overcollateralization;
- a financial guaranty insurance policy;
- a letter of credit;
- a credit or liquidity facility;
- a repurchase obligation;
- a third party payment or other support;
- a cash deposit or other credit enhancement; or
- any combination of the foregoing, as may be set forth in the
related prospectus supplement.
If specified in the related prospectus supplement, credit enhancement
for a series of transition bonds may support one or more other series of
transition bonds.
PREFUNDING
If and to the extent specified in the related prospectus supplement,
the issuer may elect to issue transition bonds in a principal amount that, on
the date of issuance, exceeds the aggregate amount of bondable transition
property created under the BPU financing order or orders then in effect. The
incremental amount of transition bonds issued over the amount of bondable
transition property then created would be issued in anticipation of a subsequent
authorization by the BPU, within a period of time specified in the related
prospectus supplement, of additional bondable transition property in the same
incremental amount. In the event of such an incremental issuance, the issuer
would immediately deposit the bond proceeds from the sale of this incremental
issuance into a separate prefunding account owned by it and administered by the
trustee. ACE may provide additional credit enhancement for the incremental
principal amount of bonds, as set forth in the related prospectus supplement.
Amounts in the prefunding account would be used, to the extent necessary, to
meet obligations on the transition bonds in the manner set forth in the related
prospectus supplement.
If following such an issuance but within the time period specified in
the related prospectus supplement, the BPU approves the creation of additional
bondable transition property in an amount equal to the incremental amount of
transition bonds issued, ACE will sell that additional bondable transition
property to the issuer and receive as consideration for it all amounts in the
prefunding account. If, however, the BPU does not approve the creation of
additional bondable transition property in the incremental amount within that
time period, at the end of that period all amounts in the prefunding account
will be applied to redeem the incremental principal amount and pay accrued
interest thereon of transition bonds on the terms set forth in the related
prospectus supplement.
BOOK-ENTRY FORM
Unless otherwise specified in the related prospectus supplement, all
classes of transition bonds will initially be represented by one or more bonds
registered in the name of DTC or another securities depository. The transition
bonds will be available to investors only in the form of book-entry transition
bonds. Transition bondholders may also hold transition bonds through Clearstream
Banking, Luxembourg, S.A., referred to as Clearstream or Euroclear in Europe, if
they are participants in one of those systems or indirectly through
participants.
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The Role of Cede, Clearstream and Euroclear. DTC will hold the global
bond or bonds representing the transition bonds. Clearstream and Euroclear will
hold omnibus positions on behalf of their participants through customers'
securities accounts in Clearstream's and Euroclear's names on the books of their
respective depositories. Citibank, N.A. is depository for Clearstream and Morgan
Guaranty Trust Company of New York is depository for Euroclear. These
depositories will, in turn, hold these positions in customers' securities
accounts in the depositories' names on the books of DTC.
The Function of DTC. DTC is a limited purpose trust company organized
under the laws of the State of New York and is a member of the Federal Reserve
System. DTC is 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 securities. Direct participants of DTC include securities
brokers and dealers, banks, trust companies, clearing corporations and some
other organizations. DTC is owned by a number of its direct participants and by
the New York Stock Exchange, Inc., the Nasdaq-Amex Market Group and the National
Association of Securities Dealers, Inc. Access to DTC's system is also available
to indirect participants.
The Function of Clearstream. Clearstream holds securities for its
customers and facilitates the clearance and settlement of securities
transactions between Clearstream customers through electronic book-entry changes
in accounts of Clearstream customers, thereby eliminating the need for physical
movement of securities. Transactions may be settled by Clearstream in any of 36
currencies, including United States dollars. Clearstream provides to its
customers, among other things, services for safekeeping, administration,
clearance and settlement of internationally traded securities and securities
lending and borrowing. Clearstream also deals with domestic securities markets
in over 30 countries through established depository and custodial relationships.
Clearstream is registered as a bank in Luxembourg, subject to regulation by the
Commission de Surveillance du Secteur, which supervises Luxembourg banks.
Clearstream's customers are worldwide financial institutions including
underwriters, securities brokers and dealers, banks, trust companies and
clearing corporations. Clearstream's United States customers are limited to
securities brokers and dealers and banks. Currently, Clearstream has
approximately 2,000 customers located in over 80 countries, including all major
European countries, Canada, and the United States. Indirect access to
Clearstream is available to other institutions that clear through or maintain a
custodial relationship with an account holder of Clearstream. Clearstream has
established an electronic bridge with Morgan Guaranty Trust Company of New York
as the Operator of the Euroclear System, referred to as MGT/EOC, in Brussels to
facilitate settlement of trades between Clearstream and MGT/EOC.
Clearstream and MGT/EOC customers are worldwide financial institutions,
including underwriters, securities brokers and dealers, banks, trust companies
and clearing corporations. Indirect access to Clearstream and MGT/EOC is
available to other institutions that clear through or maintain a custodial
relationship with an account holder of either system.
The Function of Euroclear. Euroclear was created in 1968 to hold
securities for Euroclear participants and to clear and settle transactions
between Euroclear participants through simultaneous electronic book-entry
delivery against payment. By performing these functions, Euroclear eliminated
the need for physical movement of securities and also eliminated any risk from
lack of simultaneous transfers of securities and cash. Transactions may now be
settled in any of 30 currencies, including United States dollars. The Euroclear
System includes various other services, including securities lending and
borrowing, and arrangements with domestic markets in several countries generally
similar to the arrangements for cross-market transfers with DTC described below.
The Euroclear System is operated by the Euroclear Operator, under contract with
the Euroclear Clearance System S.C., a Belgian cooperative
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corporation, referred to as 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 central banks, commercial
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 a Federal
Reserve System member, 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.
Terms and Conditions of Euroclear. 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, which are referred to in this prospectus
as 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
Clearstream participants.
The Rules for Transfers Among DTC, Clearstream or Euroclear
Participants. Transfers between participants will occur in accordance with DTC
rules. Transfers between Clearstream customers 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 Clearstream customers
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 depository. Cross-market transactions will require delivery of
instructions to the relevant European international clearing system by the
counterparty in this system in accordance with its rules and procedures and
within its established deadlines, in European time. The relevant European
international clearing system will, if the transaction meets its settlement
requirements, deliver instructions to its depository 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. Clearstream customers and Euroclear
participants may not deliver instructions directly to the depositories.
DTC Will Be the Holder of the Issuer's Transition Bonds. Unless and
until definitive transition bonds are issued to beneficial owners of the
transition bonds, which transition bonds are referred to as certificated
transition bonds, it is anticipated that the only "holder" of transition bonds
of any class or series will be DTC. Transition bondholders will be only
permitted to exercise their rights as transition bondholders indirectly through
participants and DTC. Therefore, unless and until certificated transition bonds
are issued, all references herein to actions by transition bondholders 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 DTC, as the registered
holder of the transition bonds, for subsequent payments to the beneficial owners
of the transition bonds in accordance with DTC procedures.
Book-Entry Transfers and Transmission of Payments. Except under the
circumstances described below, while any book-entry transition bonds of a series
are outstanding, under DTC's rules, DTC is
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required to make book-entry transfers among participants on whose behalf it acts
with respect to the book-entry transition bonds. In addition, DTC 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 these payments on behalf of their
respective transition bondholders. Accordingly, although transition bondholders
will not possess certificated transition bonds, DTC's rules provide a mechanism
by which transition bondholders will receive payments and will be able to
transfer their interests.
DTC can only act on behalf of participants, who in turn act on behalf
of indirect participants and some banks. Thus, 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 these transition bonds may be limited because of the lack
of certificated transition bonds.
DTC has advised the 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.
How Transition Bond Payments Will Be Credited by Clearstream and
Euroclear. Payments with respect to transition bonds held through Clearstream or
Euroclear will be credited to the cash accounts of Clearstream customers or
Euroclear participants in accordance with the relevant systems' rules and
procedures, to the extent received by its depository. These payments will be
subject to tax reporting in accordance with relevant United States tax laws and
regulations. See "MATERIAL INCOME TAX MATTERS" in this prospectus. Clearstream
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 Clearstream customer or Euroclear participant only in accordance with its
relevant rules and procedures and subject to its depository's ability to effect
these actions on its behalf through DTC.
DTC, Clearstream and Euroclear have agreed to the foregoing procedures
in order to facilitate transfers of transition bonds among participants of DTC,
Clearstream and Euroclear. However, they are under no obligation to perform or
continue to perform these procedures and these procedures may be discontinued at
any time.
CERTIFICATED TRANSITION BONDS
The Circumstances That Will Result in the Issuance of Certificated
Transition Bonds. Unless otherwise specified in the related prospectus
supplement, each class of transition bonds will be issued in fully registered,
certificated form to beneficial owners of transition bonds or their nominees,
rather than to DTC, only if:
1. the issuer advises the trustee in writing that DTC is no
longer willing or able to discharge properly its
responsibilities as depository with respect to this 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, the beneficial owners of transition bonds
representing at least a majority of the outstanding principal
amount of the transition bonds of all series advise the
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.
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The Delivery of Certificated Transition Bonds. Upon the occurrence of
any event described in the immediately preceding paragraph, DTC will be required
to notify all affected beneficial owners of transition bonds through
participants of the availability of certificated transition bonds. Upon
surrender by DTC of the transition bonds in the possession of DTC that had
represented the applicable transition bonds and receipt of instructions for
re-registration, the trustee will authenticate and deliver certificated
transition bonds to the beneficial owners. Any certificated transition bonds
listed on the Luxembourg Stock Exchange will be made available to the beneficial
owners of such transition bonds through the office of the transfer agent in
Luxembourg. Thereafter, the trustee will recognize the holders of these
certificated transition bonds as transition bondholders under the indenture.
The Payment Mechanism for Certificated Transition Bonds. Payments of
principal of, and interest and premium, if any, on, certificated transition
bonds will be made by the trustee, as paying agent, in accordance with the
procedures set forth in the indenture. These payments will be made directly to
holders of certificated transition bonds in whose names the certificated
transition bonds were registered at the close of business on the related record
date specified in the related prospectus supplement. These payments will be made
by check mailed to the address of the holder as it appears on the register
maintained by the trustee.
The Transfer or Exchange of Certificated Transition Bonds. Certificated
transition bonds will be transferable and exchangeable at the offices of the
transfer agent and registrar, which will initially be the 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.
Final Payment on Transition Bonds. The final payment on any transition
bond, however, will be made only upon presentation and surrender of the
transition bond at the office or agency specified in the notice of final payment
to transition bondholders. The final payment of any transition bond listed on
the Luxembourg Stock Exchange may also be made upon presentation and surrender
of the transition bond at the office of the paying agent in Luxembourg as
specified in the notice of final distribution. A notice of such final
distribution will be published in a daily newspaper in Luxembourg, which is
expected to be the Luxemburger Wort, not later than the fifth day of the month
of such final distribution. Certificated transition bonds listed on the
Luxembourg Stock Exchange will also be transferable and exchangeable at the
offices of the transfer agent in Luxembourg. With respect to any transfer of
these listed certificated transition bonds, the new certificated transition
bonds registered in the names specified by the transferee and the original
transferor will be available at the offices of the transfer agent in Luxembourg.
WEIGHTED AVERAGE LIFE AND YIELD CONSIDERATIONS
FOR THE TRANSITION BONDS
The rate of principal payments, the amount of each interest payment and
the final maturity date for each series or class of transition bonds will be
dependent on the rate and timing of receipt of transition bond charge
collections. Accelerated receipts of transition bond charge collections will
not, however, result in payment of principal on the transition bonds earlier
than the related expected final payment dates. This is because receipts in
excess of the amounts necessary to amortize the transition bonds in accordance
with the applicable expected amortization schedule, to pay interest and premium,
if any, on the transition bonds, to pay related expenses and to find or
replenish the capital and overcollateralization subaccounts, will be allocated
to the reserve subaccounts. However, delayed receipts of transition bond charge
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.
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Redemption of any class or series of transition bonds and acceleration of the
final maturity date after an event of default will result in payment of
principal earlier than the related expected final payment dates.
The Effect of Transition Bond Charge Collections on the Timing of
Transition Bond Payments. 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 and the timing of receipt of transition bond
charge collections. Amounts available in the reserve subaccount, the
overcollateralization subaccount and the capital subaccount for each series will
also affect the weighted average life of the transition bonds. The aggregate
amount of transition bond charge 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. This is because
the transition bond charge will be calculated based on estimates of usage and
collections revenue. The transition bond charge will be adjusted from time to
time based in part on the actual rate of transition bond charge collections.
However, there can be no assurance that the servicer will be able to forecast
accurately actual electricity usage and the rate of delinquencies, customer
payment patterns and write-offs or implement adjustments to the transition bond
charge that will cause transition bond charge collections to be received at any
particular rate. See "RISK FACTORS -- Unusual Nature of Bondable Transition
Property and Servicing Risks" and "THE BPU FINANCING ORDER AND THE TRANSITION
BOND CHARGE -- THE BPU'S TRANSITION BOND CHARGE ADJUSTMENT PROCESS" in this
prospectus.
A payment on a date that is later than the expected final payment date
might result in a longer weighted average life of the transition bonds. In
addition, if scheduled payments on the transition bonds are received later than
the applicable scheduled payment dates, this might result in a longer weighted
average life of the transition bonds.
THE SALE AGREEMENT
The following summary describes all material terms and provisions of
the sale agreement pursuant to which ACE is selling and the issuer is purchasing
bondable transition property arising pursuant to the BPU financing order. For
more detailed information on the sale agreement, please see the sale agreement,
filed as an exhibit to the registration statement of which this prospectus forms
a part. The sale agreement may be amended by the parties who signed it, if the
trustee consents, notice of the substance of any amendment is provided to each
rating agency and the rating agency condition is satisfied with respect to the
amendment.
ACE'S SALE AND ASSIGNMENT OF THE BONDABLE TRANSITION PROPERTY
On the initial transfer date, pursuant to the sale agreement, ACE, as
seller, will sell and assign to the issuer, without recourse, except as provided
in the sale agreement, the initial bondable transition property, identified in
the related bill of sale. The bondable transition property represents the
irrevocable right to receive through the transition bond charge amounts
sufficient to recover bondable stranded costs with respect to the related series
of transition bonds. The net proceeds received by the issuer from the sale of
the transition bonds will be applied to the purchase of the bondable transition
property. In addition, ACE may from time to time offer to sell additional
bondable transition property to the issuer, subject to the satisfaction of the
conditions specified in the sale agreement and the indenture. The bondable
transition property sold will be identified in an additional bill of sale. Each
subsequent sale will be financed through the issuance of an additional series of
transition bonds. If this offer is accepted by the issuer, the subsequent sale
will be effective on a subsequent transfer date.
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In accordance with the Competition Act, upon the issuance of the BPU
financing order, the execution and delivery of the sale agreement and the
related bill of sale and the filing of a financing statement under the Uniform
Commercial Code, the transfer of the initial bondable transition property will
be perfected as against all third persons, including judicial lien creditors. In
addition, upon the execution of a subsequent bill of sale and the filing of a
financing statement under the Uniform Commercial Code, a transfer of subsequent
bondable transition property will also be perfected against all third persons,
including judicial lien creditors. The sale agreement provides that in the event
that the sale and transfer of the bondable transition property is determined by
a court not to be a true and absolute sale as contemplated by the Competition
Act, then the sale and transfer will be treated as a pledge of the bondable
transition property and ACE will be deemed to have granted a security interest
to the issuer in the bondable transition property, which security interest will
secure a payment obligation of ACE in an amount equal to the purchase price for
the bondable transition property.
The initial bondable transition property is the bondable transition
property, as identified in the related bill of sale, sold to the issuer on the
initial transfer date pursuant to the sale agreement in connection with the
issuance of the initial series of transition bonds. The subsequent bondable
transition property is the bondable transition property, as identified in the
related bill of sale, sold to the issuer on any subsequent transfer date
pursuant to the sale agreement in connection with a subsequent issuance of a
series of transition bonds.
ACE's Representations and Warranties
The sale agreement provides that, in connection with each transfer of
bondable transition property, ACE, as seller, makes the following
representations and warranties to the issuer with respect to the transferred
property on and as of the initial transfer date and any subsequent transfer date
to the effect, among other things, that:
1. all information provided by ACE to the issuer in writing on or
prior to the date of such transfer with respect to the
bondable transition property is, in light of the circumstances
under which it was provided, correct in all material respects;
2. the transfers and assignments contemplated by the sale
agreement constitute an absolute transfer of the initial
bondable transition property or the subsequent bondable
transition property, as the case may be, from ACE to the
issuer, as provided in the Competition Act, and the beneficial
interest in and title to the bondable transition property
would not be part of the debtor's estate in the event of the
filing of a bankruptcy petition by or against ACE under any
bankruptcy law;
3. a. ACE is the sole owner of the bondable transition
property being sold to the issuer on the initial
transfer date or subsequent transfer date, as
applicable;
b. the bondable transition property will be 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
c. all filings, including filings with the BPU under the
Competition Act and filings with the New Jersey
Secretary of State under the Uniform Commercial Code,
necessary in any jurisdiction to give the issuer a
valid ownership interest in the transferred bondable
transition property, free and clear of all liens of
ACE or anyone else claiming through ACE and to give
the issuer a first priority perfected security
interest, have been made other than filings that
would not have an
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adverse effect on the ability of the servicer to
collect the transition bond charges or on the rights
of the issuer or trustee with respect to the
transferred bondable transition property;
4. the BPU financing order giving rise to the transferred
bondable transition property has been issued by the BPU in
accordance with the Competition Act; the BPU financing order
and the process by which it was issued comply with all
applicable laws, rules and regulations; and the BPU financing
order is in full force and effect and is final and
non-appealable under state law and the designee certification
delivered pursuant to the BPU financing order is final and
incontestable as of its date;
5. as of the date of issuance of any series of transition bonds:
a. the transition bonds will be entitled to the
protections provided by the Competition Act and, in
accordance with the Competition Act, the provisions
of the BPU financing order relating to the bondable
transition property and the transition bond charges
have become irrevocable and each issuance advice
letter delivered by the issuer to the BPU pursuant to
the BPU financing order is final and incontestable,
b. under the Competition Act, none of the State of New
Jersey, the BPU or any other government agency may
limit, alter or in any way impair or reduce the value
of the bondable transition property or the transition
bond charges approved by the BPU financing order or
any rights thereunder, and
c. under the contract clauses of the constitutions of
the State of New Jersey and of the United States,
none of the State of New Jersey, the BPU or any other
governmental entity may take any action that
substantially impairs the rights of transition
bondholders whose bonds are secured by the bondable
transition property unless such action is justified
as necessary and reasonable and of a character
appropriate to advance an important public purpose,
such as to remedy an important general social or
economic problem or to cope with a great public
calamity and, under the takings clauses of the
constitutions of the United States and New Jersey,
the State of New Jersey could not repeal or amend the
Competition Act by way of legislative process or take
any action in contravention of its pledge and
agreement under the Competition Act without paying
just compensation to the transition bondholders, as
determined by a court of competent jurisdiction, if
doing so would constitute a permanent appropriation
of the property interest of the transition
bondholders and deprive the transition bondholders of
their reasonable investment-backed expectations
arising from their investments in the transition
bonds;
6. there is no order by any court providing for the revocation,
alteration, limitation or other impairment of the Competition
Act, the BPU financing order, the BPU restructuring order
(insofar as it relates to the sale of the bondable transition
property), any issuance advice letter, the bondable transition
property arising thereunder or the transition bond charges
approved thereunder or of any rights arising under any of them
or which seeks to enjoin the performance of any obligations
under the BPU financing order;
7. 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
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instrumentality is required in connection with the creation of
the bondable transition property arising under the BPU
financing order, except those that have been obtained or made;
8. any assumptions used in calculating the transition bond
charges in the issuance advice letter delivered by the issuer
to the BPU pursuant to the BPU financing order are reasonable
and made in good faith;
9. a. the bondable transition property will upon the
transfer thereof to an assignee and receipt of
consideration therefor in connection with its sale to
the issuer constitute a vested, presently existing
property right,
b. the bondable transition property includes without
limitation the irrevocable right of ACE and its
permitted assigns to charge, collect and receive, and
be paid from collections of, transition bond charges,
subject to the limitations on electricity rates
specified in the final restructuring order, in the
amount necessary to recover all of the bondable
transition costs described in the BPU financing
order, all rights of ACE under the BPU financing
order, including all rights to obtain periodic
adjustments of the related transition bond charges,
and all revenues, collections, payments, money or
proceeds arising under, or with respect to, any of
the foregoing, and
c. the provisions of the BPU financing order creating
the bondable transition property and authorizing the
issuance of the transition bonds have been declared
to be irrevocable by the BPU, and any supplemental
order of the BPU of similar effect authorizing the
issuance of the transition bonds will be given such
status to the extent necessary to provide the
protections described in paragraph b. above;
[10. the bondable transition property is not subject to any lien
created by a previous indenture;]
11. no failure on the date of execution of the sale agreement to
satisfy any condition imposed by the Competition Act with
respect to the recovery of stranded costs will adversely
affect the creation of the bondable transition property, the
sale, transfer and assignment of the bondable transition
property or the right to collect transition bond charges;
12. ACE is a corporation duly organized and in good standing under
the laws of the State of New Jersey and has the corporate
power and authority to own its properties and conduct its
business as currently owned and conducted;
13. ACE is duly qualified to do business as a foreign corporation
and has obtained all necessary licenses and approvals in all
jurisdictions in which the ownership or lease of its property
or the conduct of its business requires such qualifications,
licenses or approvals except where the failure to so qualify
or to obtain such licenses or approvals would not be
reasonably likely to have a material adverse effect on it;
14. ACE has the power and authority to execute and deliver, and to
perform its obligations under, the sale agreement, and the
execution, delivery and performance of the sale agreement by
ACE has been duly authorized by all necessary corporate
action, and ACE has the power and authority to own the
bondable transition property arising under the BPU financing
order and to assign, transfer and convey such bondable
transition property
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to the issuer, and ACE has duly authorized such assignment,
transfer and conveyance pursuant to the sale agreement;
15. the sale agreement constitutes a legal, valid and binding
obligation of ACE, enforceable against it in accordance with
its terms, subject to customary exceptions relating to
bankruptcy and equitable principles;
16. the execution and delivery by ACE of the sale agreement, the
performance by ACE of the transactions contemplated by the
sale agreement and the fulfillment by it of the terms of the
sale agreement do not conflict with, result in any breach of
any of the terms and provisions of, or constitute a default
under, its organizational documents or any indenture or other
material instrument to which it is a party or by which it is
bound; or result in the creation or imposition of any lien
upon any of its properties pursuant to the terms of any such
indenture or other material instrument; or violate any law or
any order, rule or regulation applicable to ACE of any court
or of any federal or state regulatory body, administrative
agency or other governmental instrumentality having
jurisdiction over ACE or its properties;
17. except for the filing of financing statements and continuation
statements under the UCC, 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 of the sale agreement by ACE, the
performance by it of the transactions contemplated by the sale
agreement or the fulfillment by it of the terms of the sale
agreement, except those that have been obtained or made;
18. there are no proceedings or investigations pending or, to
ACE's best knowledge, threatened, before any court, federal or
state regulatory body, administrative agency or other
governmental instrumentality having jurisdiction over ACE or
the issuer or their respective properties:
a. challenging the BPU financing order or the
Competition Act,
b. challenging the final restructuring order insofar as
it relates to the sale of such bondable transition
property,
c. asserting the invalidity of the indenture, the
administration agreement, sale agreement, servicing
agreement, any bills of sale for the bondable
transition property arising under the BPU financing
order, the issuer's limited liability company
agreement or the certificate of formation filed with
the Secretary of State of the State of Delaware to
establish the issuer (which documents are referred to
in this registration statement as the basic
documents),
d. asserting the invalidity of the transition bonds,
e. seeking to prevent the issuance of transition bonds
or the consummation of the transactions contemplated
by the basic documents,
f. seeking any determination or ruling that could
reasonably be expected to materially and adversely
affect the performance by ACE or the issuer of its
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obligations under, or the validity or enforceability
of, the basic documents or the transition bonds, or
g. challenging ACE's treatment of the transition bonds
as debt for federal and state income or franchise tax
purposes;
19. after giving effect to the sale, transfer and conveyance to
the issuer of the bondable transition property arising under
the BPU financing order pursuant to the sale agreement, ACE:
a. is solvent and expects to remain solvent,
b. is adequately capitalized to conduct its business and
affairs considering its size and the nature of its
business and intended purposes,
c. is not engaged nor does it expect to engage in a
business for which its remaining property represents
an unreasonably small portion of its capital,
d. reasonably believes that it will be able to pay its
debts as they become due, and
e. does not intend to incur, or believe it will incur,
indebtedness that it will not be able to repay at its
maturity.
Notwithstanding the foregoing, ACE makes no representation or warranty
that any amounts actually collected arising from the transition bond charge will
in fact be sufficient to meet payment obligations on the transition bonds or
that assumptions made in calculating the transition bond charge will in fact be
realized.
In addition, the sale agreement provides that no change in the law by
legislative enactment or constitutional amendment and no reduction by the State
of New Jersey of the bondable transition property or transition bond charges in
breach of the pledge and agreement of the state under the Competition Act will
constitute a breach under the sale agreement. See " -- ACE's OBLIGATION TO
INDEMNIFY THE ISSUER AND THE TRUSTEE" below.
The representations and warranties set forth above will survive any
pledge of bondable transition property to the trustee pursuant to the indenture
and will be substantially reaffirmed by ACE at and as of the time of any such
sale and pledge with respect to the property being sold and pledged as if made
by ACE at that time.
ACE's Covenants
Pursuant to the sale agreement, in connection with each transfer of
bondable transition property, ACE has made the following covenants with respect
to the property contributed:
1. so long as the transition bonds are outstanding, ACE will keep
in full force and effect its corporate existence and remain in
good standing under the laws of the State of New Jersey, and
will obtain and preserve its qualification to do business in
each jurisdiction in which such qualification is necessary to
protect the validity and enforceability of the sale agreement
and each other instrument or agreement to which ACE is a party
necessary to the proper administration of the sale agreement
and the transactions contemplated hereby;
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2. except for the conveyances pursuant to the sale agreement, ACE
will not sell, pledge, assign or transfer to any other person,
or grant, create, incur, assume or suffer to exist any lien
on, the bondable transition property, whether now existing or
hereafter created, or any interest therein;
3. ACE will not at any time assert any lien against or with
respect to the bondable transition property and will defend
the right, title and interest of the issuer and the trustee,
in, to and under the bondable transition property, whether now
existing or hereafter created, against all claims of third
parties claiming through or under ACE;
4. if ACE receives collections in respect of the transition bond
charges or the proceeds thereof, then if ACE is not the
servicer, ACE agrees to pay the servicer on behalf of the
issuer, all payments received by ACE in respect thereof as
soon as practicable after receipt thereof by ACE, but in no
event later than two business days after such receipt;
5. ACE will notify the issuer and the trustee promptly after
becoming aware of any lien on the bondable transition property
other than under the sale agreement or the indenture
conveyances;
6. ACE will comply with its organizational or governing documents
and with all laws, treaties, rules, regulations and
determinations of any governmental instrumentality applicable
to ACE, except to the extent that failure to so comply would
not adversely affect the interests of the issuer or the
trustee in the bondable transition property or under any of
the basic documents or ACE's performance of its obligations
under any of the basic documents to which it is a party;
7. so long as the transition bonds are outstanding, ACE will:
a. treat the transition bonds as debt of ACE for federal
income tax purposes,
b. disclose in its financial statements that it is not
the owner of the bondable transition property and
that the assets of the issuer are not available to
pay creditors of ACE or any of its other affiliates,
and
c. disclose in its financial statements the effects of
all transactions between ACE and the issuer in
accordance with generally accepted accounting
principles;
8. upon the assignment, transfer and conveyance by ACE of the
bondable transition property to the issuer, to the fullest
extent permitted by law, including applicable BPU orders and
regulations, the issuer will have all of the rights originally
held by ACE with respect to the bondable transition property,
other than the rights of a public electric utility set forth
in the Competition Act, including the right to collect any
amounts payable by any customer or third party in respect of
such bondable transition property, notwithstanding any
objection or direction to the contrary by ACE;
9. so long as the transition bonds are outstanding:
a. ACE will not make any statement or reference in
respect of the bondable transition property that is
inconsistent with the ownership thereof by the
issuer, and
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b. ACE will not take any action in respect of the
bondable transition property except solely in its
capacity as the servicer thereof pursuant to the
servicing agreement or as otherwise contemplated by
or consistent with the basic documents or as required
by applicable law;
10. in connection with the issuance of any transition bonds, ACE
will execute and deliver, or cause to be delivered, such
additional agreements, certificates, documents and opinions as
may in ACE's judgment be required to obtain the highest
possible rating for the transition bonds from each rating
agency rating the transition bonds and to effect the sale of
the transition bonds to the underwriters of such bonds;
11. ACE will deliver to the issuer and the trustee, promptly after
having obtained knowledge thereof, written notice in a
certificate, signed by authorized officers of ACE, of the
occurrence of any event that requires or that, with the giving
of notice or the passage of time or both, would require ACE to
make any indemnification payment to the issuer or the trustee
pursuant to the sale agreement;
12. ACE will execute and file or cause to be executed and filed
any filings, including filings with the BPU pursuant to the
Competition Act, in such manner and in such places as may be
required under applicable law to fully preserve, maintain and
protect the interests of the issuer in the bondable transition
property, including all filings contemplated by the
Competition Act relating to the transfer of the ownership of
the bondable transition property by ACE to the issuer;
13. ACE will deliver to the issuer file-stamped copies of, or
filing receipts for, any document filed as described in clause
12 above, as soon as available following such filing;
14. ACE will take 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 to protect the
issuer and its permitted assigns from claims, state actions or
other actions or proceedings of third parties that, if
successfully pursued, would result in a breach of any
representation or warranty set forth in the sale agreement;
and
15. so long as the transition bonds are outstanding, ACE will, and
will cause each of its subsidiaries to, pay all material
taxes, including gross receipts taxes, assessments and
governmental charges imposed upon it or any of its properties
or assets or with respect to any of its franchises, business,
income or property before any penalty accrues thereon if the
failure to pay any such taxes, assessments and governmental
charges would, after any applicable grace periods, notices or
other similar requirements, result in a lien on the bondable
transition property; provided that no such tax need be paid if
ACE or any of its subsidiaries is contesting the same in good
faith by appropriate proceedings promptly instituted and
diligently conducted and if ACE or any of its subsidiaries has
established appropriate reserves as required in conformity
with generally accepted accounting principles.
ACE'S OBLIGATION TO INDEMNIFY THE ISSUER AND THE TRUSTEE
Under the sale agreement, subject to the limitations set forth below,
ACE is obligated to indemnify the issuer and the trustee against:
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1. any and all taxes, other than any taxes imposed on transition bondholders
solely as a result of their ownership of transition bonds, that may at any
time be imposed on or asserted against the issuer and the trustee under
existing law as of the date of issuance of the transition bonds as a
result of the sale and assignment of the bondable transition property by
ACE to the issuer, or the acquisition or holding of the bondable
transition property by the issuer, or the issuance and sale by the issuer
of the transition bonds, including any sales, general corporation,
personal property, privilege or license taxes, but excluding any taxes
imposed as a result of a failure of that person to properly withhold or
remit taxes imposed with respect to payments on any transition bond;
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 that are not made
when so required, in either case as a result of ACE's breach of any of its
representations, warranties or covenants contained in the sale agreement;
3. any and all liabilities, obligations, claims, actions, suits or payments
of any kind whatsoever that may be imposed on or asserted against the
issuer or the trustee other than any liabilities, obligations or claims
for or payments of principal of or interest on the transition bonds,
together with any reasonable costs and expenses incurred by that person,
as a result of ACE's breach of any of its representations, warranties or
covenants contained in the sale agreement; and
4. any and all liabilities, obligations, losses, damages, payments or
expenses that result from:
a. ACE's willful misconduct, bad faith or gross negligence in the
performance of its duties under the sale agreement, or
b. ACE's reckless disregard of its obligations and duties under the
sale agreement.
Notwithstanding the foregoing, ACE will not indemnify the issuer or the
trustee on behalf of the transition bondholders as a result of any change in the
law by legislative enactment or constitutional amendment or any reduction by the
State of New Jersey of the bondable transition property or transition bond
charges in breach of the pledge and agreement of the state under the Competition
Act. See " -- ACE'S REPRESENTATIONS AND WARRANTIES" above.
These indemnification obligations will rank equal in right of payment to
other general unsecured obligations of ACE. The indemnities described above will
survive the termination of the sale agreement and include reasonable fees and
expenses of investigation and litigation, including reasonable attorneys' fees
and expenses.
ACE'S OBLIGATION TO UNDERTAKE LEGAL ACTION
ACE is required to institute any action or proceeding necessary to compel
performance by the BPU or the State of New Jersey of any of their obligations or
duties under the Competition Act or the BPU financing order, with respect to the
bondable transition property. The cost of any action reasonably allocated by ACE
to the serviced bondable transition property would be payable from amounts on
deposit in the collection account as an operating expense payable to the
servicer and, in the case of ACE, as reimbursed by the servicer to ACE. Except
for the foregoing and subject to ACE's further covenant to
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fully preserve, maintain and protect the interests of the issuer in the bondable
transition property, ACE will not be under any obligation to appear in,
prosecute or defend any legal action that is not incidental to its obligations
under the sale agreement.
SUCCESSORS TO ACE
The sale agreement provides that any person that succeeds to all or
substantially all of the electric transmission and distribution business of ACE
will be the successor to ACE under the sale agreement. The sale agreement
further requires that, in connection with any transaction that results in such a
successorship:
1. no representation or warranty made in the sale agreement will have
been breached and no servicer default, and no event that, after
notice or lapse of time, or both, would become a servicer default
will have occurred and be continuing;
2. the successor to ACE must execute an agreement of assumption to
perform every obligation of ACE under the sale agreement;
3. the rating agencies will have received prior written notice of the
transaction and the rating agency condition will have been satisfied
with respect to the transaction; and
4. officers' certificates and opinions of counsel specified in the sale
agreement will have been delivered to the issuer and the trustee.
TREATMENT OF THE ASSIGNMENT OF BONDABLE TRANSITION PROPERTY
ACE's regulatory accounting records and computer systems will reflect the
assignment of bondable transition property to the issuer. However, ACE will
treat the transition bonds as debt of ACE for federal and state income, and
franchise tax purposes and for financial accounting purposes.
THE SERVICING AGREEMENT
The following summary describes the material terms of the servicing
agreement pursuant to which the servicer is undertaking to service bondable
transition property. For more detailed information on the servicing agreement,
please see the servicing agreement, filed as an exhibit to the registration
statement of which this prospectus forms a part.
The servicing agreement may be amended by the parties thereto with the
consent of the trustee under the indenture if the rating agency condition has
been satisfied with respect to the amendment.
SERVICING PROCEDURES
General. The servicer, as agent for the issuer, will manage, service,
administer and make collections in respect of bondable transition property.
The servicer's duties will include:
1. calculating and billing the transition bond charge and collecting
the transition bond charge from customers and third-party suppliers,
as applicable;
2. responding to inquiries by customers and third-party suppliers, the
BPU, or any federal, local or other state governmental authority
with respect to the bondable transition property and the transition
bond charge;
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3. accounting for transition bond charge collections, investigating
delinquencies, processing and depositing collections, making
periodic remittances and furnishing periodic reports to the issuer,
the 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 for
its own electric service customers; and
5. taking action in connection with adjustments to the transition bond
charge as described below.
The servicer is required to notify the issuer, the trustee and the rating
agencies in writing of any laws or BPU 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.
Collections Curves. The servicer will make estimated payments to the
trustee from collections received from customers. The servicer will prepare
annually a forecast of the percentages of amounts billed in a particular
calendar month that are expected to be received during that month and each of
the following six months. These forecasts are referred to as collections curves.
Collections curves will be used to estimate transition bond charge collections
because the actual amount of those collections in any month cannot be determined
on a current basis and the servicer believes that collections curves will
provide a reasonably accurate estimate of actual collections.
The servicer will make remittances on account of transition bond charge
collections to the trustee for deposit in the collection account on a periodic
basis. The frequency of these payments will be determined as follows. For so
long as:
1. ACE or any successor to ACE's public electric utility business
remains the servicer;
2. no servicer default has occurred and is continuing; and
3. a. either ACE, or any successor to ACE's public electric utility
business which acts as servicer, maintains a short-term rating
of "A-2" or better by Standard & Poor's Ratings Group, a
division of McGraw Hill Companies, Inc. or "P-2" or better by
Moody's Investors Service, or
b. the rating agency condition has been satisfied with respect
to all actions theretofore taken, and any conditions or
limitations imposed by the rating agencies in connection
therewith are complied with,
the servicer will make remittances on account of the transition bond charges to
the trustee on a monthly basis. If, however, the servicer has not satisfied all
of these conditions, it will remit daily estimated transition bond charge
collections based on the collections curve then in effect to the trustee within
two business days of their collection. Each daily or monthly date on which
remittances are made is referred to in this prospectus as a remittance date. If
remittances are to be made monthly, then on the 15th day of each month, or if
that day is not a business day, on the next business day, the servicer will
remit to the trustee an amount equal to the transition bond charge collections
estimated to have been received during the preceding calendar month in payment
of charges billed during the seven month period running through the end of that
calendar month. If remittances are to be made daily, then the amount remitted on
each remittance date will equal the transition bond charge collections estimated
to have been received on the second preceding business day. In either case,
estimates will be based on the collections curve in effect on the remittance
date.
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The servicer will reconcile estimated payments for each month to actual
collections on the last business day of the seventh month following that month.
That day is referred to in this prospectus as the reconciliation date relating
to that month. Consequently, the first such date will occur in the eighth month
after the transition bonds are first issued. On each reconciliation date, the
servicer will compare the total amount of transition bond charges collected with
respect to the related month to the sum of the estimated payments it made to the
trustee with respect to that month. The latter sum is referred to as the
collections curve payment for that month. If the collections curve payment
exceeds the actual transition bond charge collections the servicer may either
reduce the amount that it remits on the following remittance date, and if
necessary, succeeding remittance dates, by the amount of the excess payment, or
require the trustee to pay to it, from the collection account, the excess
amount. If the collections curve payment is less than actual transition bond
charge collections, the servicer will remit the shortfall to the trustee on the
reconciliation date for that month.
The servicer will file adjustment requests with the BPU on _____ of each
year, at a minimum, but it may file adjustment requests quarterly. In either
case, the servicer will file these adjustment requests at least 30 days in
advance of the date on which it proposes that the adjustment become effective on
an interim basis. Absent a determination of manifest error (defined in the BPU
financing order as an arithmetic error evident on the face of the filing) by the
BPU, the adjustment will become final and nonappealable 60 days thereafter. The
Servicer may also file nonroutine adjustment requests if the methodology used to
calculate the transition bond charge requires modification to more accurately
project and generate adequate revenues. In this case, the modification will take
effect following review and approval by the BPU, which is to occur within 60
days after filing the nonroutine adjustment request. For a description of the
adjustment process, see "THE BPU FINANCING ORDER AND THE TRANSITION BOND CHARGE
- -- THE TRANSITION BOND CHARGE ADJUSTMENT PROCESS" in this prospectus.
TRANSITION BOND CHARGE COLLECTIONS
The servicer is required to remit all transition bond charge collections
from whatever source, based on the collections curve, to the trustee for deposit
pursuant to the indenture on each remittance date. Until transition bond charge
collections are remitted to the collection account, the servicer will not
segregate them from its general funds. Remittances of transition bond charge
collections will not include interest thereon prior to the remittance date or
late fees from customers, which the servicer is not required to remit to the
trustee. See "RISK FACTORS -- RISKS ASSOCIATED WITH POTENTIAL BANKRUPTCY
PROCEEDINGS" in this prospectus. If specified in the annex of the servicing
agreement relating to the transition bonds, the servicer will obtain a letter of
credit to assure remittances of the collection amount.
SERVICER ADVANCES
If specified in the prospectus supplement for a series of transition
bonds, 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 that
prospectus supplement.
SERVICER COMPENSATION; RELEASES
The issuer agrees to pay the servicer a monthly servicing fee, in the
amount specified in the related prospectus supplement. The servicing fee for
each series, together with any portion of the servicing fee that remains unpaid
from prior payment periods, will be paid solely to the extent funds are
available therefor. See "THE INDENTURE -- ALLOCATIONS AND PAYMENTS; PRIORITY OF
DISTRIBUTIONS" 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. Pursuant to the servicing agreement, the
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servicer has released the issuer and the trustee from claims relating to
bondable transition property or the servicer's servicing activities with respect
thereto.
THIRD-PARTY SUPPLIERS
Third-party suppliers may in the future bill, collect and remit transition
bond charges. Pursuant to the BPU financing order, third-party suppliers will be
required to pay all amounts arising from the transition bond charge billed,
regardless of whether payments are received from customers, within 15 days of
the servicer's bill to the third-party supplier for amounts arising from the
transition bond charge. Seven days after a default by a third-party supplier,
the servicer will be entitled to assume responsibility for billing all charges
for services provided by ACE or a successor servicer or to transfer such billing
responsibility to a qualified third party. The third-party supplier must provide
the servicer with total monthly kilowatt-hour usage information for each
customer in a timely manner to enable ACE or a successor servicer to fulfill its
obligations. If and so long as a third-party supplier does not maintain at least
a "Baa" and a "BBB" (or the equivalent) long-term unsecured credit rating from
Moody's Investors Service and Standard & Poor's Ratings Group, respectively, a
third-party supplier must pay a deposit in cash or comparable security equal to
two months' maximum estimated collections of all charges to the servicer. The
adjustment mechanism described under "THE BPU FINANCING ORDER AND THE TRANSITION
BOND CHARGE -- THE BPU'S TRANSITION BOND CHARGE ADJUSTMENT Process" in this
prospectus, as well as amounts on deposit in the overcollateralization, capital
and reserve subaccounts for each series, are available to mitigate the risk of a
shortfall in transition bond charge collections; however, the additional funds
generated through the adjustment mechanism and on deposit in the
overcollateralization, capital and reserve subaccounts for each series may be
insufficient to prevent payment delays on the transition bonds. See "RISK
FACTORS -- UNUSUAL NATURE OF BONDABLE TRANSITION PROPERTY AND SERVICING RISKS"
in this prospectus.
SERVICER DUTIES
Pursuant to the servicing agreement, the servicer has agreed that, in
servicing the issuer's bondable transition property:
1. except where the failure to comply with any of the following would
not adversely affect the issuer's or the trustee's respective
interests in bondable transition property, it will manage, service,
administer and make collections in respect of bondable transition
property with reasonable care and in material compliance with
applicable law and regulations, using the same degree of care and
diligence that it exercises with respect to billing and collection
activities that it conducts for itself and others, that it will
follow customary standards, policies and procedures, that it will
use all reasonable efforts, consistent with its customary servicing
procedures, to enforce and maintain rights in respect of bondable
transition property, and that it will calculate the transition bond
charge in compliance with the Competition Act, the BPU financing
order and any applicable tariffs;
2. it will keep on file, in accordance with customary procedures, all
documents related to bondable transition property and will maintain
accurate and complete accounts pertaining to bondable transition
property; and
3. it will use all reasonable efforts consistent with its customary
servicing procedures to collect all amounts owed in respect of
bondable transition property as they become due.
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The servicer may in its own discretion waive any late payment charges or any
other fee or charge relating to delinquent payments, and may waive or modify any
terms of payment of any amount payable by a customer if the waiver complies with
the servicer's customary practices and applicable law and does not materially
adversely affect transition bondholders.
REPRESENTATIONS AND WARRANTIES
Pursuant to the servicing agreement, the servicer has represented and
warranted as of each date ACE sells or otherwise transfers bondable transition
property to the issuer that:
1. the servicer is a corporation duly organized and in good standing
under the laws of the state of its incorporation, has the corporate
power and authority to own its properties and conduct its business
as currently owned and 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 bondable transition
property;
2. the servicer is duly qualified to do business as a foreign
corporation in all jurisdictions in which it is required to be so
qualified;
3. the servicer's execution, delivery and performance of the servicing
agreement have been duly authorized by all necessary corporate
action;
4. the servicing agreement constitutes a 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 the servicer's articles of
incorporation or by-laws or any material agreement by which the
servicer is bound, nor result in any lien upon the servicer's
properties or violate any law or regulation applicable to the
servicer or its properties;
6. except for filings with the BPU for adjusting the transition bond
charge and filings under the New Jersey Uniform Commercial Code, no
governmental actions or filings are required for the servicer to
execute, deliver and perform its obligations under the servicing
agreement, except those which have been taken or made; and
7. no proceeding 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:
a. seeking any ruling that might materially and adversely affect
the performance by the servicer of its obligations under, or
the enforceability against the servicer of, the servicing
agreement, or
b. relating to the servicer that might adversely affect the
federal or state income or franchise tax attributes of the
transition bonds; and
8. the servicer has all material licenses necessary for it to perform
its obligations under the servicing agreement.
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SERVICER INDEMNIFICATION
Under the servicing agreement, the servicer has agreed to indemnify the
issuer and the trustee (for itself and on behalf of the transition bondholders),
and related parties specified in the servicing agreement, against any and all
liabilities that may be incurred by or asserted against any of those persons as
a result of:
1. the servicer's willful misconduct, 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 or duties under the servicing agreement;
2. the servicer's breach of any of its representations or warranties
under the servicing agreement; and
3. litigation and related expenses relating to its status and
obligations as servicer.
The servicer will not be liable for any costs, expenses, losses, claims, damages
or liabilities resulting from the willful misconduct or gross negligence of any
indemnified persons.
PAYMENT DATE STATEMENTS
For each payment date, the servicer will provide to the issuer and the
trustee a statement indicating, with respect to the bondable transition
property, among other things:
1. the amount to be paid to transition bondholders of that series and
class in respect of principal on that payment date;
2. the amount to be paid to transition bondholders of that series and
class in respect of interest on that payment date;
3. the scheduled transition bond principal balance and the transition
bond principal balance for that series and class as of that payment
date;
4. the amount on deposit in the overcollateralization subaccount for
that series and the scheduled overcollateralization level for that
series as of that payment date;
5. the amount on deposit in the capital subaccount for that series as
of that payment date; and
6. the amount, if any, on deposit in the reserve subaccount for that
series as of that payment date.
On the basis of this information, the trustee will furnish to the transition
bondholders on each payment date the report described under "THE INDENTURE --
REPORTS TO HOLDERS OF THE TRANSITION BONDS." For so long as any transition bonds
are listed on the Luxembourg Stock Exchange and the rules of that exchange so
require, notice that such report is available with the listing agent in
Luxembourg also will be published in a daily newspaper in Luxembourg, which is
expected to be the Luxemburger Wort.
On or before each remittance date (or, if there are daily remittances,
once a month) the servicer will furnish to the issuer and the trustee a
statement setting forth the aggregate amount remitted or to be
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remitted by the servicer to the trustee for deposit on that remittance date (or,
if there are daily remittances, amounts remitted since the date of the last such
statement) pursuant to the indenture.
In addition, under the servicing agreement, the servicer is required to
give written notice to the issuer, the trustee and each rating agency, promptly
after having obtained knowledge thereof, but in no event less than five business
days thereafter, of any event which, with the giving of notice or the passage of
time or both, would become a servicer default under the servicing agreement. For
so long as any transition bonds are listed on the Luxembourg Stock Exchange and
the rules of that exchange so require, this notice also will be given by
publication in a daily newspaper in Luxembourg, which is expected to be the
Luxemburger Wort.
COMPLIANCE REPORTS
A firm of independent public accountants will furnish to the issuer, the
trustee and the rating agencies, on or before March 31 of each year, a report as
to compliance by the servicer during the preceding calendar year, or the
relevant portion thereof, with procedures relating to the servicing of bondable
transition property. This report is to state that the accounting firm has
performed certain procedures in connection with the servicer's compliance with
its obligations under the servicing agreement during the preceding calendar
year, identifying the results of these procedures and including any exceptions
noted. The accounting firm providing the report will be independent of the
servicer. The servicing agreement also provides for delivery to the issuer and
the trustee, on or before March 31 of each year, a certificate signed by an
officer of the servicer stating that, to the officer's best knowledge, the
servicer has fulfilled its obligations under the servicing agreement for the
preceding calendar year or, if there has been a default in the fulfillment of
any relevant obligation, describing each such default. In addition, the servicer
has agreed to give the issuer, each rating agency, and the trustee prompt notice
of any servicer default under the servicing agreement or other basic documents
promptly after acquiring knowledge thereof.
MATTERS REGARDING THE SERVICER
ACE may assign its obligations under the servicing agreement to any
successor approved by the BPU provided the rating agency condition and other
conditions specified in the BPU financing order have been satisfied. Under the
BPU financing order, the BPU will permit a successor servicer to replace ACE
only if it also determines that the current credit ratings on the transition
bonds will not be withdrawn or downgraded following the appointment and approval
of the successor. Under the servicing agreement, the servicer may assign its
obligations under the servicing agreement to any electric distribution company
that succeeds to all or substantially all of the electric distribution business
of the servicer and so long as:
1. no representation or warranty made by the servicer in the servicing
agreement will have been breached and no servicer default, and no
event which, after notice or lapse of time, or both, would become a
servicer default will have occurred and be continuing after giving
effect to the transactions;
2. officers' certificates and opinions of counsel will have been
delivered to the issuer and the trustee, certifying to matters under
the Competition Act and federal tax law relative to the interests of
the issuer, the bondable transition property and the transition
bondholders; and
3. prior written notice will have been received by the rating agencies,
and the rating agency condition will have been satisfied.
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Except pursuant to the foregoing provisions, ACE may not resign from the
obligations and duties imposed on it as servicer. However, ACE may resign as
servicer upon a determination that the performance of ACE's duties under the
servicing agreement is no longer permissible under applicable law. This
resignation will not become effective until a successor servicer has assumed the
duties of ACE under the servicing agreement.
Until the transition bonds have been paid in full and all related
obligations have been satisfied, ACE is obligated by the Competition Act to
provide electricity through its transmission and distribution system to its
customers and, as servicer, will have the right to meter, charge, bill, collect
and receive the transition bond charge from its customers for the account of the
issuer and the trustee. These rights and obligations may be assigned solely at
the discretion of ACE. However, under the Competition Act, if ACE defaults in
respect of metering, charging, billing, collecting and receiving revenues
derived from transition bond charges, the trustee or the issuer may apply to the
BPU or any court of competent jurisdiction for an order designating a trustee or
other entity to act in place of ACE as the servicer for the metering, charging,
billing, collecting and receiving of the transition bond charge for the account
of the issuer and the trustee. Under the Competition Act, the BPU or the court
is required to issue the order. The BPU may, at its discretion, establish
criteria for the selection of any entity that may become a successor servicer
upon default or other material adverse change in the financial condition of ACE.
SERVICER DEFAULTS
Servicer defaults will include:
1. any failure by the servicer to deliver to the trustee, on behalf of
the issuer, any required remittance that continues unremedied for
five business days after written notice of the failure is received
by the servicer from the issuer or the trustee;
2. any failure by the servicer to perform in any material respect any
other agreement in the servicing agreement or any other basic
document to which it is a party, which failure materially and
adversely affects bondable transition property and continues
unremedied for 60 days after notice of the failure has been given to
the servicer by the issuer or the trustee or after discovery of the
failure by an officer of the servicer;
3. any representation or warranty made by the servicer in the servicing
agreement proving to have been incorrect when made that has a
material adverse effect on the transition bondholders or the issuer
and that continues unremedied for 60 days after notice of the
failure has been given to the servicer by the issuer or the trustee
or after discovery of the failure by an officer of the servicer; or
4. specified insolvency events, including the filing of an order in an
involuntary case under bankruptcy or similar laws in respect of all
or a substantial part of the servicer's property that remains
unstayed and in effect for at least 90 consecutive days; the
commencement by the servicer of a voluntary case under any such
laws; the consent by the servicer to the entry of an order for
relief in an involuntary case under any such laws; the making by the
servicer of an assignment for the benefit of creditors; the
servicer's failure generally to pay its debts as they become due; or
the servicer's taking any action to further any of the above.
The trustee, with the consent of the holders of the majority of the outstanding
principal amount of transition bonds of all series, may waive any default by the
servicer other than a default in making any required remittances to the trustee.
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RIGHTS UPON SERVICER DEFAULT
As long as a servicer default remains unremedied, the trustee, with the
consent of the holders of a majority of the outstanding principal amount of the
transition bonds of all series, 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 as servicer
until a successor servicer is appointed. Under the servicing agreement, upon the
servicer's receipt of a termination notice, the trustee, with the consent of the
holders of a majority of the outstanding principal amount of the transition
bonds of all series, may appoint a successor servicer, subject to further
qualifications including satisfaction of the rating agency condition with
respect to the appointment and approval by the BPU. Only a successor servicer
that is a public electric utility within the meaning of the Competition Act may
bring an action against a customer for nonpayment of the transition bond charge
or terminate service for failure to pay the transition bond charge.
If a third party succeeds to the role of servicer, the servicer will
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. A successor
servicer may not resign unless it is prohibited from acting as servicer by law.
Upon a servicer default based upon the commencement of a case by or
against the servicer under the United States Bankruptcy Code or similar laws,
the trustee and the issuer may be prevented from effecting a transfer of
servicing. See "RISK FACTORS -- RISKS ASSOCIATED WITH POTENTIAL BANKRUPTCY
PROCEEDINGS" in this prospectus. Upon a servicer default because of a failure to
make required remittances, the issuer or the trustee will have the right to
apply to the BPU for sequestration and payment of revenues arising from the
bondable transition property. See "RISK FACTORS -- RISKS ASSOCIATED WITH
POTENTIAL BANKRUPTCY PROCEEDINGS" in this prospectus.
TERMINATION
The obligations of the servicer and the issuer pursuant to the servicing
agreement will terminate upon the retirement, redemption or defeasance in full
of the transition bonds.
THE INDENTURE
The following summary describes some of the terms of the indenture
pursuant to which transition bonds will be issued. For more detailed information
on the indenture, please see the indenture, filed as an exhibit to the
registration statement of which this prospectus forms a part.
SECURITY
To secure the payment of principal, interest and other amounts owing in
respect of the transition bonds pursuant to the indenture, the issuer will grant
to the 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 bondable transition property sold by ACE to the issuer pursuant
to the sale agreement and all proceeds thereof;
2. the sale agreement;
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3. all bills of sale delivered by ACE pursuant to the sale agreement;
4. the servicing agreement;
5. the administration agreement;
6. the collection account, each subaccount therein relating to a
specific series and all amounts on deposit therein from time to time
with the exception of an aggregate of $[ ] to be held in the capital
subaccounts free of the lien of the indenture to ensure that the
issuer has sufficient assets to pay its expenses as they come due;
7. any other property of whatever kind owned from time to time by the
issuer, other than (a) cash or other property released to the issuer
from the collection account and subaccounts therein in accordance
with the provisions of the indenture, (b) any payment received by
the issuer under any hedge agreement, and (c) proceeds from the sale
of the transition bonds used to pay the costs of issuance of the
transition bonds and the purchase price of the bondable transition
property under the sale agreement;
8. all present and future claims, demands, causes and choses in action
in respect of any or all of the foregoing; and
9. all payments on or under and all proceeds of every kind and nature
whatsoever in respect of any or all of the foregoing, provided that
cash and other property released 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.
The transition bond charge and the subaccounts of each series will secure all
series; provided, however, that amounts on deposit in the subaccounts of each
series will be allocated to that series as provided under " -- ALLOCATIONS AND
PAYMENTS; PRIORITY OF DISTRIBUTIONS" below. However, the issuer may agree, in
the indenture supplement relating to a series of transition bonds, that after
all transition bonds of that series have been paid, redeemed or defeased, and
all obligations of the issuer with respect to that series have been satisfied,
amounts, if any, remaining in that series' subaccounts will be released to the
issuer free of the lien of the indenture rather than being reallocated to the
subaccounts of the remaining outstanding series.
See " -- ALLOCATIONS AND PAYMENTS; PRIORITY OF DISTRIBUTIONS" below.
ISSUANCE IN SERIES OR CLASSES
Transition bonds may be issued under the indenture from time to time in
series to finance the purchase by the issuer of bondable transition property.
The aggregate principal amount of transition bonds that may be authenticated and
delivered under the indenture is not limited by dollar amount. Any series of
transition bonds may include one or more classes that differ, among other
things, as to interest rate and amortization of principal, although the dates on
which the transition bond charge will be adjusted, as described under "THE BPU
FINANCING ORDER AND THE TRANSITION BOND CHARGE -- THE TRANSITION BOND CHARGE
ADJUSTMENT PROCESS," will be the same for every series. The terms of all
transition bonds of the same series will be identical, unless a series includes
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 or class will be set forth in a supplemental indenture. The issuer may
not issue a new series of transition bonds if it would result in the reduction
or withdrawal of the credit ratings on any outstanding series of transition
bonds, but the terms of a series or of any
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classes thereof will not be subject to the prior review by, or consent of, the
transition bondholders of any previously issued series or classes. See "RISK
FACTORS -- OTHER RISKS ASSOCIATED WITH AN INVESTMENT IN THE TRANSITION BONDS,"
"THE TRANSITION BONDS" and "ACE'S RESTRUCTURING" in this prospectus. The
issuance of additional series of transition bonds may delay or reduce payments
you receive on the transition bonds. See "RISK FACTORS -- OTHER RISKS ASSOCIATED
WITH AN INVESTMENT IN THE TRANSITION BONDS" in this prospectus.
Issuer Certificate, Opinion of Counsel and Satisfaction of Rating Agency
Condition. Under the indenture, the trustee will authenticate and deliver an
additional series of transition bonds only upon receipt by the 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 that the
issuance of the additional series of transition bonds will not result in the
downgrading or withdrawal of any rating on any outstanding transition bonds.
Opinion of Independent Certified Public Accountants Required for Each
Series or Class. In connection with the issuance of each new series, the trustee
must receive a certificate or opinion of a firm of independent certified public
accountants of recognized national reputation. This certificate will be based on
the assumptions used in calculating the transition bond charge with respect to
the bondable transition property whose purchase by the issuer was financed by
the new issuance. The certificate will include a statement to the effect that,
after giving effect to the new issuance and the application of the proceeds
therefrom, the transition bond charge will be sufficient:
1. to pay all expenses, fees and charges of the issuer and those
associated with the transition bonds;
2. to pay interest on each series of transition bonds when due;
3. to pay principal of each series of transition bonds in accordance
with the expected amortization schedule therefor; and
4. to fund the overcollateralization subaccount for each series to its
scheduled overcollateralization level and replenish any withdrawals
from the capital subaccount for each series, taking into account
amounts on deposit in the reserve subaccount for each series.
COLLECTION ACCOUNT
Under the indenture, the issuer will establish the collection account with
the trustee or another eligible institution. Eligible institutions for purposes
of establishing the collection account are:
1. the corporate trust department of the trustee; or
2. any depositary institution organized under the laws of the United
States of America or any state or any domestic branch of a foreign
bank that:
a. has either:
(1) a long-term unsecured debt rating of "[________]" by
Standard & Poor's Ratings Group and "[__________]" by
Moody's Investors Service or
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(2) a certificate of deposit rating of "A-1" by Standard &
Poor's Ratings Group and "P-1" by Moody's Investors
Service or any other long-term, short-term or
certificate of deposit rating acceptable to the rating
agencies; and
b. whose deposits are insured by the Federal Deposit Insurance
Corporation.
The collection account will be divided into subaccounts. Other than the
general subaccount, which will be used to fund all series of transition bonds,
each series will have its own group of subaccounts, which need not be segregated
into separate bank accounts for each series. The subaccounts are:
1. the general subaccount;
2. a series subaccount for each series;
3. a capital subaccount for each series;
4. an overcollateralization subaccount for each series;
5. a reserve subaccount for each series; and
6. if required pursuant to an indenture supplement, one or more
defeasance subaccounts for particular series.
All amounts held directly in the collection account will be allocated to
the general subaccount. Unless the context indicates otherwise, references to
the collection account include all of the subaccounts contained therein. All
money deposited from time to time in the collection account, all deposits
therein pursuant to the indenture and all investments made in eligible
investments will be held by the trustee in the collection account as part of the
collateral.
Appropriate Investments for Funds in the Collection Account. Funds in
the collection account will be invested in one or more of the following
eligible investments:
1. direct obligations of, and obligations fully and unconditionally
guaranteed as to their timely payment by, the United States of
America;
2. demand deposits, time deposits, certificates of deposit of
depository institutions or trust companies fully insured by the
Federal Deposit Insurance Corporation or otherwise meeting standards
specified in the indenture;
3. commercial paper or other short-term unsecured debt obligations
(other than those of ACE and its affiliates) having, at the time of
investment, a rating in the highest rating category from each rating
agency;
4. investments in money market funds that have the highest rating from
each rating agency, including funds for which the trustee or any of
its affiliates is investment manager or advisor;
5. banker's acceptances issued by any depository institution or trust
company meeting standards specified in the indenture;
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6. repurchase obligations with respect to any security that is a direct
obligation of, or fully guaranteed by, the United States of America
or any agency or instrumentality thereof, in either case entered
into with trust companies or depository institutions which have a
long-term unsecured debt rating of [________] by Standard & Poor's
Ratings Group and [__________] by Moody's Investors Service or a
certificate of deposit rating of A-1 by Standard & Poor's Rating
Group and P-1 by Moody's Investors Service or any other long-term,
short-term or certificate of deposit rating acceptable to the rating
agencies, and whose deposits are insured by the Federal Deposit
Insurance Corporation; or
7. any other investment permitted by the rating agencies, but:
a. any book-entry security, instrument or security having a
maturity of one month or less that would be an eligible
investment but for its failure, or the failure of the obligor
thereon, to have the rating specified above will be an
eligible investment if the book-entry security, instrument or
security, or the obligor thereon, has a long-term unsecured
debt rating of at least "A2" by Moody's Investors Service, or
the equivalent thereof by the other rating agencies, or a
short-term rating of at least "P-1" by Moody's Investors
Service or the equivalent thereof by the other rating
agencies, and
b. any book-entry security, instrument or security having a
maturity of greater than one month that would be an eligible
investment but for its failure, or the failure of the obligor
thereon, to have the rating specified above shall be an
eligible investment if this book-entry security, instrument or
security, or the obligor thereon, has a long-term unsecured
debt rating of at least "A1" by Moody's Investors Service, or
the equivalent thereof by the other rating agencies, and a
short-term rating of at least "P-1" by Moody's Investors
Service or the equivalent thereof by the other rating
agencies.
These eligible investments may not be sold, liquidated or otherwise
disposed of at a loss prior to their maturity. In addition, on each payment date
and each monthly fee disbursement date (or on the preceding business day if they
are held by a non-affiliate of the trustee), eligible investments will mature in
an aggregate amount sufficient, taken together with the transition bond charge
collections and other available amounts, to make any payments then scheduled to
be made to third parties and any deposits then required to be made into any
subaccounts under the indenture.
In the case of a defeasance of a series of transition bonds, the issuer
will deposit United States government obligations in the defeasance subaccount
established for the series. Unites States government obligations are direct
obligations, or certificates representing an ownership interest in those
obligations of the United States, including any agency or instrumentality
thereof, for the payment of which the full faith and credit of the United States
is pledged and which are not callable at the issuer's option. No money held in
the collection account may be invested, and no investment held in the collection
account may be sold, unless the security interest in the collection account will
continue to be perfected in the investment or in the proceeds of the sale, as
the case may be.
Remittances to the Collection Account. On each remittance date, as defined
under "THE SERVICING AGREEMENT -- SERVICING PROCEDURES" in this prospectus, the
servicer will remit all the transition bond charge collections and any indemnity
amounts to the trustee under the indenture for deposit in the collection
account. An indemnity amount is any amount paid by ACE, as the seller or the
servicer, to the trustee, for the trustee itself or on behalf of the transition
bondholders, in respect of indemnification obligations under the sale agreement
or the servicing agreement. See "THE SALE
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AGREEMENT -- ACE'S OBLIGATION TO INDEMNIFY THE ISSUER AND THE TRUSTEE" and "THE
SERVICING AGREEMENT -- SERVICER INDEMNIFICATION" in this prospectus.
General Subaccount. Transition bond charge collections and any indemnity
amounts remitted by the servicer to the trustee will be deposited into the
general subaccount. On the business day preceding each payment date, the trustee
will allocate amounts in the general subaccount, including earnings thereon, to
each series as described under " -- ALLOCATIONS AND PAYMENTS; PRIORITY OF
DISTRIBUTIONS" below.
Series Subaccount. Upon each issuance of a new series of transition bonds,
a series subaccount will be established for that series. On the business day
preceding each payment date, allocations will be made to each series subaccount
as described under " -- ALLOCATIONS AND PAYMENTS; PRIORITY OF DISTRIBUTIONS"
below.
Capital Subaccount. Upon each issuance of a new series of transition
bonds, ACE will make a capital contribution to the issuer of the required
capital amount. The issuer will pay this amount to the trustee for deposit into
the capital subaccount for the series, and the amount will be invested in
eligible investments.
Overcollateralization Subaccount. Transition bond charge collections, to
the extent available, as described under " -- ALLOCATIONS AND PAYMENTS; PRIORITY
OF DISTRIBUTIONS" below, will be allocated to the overcollateralization
subaccount for each series on each payment date. Each prospectus supplement will
specify the scheduled overcollateralization level on each payment date for the
series of transition bonds to which the supplement relates. The
overcollateralization amount for each series will be funded over the life of the
transition bonds of that series and in the aggregate will equal the amount
stated in the prospectus supplement relating to that series. Amounts on deposit
in the overcollateralization subaccounts will be invested in eligible
investments.
Reserve Subaccount. Transition bond charge collections allocated to a
particular series that are not needed to make the payments set forth in clauses
1 through 11 in " -- ALLOCATIONS AND PAYMENTS; PRIORITY OF DISTRIBUTIONS" below
will be allocated to the reserve subaccount for that series. Amounts in each
series' reserve subaccount will be invested in eligible investments.
Defeasance Subaccount. In the event funds are remitted to the trustee in
connection with the exercise of the legal defeasance option or the covenant
defeasance option with respect to a series of transition bonds, the issuer will
establish a defeasance subaccount for that series. If this occurs, funds set
aside for future payment of the transition bonds of that series will be
deposited into that defeasance subaccount. All amounts in the defeasance
subaccount for that series will be applied by the trustee to the payment to the
holders of the particular series of transition bonds for the payment or
redemption of which these amounts were deposited with the trustee. These amounts
will include all sums due for principal, interest and premium, if any, and they
will be applied in accordance with the provisions of the transition bonds and
the indenture. See " -- LEGAL DEFEASANCE AND COVENANT DEFEASANCE" below.
Other Credit Enhancement. In addition to the above-mentioned subaccounts
and the mandatory periodic adjustments to the transition bond charge, further
credit enhancement may be provided. The amounts and types of credit enhancement
provided for any series of transition bonds and the provider of any such credit
enhancement will be described in the related prospectus supplement.
Release or Reallocation. The issuer may agree, in the indenture supplement
relating to a series of transition bonds, that after all transition bonds of
that series have been paid, redeemed or defeased, and all obligations of the
issuer with respect to that series have been satisfied, amounts, if any,
remaining in that
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series' subaccounts will either be released to the issuer free of the lien of
the indenture or be reallocated to the subaccounts of the remaining outstanding
series, as specified in the related prospectus supplement. If no other series is
then outstanding, then amounts on deposit will be released to the issuer free of
the lien of the indenture. Amounts released to the issuer may be distributed to
ACE in accordance with the indenture supplement.
ALLOCATIONS AND PAYMENTS; PRIORITY OF DISTRIBUTIONS
The transition bond charge collections will be remitted by the servicer at
least monthly and will be deposited by the trustee into the general subaccount
of the collection account. In addition, investment earnings on amounts on
deposit in the trust accounts will be deposited into the general subaccount of
the collection account on the business day preceding each payment date and, if
and to the extent necessary to meet monthly fees and expenses, on the business
day preceding each monthly fee disbursement date. In addition, any indemnity
payments received by the trustee will be deposited into the general subaccount
as received. On each transition bond charge adjustment date, the trustee will
determine the total revenue requirements of each series of transition bonds over
the period that begins on that date and ends on the date immediately preceding
the next scheduled transition bond charge adjustment date.
On the business day preceding each payment date, the trustee will allocate
amounts in the general subaccount of the collection account to each series in
accordance with the proportion of the total revenue requirements a particular
series' revenue requirements bears to the total revenue requirements for all
series as determined on the previous transition bond charge adjustment date. On
each payment date, the trustee will pay as to each series the amounts as
described in clauses 1 through 12 below to the extent funds are available in the
general subaccount of the collection account. All series and all classes within
a series will have the same payment dates. In addition, the trustee will pay the
monthly fees and expenses specified in clauses 1 through 5 below on the monthly
fee disbursement date to the extent funds are available in the general
subaccount of the collection account.
The priorities among payments made on each series are as follows:
1. To the trustee, payment of that series' portion of the trustee's
fee, plus (up to an aggregate amount specified in the related
prospectus supplement) all expenses of the trustee and indemnities
payable to the trustee;
2. To the independent managers of the issuer, payment of that series'
portion of the managers' fees;
3. To the servicer, payment of that series' portion of the servicing
fee;
4. To the administrator, payment of that series' portion of the
administration fee;
5. To the issuer, payment of that series' portion of the current
operating expenses of the issuer (up to an aggregate amount
specified in the related prospectus supplement) unless an event of
default under the indenture exists or would result from the payment;
6. To the transition bondholders:
(A) payment of the interest then due on the transition bonds of
that series and any previously accrued but unpaid interest;
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(B) payment of the principal then due on the transition bonds of
that series, to the extent applicable equal to the following:
- the unpaid principal amount of any class of that series
upon an acceleration triggered by an event of default,
- the unpaid principal amount of any class of that series
due on the final maturity date of that class and
- the unpaid principal amount of any class of that series
called for redemption; and
(C) payment of principal in the amount that would bring the
aggregate principal amount outstanding for that series to the
level set forth in the expected amortization schedule for that
series for that payment date;
7. To hedge or interest rate counterparties, payments of any amounts
due under any hedge or swap agreements made with respect to any
class of that series;
8. To the persons entitled thereto, payment of that series' portion of
any remaining unpaid operating expenses, including any unpaid
trustee expenses and indemnity amounts then owed;
9. To the capital subaccount for that series, replenishment up to the
required capital amount;
10. To the overcollateralization subaccount for that series, allocation
of the amount that would bring the amount in that subaccount to the
level set forth in the overcollateralization schedule for that
series on that payment date;
11. To the issuer, so long as no event of default has occurred and is
continuing, release of an amount equal to investment earnings on
amounts in the capital subaccount for that series since the
preceding payment date; and
12. To the reserve subaccount for that series, allocation of any
remaining amount, subject to reallocation of that remainder to
another series in the event of a payment default of the other
series.
After all transition bonds of that series have been paid, redeemed or
defeased, and all obligations of the issuer with respect to that series have
been satisfied, amounts, if any, remaining in that series' subaccounts will
either be released to the issuer free of the lien of the indenture or be
reallocated to the subaccounts of the remaining outstanding series, as specified
in the related prospectus supplement.
If so specified in the related prospectus supplement, to the extent that
more than one class of a series of transition bonds is to receive payments of
principal legally due or scheduled to be paid in accordance with the related
expected amortization schedule on any payment date, the applicable funds will be
allocated in a sequential manner, to the extent funds are available, as
specified in that prospectus supplement.
Interest means, for any payment date and any series or class of transition
bonds, the sum, without duplication, of:
- the amount of interest accrued since the prior payment date for the
series or class;
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- the amount of unpaid interest for the series or class plus any
interest accrued on that unpaid interest as of that payment date;
and
- if the series has been declared due and payable, all accrued and
unpaid interest for the series or class as of that payment date.
Principal means, for any payment date and any series or class of
transition bonds:
- the amount of principal scheduled to be paid for the series or class
on the payment date;
- the amount of principal due on the final maturity date of the series
or class;
- the amount of principal for the series or class due as a result of
the occurrence and continuance of an event of default and
acceleration of the transition bonds; and
- any overdue payments of principal.
If on any payment date funds in any series subaccounts are insufficient to
make the allocations contemplated above funds drawn from amounts on deposit in
the following subaccounts of that series will be available to make payments in
the following order up to the amount of the shortfall:
- from the reserve subaccount for that series for allocations in
clauses 1 through 11 with respect to that series;
- from the overcollateralization subaccount for that series for
allocations in clauses 1 through 6 and 8 with respect to that
series; and
- from the capital subaccount for that series for allocations in
clauses 1 through 6 and 8 with respect to that series.
In addition, in order to avoid a default in the payment of interest or
legally due principal on another series of transition bonds, amounts held in the
reserve subaccount of any series may be used to make payments in order to avoid
such a default or an event of default if doing so would not cause the series to
suffer a default or an event of default. If on any monthly fee disbursement date
amounts available in a series' subaccount are insufficient to pay that series'
share of monthly fees and expenses, amounts held in the reserve subaccount of
that series may be used to make the payments. The amount of a series' share of
fees and expenses will be based on the then outstanding principal amount of that
series in relation to the outstanding principal amount of all series as of the
immediately preceding payment date.
REPORTS TO TRANSITION BONDHOLDERS
On or prior to each payment date, the trustee will prepare and provide
statements to the holders of record of each outstanding series of transition
bonds. These statements will be available to the beneficial owners of each
series of transition bonds upon request to the 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. This statement will include, to the
extent applicable, the following information, as well as any other information
required to be so furnished by the trustee under the related supplemental
indenture, as to the transition bonds of that series with respect to that
payment date or the period since the previous payment date:
1. the amount to be paid to those transition bondholders in respect of
principal;
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2. the amount to be paid to those transition bondholders in respect of
interest;
3. the projected transition bond balance and the transition bond
balance for that series as of that payment date;
4. the amount on deposit in the overcollateralization subaccount for
that series and the scheduled overcollateralization level for that
series, as of that payment date;
5. the amount on deposit in the capital subaccount for that series as
of that payment date; and
6. the amount, if any, on deposit in the reserve subaccount for that
series as of that payment date and any amounts transferred from the
reserve subaccount to make payments on another series.
In addition, the statements will contain information with respect to total
receipts for transition bond charges, expenses paid and allocation of net
transition bond charges among all series.
MODIFICATION OF THE INDENTURE
Modifications of the Indenture That Do Not Require Consent of Transition
Bondholders. Without the consent of any of the transition bondholders or the
counterparty to any hedge or swap transaction but with prior notice to the
rating agencies, the issuer and the trustee may execute a supplemental indenture
for any of the following purposes:
1. to correct or amplify the description of the collateral, or better
assure, convey and confirm to the trustee the collateral, or to
subject to the lien of the indenture additional property;
2. to evidence the succession of another person to the issuer and the
assumption by the successor of the covenants of the issuer in the
indenture and in the transition bonds;
3. to add to the covenants of the issuer, for the benefit of the
transition bondholders, or to surrender any right or power conferred
upon the issuer in the indenture;
4. to assign or pledge any property to or with the trustee;
5. to cure any ambiguity, to correct any inconsistent provision of the
indenture or any supplemental indenture or to make any other
provisions with respect to matters arising under the indenture or in
any supplemental indenture, but:
a. the action must not, as evidenced by an opinion of counsel,
adversely affect in any material respect the interests of any
transition bondholder or any hedge or swap counterparty, and
b. the rating agency condition must be satisfied with respect to
the action;
6. to evidence and provide for a successor trustee and to facilitate
the administration of the trusts under the indenture by more than
one trustee, as may be required by the indenture;
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7. to modify the indenture to effect the qualification of the indenture
under the Trust Indenture Act or any similar federal statute
hereafter enacted and to add to the indenture any other provisions
as may be expressly required by the Trust Indenture Act;
8. to set forth the terms of any series that has not theretofore been
authorized by a supplemental indenture, provided that the rating
agency condition has been satisfied with respect to the action;
9. change the type of third-party credit enhancement available in
support of the transition bonds so long as the rating agency
condition has been satisfied; or
10. to authorize the appointment of any listing agent, transfer agent or
paying agent or additional registrar for any class of transition
bonds required or advisable in connection with the listing of any
class of transition bonds on any stock exchange, and otherwise to
amend the indenture to incorporate any changes requested or required
by any governmental authority, stock exchange authority, listing
agent, transfer agent or paying agent or additional registrar for
any class of transition bonds in connection with that listing.
Additionally, without the consent of any of the transition bondholders,
the issuer and 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. the rating agency condition must be satisfied with respect to that
action.
Modifications That Require the Approval of the Transition Bondholders. The
issuer and the 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 amount of
outstanding transition bonds of each series or class to be affected thereby,
execute a supplemental indenture to add any provisions to, or change in any
manner or eliminate any of the provisions of, the indenture or modify in any
manner the rights of the transition bondholders under the indenture. However, no
supplemental indenture may, without the consent of the holder of each
outstanding transition bond of each series or class affected thereby and each
swap or hedge counterparty, if any, affected thereby:
1. change the date of any scheduled payment of principal of, or
interest or premium, if any, on, any transition bond, or reduce the
principal amount thereof, the interest rate specified thereon or the
redemption price or the premium, if any, with respect thereto,
change the provisions of the indenture and the applicable
supplemental indenture relating to the application of collections
on, or the proceeds of the sale of, the collateral to payment of
principal of, or interest or premium, if any, on, the transition
bonds, or change the coin or currency in which any transition bond
or any interest thereon is payable;
2. impair the right to institute suit for the enforcement of payment of
amounts due on transition bonds after their respective due dates;
3. reduce the percentage of outstanding transition bonds, or of a
series or class thereof, the consent of the holders of which is
required for any supplemental indenture, or for any
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waiver of compliance with specified provisions of the indenture or
of defaults and their consequences;
4. reduce the percentage of outstanding transition bonds required to
direct the trustee to direct the issuer to liquidate the collateral;
5. modify the indenture so as to affect the amount of any payment of
principal, interest or premium, if any, payable on any transition
bond on any payment date or change the redemption dates, expected
amortization schedules or final maturity dates of any transition
bonds;
6. decrease the required capital amount, the overcollateralization
amount or the scheduled overcollateralization level with respect to
any series or any payment date;
7. modify the indenture regarding the voting of transition bonds held
by the issuer, ACE, an affiliate of either of them or any obligor on
the transition bonds;
8. decrease the percentage of outstanding transition bonds required to
amend any provisions of the indenture that specify the percentage of
outstanding transition bonds necessary to amend the indenture or
other agreements;
9. 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 contemplated in the
indenture, terminate the lien of the indenture on any property or
modify the collateral release provisions thereof or deprive the
holder of any transition bond of the security of the indenture; or
10. alter any of the allocations of revenues, indemnity payments, fees
or similar amounts among series.
In addition, none of the foregoing provisions may be modified without the
consent of each affected transition bondholder, except to increase any
percentage specified therein or to provide that the indenture or other documents
referred to above cannot be modified or waived without the consent of the holder
of each outstanding transition bond affected thereby.
Enforcement of Agreements. The indenture provides that the issuer will
take all lawful actions to enforce its rights under the sale agreement, the
administration agreement and the servicing agreement and to compel or secure the
performance and observance by ACE and the servicer of their respective
obligations to the issuer under these agreements. 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 sale agreement, the administration agreement and the servicing
agreement. However, if the issuer, ACE or the 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 the transition bond charge, the issuer must notify the trustee and the
trustee must notify the transition bondholders of the proposal. In addition, the
trustee may consent to such a proposal only with the consent of the holder of
each outstanding transition bond of each series or class materially and
adversely affected thereby and only if the rating agency condition is satisfied
with respect to the action.
If an event of default occurs and is continuing, the trustee may, and at
the direction of the holders of a majority of the principal amount of
outstanding transition bonds of all series, will, exercise all rights,
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remedies, powers, privileges and claims of the issuer against ACE or the
servicer under or in connection with the sale agreement, the administration
agreement and the servicing agreement, and any right of the issuer to take any
such action will be suspended. In the event of a foreclosure, there is likely to
be a limited market, if any, for the bondable transition property, and,
therefore, foreclosure may not be a realistic or practical remedy.
Modifications to the Sale Agreement and the Servicing Agreement. With the
consent of the trustee, 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, as evidenced by an officer's certificate, the
amendment does not adversely affect the interest of any transition bondholder or
change the adjustment process for the transition bond charges. The trustee will
not withhold its consent to that amendment so long as the rating agency
condition is satisfied in connection with that amendment [by each rating agency
other than Moody's Investors Service; and the issuer shall have furnished
Moody's Investors Service with written notice of the amendment prior to its
effectiveness] and the foregoing officer's certificate is provided.
No amendment, modification, waiver, supplement, termination or surrender
of the terms of the sale agreement or servicing agreement, or waiver of timely
performance or observance by ACE or the servicer under the 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
trustee consent to any such amendments, modifications, waivers, supplements,
terminations or surrenders. If the issuer or the servicer 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 sale agreement or servicing agreement or waive timely performance
or observance by ACE or the servicer thereunder, the issuer will notify the
trustee and the trustee will notify the transition bondholders. The trustee will
consent to any of these amendments, modifications, waivers, supplements,
terminations or surrenders 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.
Notification of the Rating Agencies, the Trustee and the Transition
Bondholders of Any Modification. If the issuer, ACE or the servicer:
1. proposes to amend, modify, waive, supplement, terminate or
surrender, or agree to any other amendment, modification, waiver,
supplement, termination or surrender of, the terms of the sale
agreement or the servicing agreement, as the case may be, or
2. proposes to waive timely performance or observance by ACE or the
servicer under the sale agreement or the servicing agreement, as the
case may be,
in each case in a way that would materially and adversely affect the interests
of transition bondholders, the issuer must first notify the rating agencies of
the proposed amendment. Upon satisfaction of the rating agency condition with
respect to the proposed action, the issuer must thereafter notify the trustee
and the trustee must notify the transition bondholders of the proposed action
and that the rating agency condition has been satisfied with respect thereto.
The trustee will consent to the proposed amendment, modification, supplement or
waiver only with the consent of the holders of a majority of the principal
amount of outstanding transition bonds of each series materially and adversely
affected thereby.
EVENTS OF DEFAULT
An "Event of Default" is defined in the indenture as:
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1. a default for five business days in the payment of any interest on
any transition bond;
2. a default in the payment of the principal of any transition bond of
any series or class on the final maturity date for that series or
class;
3. a default in the payment of the redemption price for any transition
bond on the redemption date therefor;
4. a default in (a) the observance or performance of any covenant or
agreement of the issuer made in the indenture (other than those
specifically dealt with in clauses 1, 2 or 3 above) or (b) any
representation or warranty of the issuer made in the indenture or in
any certificate or other writing delivered pursuant to the indenture
if, in either case, the default continues for a period of 30 days
after (x) notice is given to the issuer and the trustee by the
holders of at least 25% of the principal amount of outstanding
transition bonds of any series or class or (y) the issuer has
knowledge of the default;
5. specified involuntary events of bankruptcy, insolvency, receivership
or liquidation of the issuer if the decree or order remains unstayed
and in effect for a period of 90 consecutive days;
6. commencement of specified voluntary cases by the issuer under
bankruptcy, insolvency or other similar law; and
7. violation by the State of New Jersey of its pledge and agreement
with respect to the Competition Act and the transition bonds.
If an event of default occurs and is continuing, other than a default described
in clause 7. above, the trustee or holders of a majority of the principal amount
of outstanding transition bonds of all series may declare the principal balance
of all series of the transition bonds to be immediately due and payable. The
declaration may, under the circumstances specified in the indenture, be
rescinded by the holders of a majority of the principal amount of outstanding
transition bonds of all series. If the transition bonds are declared due and
payable, and if the bondable transition property has not been sold, then
payments will continue to be applied as described under " -- ALLOCATIONS AND
PAYMENTS; PRIORITY OF DISTRIBUTIONS" above for that series.
Remedies Available to the Trustee Following an Event of Default. In
addition to acceleration of the transition bonds, the trustee may exercise one
or more of the following remedies upon an event of default:
1. the trustee may institute proceedings in its own name and as trustee
of an express trust for the collection of all amounts then payable
on the transition bonds or under the indenture with respect to the
transition bonds, whether by declaration or otherwise, enforce any
judgment obtained, and collect from the issuer and any other obligor
upon the transition bonds moneys adjudged due;
2. the trustee may institute proceedings from time to time for the
complete or partial foreclosure of the indenture with respect to the
collateral;
3. the trustee may exercise any remedies of a secured party under the
Uniform Commercial Code or the Competition Act or any other
applicable law and take any other appropriate
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action to protect and enforce the rights and remedies of the trustee
and the holders of the transition bonds of that series;
4. the trustee may sell the collateral or any portion thereof or rights
or interest therein, at one or more public or private sales called
and conducted in any matter permitted by law;
5. the trustee may exercise all rights, remedies, powers, privileges
and claims of the issuer against the seller, the servicer or any
swap counterparty under or in connection with the sale agreement,
the servicing agreement or any interest rate swap agreement; and
6. the trustee may institute or participate in proceedings reasonably
necessary to compel performance of or to enforce the pledge and
agreement of the State of New Jersey under the Competition Act and
collect any monetary damages incurred by the holders of the
transition bonds or the trustee.
The remedy described in clause 6 above is the only remedy that the trustee may
exercise upon an event of default caused solely by a violation by the State of
New Jersey of its pledge and agreement with respect to the Competition Act and
the transition bonds.
When the Trustee Can Sell the Collateral. If the transition bonds of all
series have been declared to be due and payable following an event of default,
the trustee may, subject to the limitations of the indenture, either:
1. sell or otherwise liquidate the collateral; or
2. elect to maintain possession of the collateral and not sell or
otherwise liquidate it.
If the collateral is sold, the indenture provides for the allocation of
the proceeds pro rata among all series of the transition bonds based on
outstanding principal balances of the respective series as of the date
immediately preceding the date of sale and pro rata among the classes of such
series of transition bonds based on outstanding principal balances of the
classes within that series unless otherwise specified in the related prospectus
supplement.
The trustee is prohibited from selling the collateral following an event
of default (other than a default in the payment of principal, a default for five
business days or more in the payment of any interest on any transition bond of
any series or a default in the payment of the redemption price for any
transition bond on the redemption date therefor) unless:
1. the holders of 100% of the outstanding principal amount of all
series of transition bonds consent to the sale;
2. the proceeds of the sale are sufficient to pay in full the principal
of, accrued interest and premium, if any, on, the outstanding
transition bonds of all series; or
3. the 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 trustee obtains the consent of the holders of at least 66
2/3% of the principal amount of outstanding transition bonds of all
series.
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Right of Transition Bondholders to Direct Proceedings. Subject to the
provisions for indemnification and the limitations contained in the indenture,
the holders of a majority of the principal amount of 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 trustee or exercising
any trust or power conferred on the trustee; provided that, among other things:
1. the holders' direction does not conflict with any rule of law or
with the indenture;
2. subject to the provisions specified in the indenture, any direction
to the trustee to sell or liquidate the collateral must be by the
holders of 100% of the principal amount of all series of transition
bonds then outstanding; and
3. the trustee may take any other action deemed proper by the trustee
that is not inconsistent with the holders' direction.
In case an event of default occurs and is continuing, the trustee will be under
no obligation to exercise any of its rights or powers under the indenture at the
direction of the transition bondholders of any series if it reasonably believes
it will not be adequately indemnified against the costs, expenses and
liabilities that might be incurred by it in complying with the direction. The
trustee does not need to take any action pursuant to any such direction if it
determines that the action might materially adversely affect the rights of any
transition bondholder not consenting to the action.
Waiver of Past Defaults. The holders of a majority of the principal amount
of outstanding transition bonds of all series may, prior to acceleration of the
maturity of the transition bonds, waive any default or event of default with
respect thereto. However, they may not waive a default in the payment of
principal of, or interest or any premium on, any of the transition bonds or a
default in respect of a covenant or provision of the indenture that cannot be
modified without the waiver or consent of all of the holders of the outstanding
transition bonds of all affected series and classes.
No transition bondholder may institute any proceeding, judicial or
otherwise, or avail itself of the right to foreclose on the bondable transition
property or otherwise enforce the lien on the bondable transition property with
respect to the indenture, unless:
1. that holder previously has given to the trustee written notice of a
continuing event of default;
2. the holders of at least 25% of the principal amount of outstanding
transition bonds of all series have made written request of the
trustee to institute the proceeding in its own name as trustee;
3. the holders have offered the trustee security or indemnity
reasonably satisfactory to the trustee against the liabilities to be
incurred in complying with the request;
4. for a period of 60 days after its receipt of the notice, request and
offer, the trustee has failed to institute the proceeding; and
5. no direction inconsistent with this written request has been given
to the trustee during the 60-day period referred to above by the
holders of a majority of the principal amount of outstanding
transition bonds of all series.
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COVENANTS OF THE ISSUER
The issuer will keep in effect its existence as a limited liability
company under Delaware law (or, in the case of a successor issuer, under the law
of Delaware or another state or of the United States), 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 the consolidation or merger or to
whom substantially all of the issuer's assets are sold is organized
under the laws of the United States or any state thereof and
expressly assumes by a supplemental indenture the due and punctual
payment of the principal of, and interest and premium, if any, on,
all transition bonds and the performance of the issuer's obligations
under the indenture;
2. the entity expressly assumes all obligations and succeeds to all
rights of the issuer under the sale agreement and the servicing
agreement pursuant to an assignment and assumption agreement
executed and delivered to the trustee;
3. no default or event of default will have occurred and be continuing
under the indenture immediately after giving effect to the
consolidation, merger or sale;
4. the rating agency condition will have been satisfied with respect to
the merger, consolidation or sale;
5. the issuer has received an opinion of counsel to the effect that the
consolidation, merger or sale would have no material adverse tax
consequence to the issuer or any transition bondholder, complies
with the indenture and all conditions precedent therein provided
relating to the transaction, and will result in the trustee
maintaining a continuing valid first priority security interest in
the collateral;
6. none of the bondable transition property, the BPU financing order or
ACE's, the servicer's or the issuer's rights under the Competition
Act or the BPU financing order are impaired thereby; and
7. any action that is necessary to maintain the lien and security
interest created by the indenture has been taken.
Upon consummation of a consolidation, merger or sale in accordance with the
foregoing provisions, the issuer will be released from its agreements under the
indenture, the sale agreement, the administration agreement and the servicing
agreement.
Additional Covenants of the Issuer. The issuer will take any action
necessary or advisable to, among other things, maintain and preserve the lien
and security interest of the indenture and the priority thereof. The issuer will
not permit the validity of the indenture to be impaired, the lien to be amended,
subordinated, terminated or discharged, or any person to be released from any
covenants or obligations except as expressly permitted by the indenture. The
issuer will also not permit any lien, charge, 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.
Finally, the issuer will not permit the lien of the indenture not to constitute
a continuing valid first priority security interest in the collateral.
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The issuer may not, among other things:
1. except as expressly permitted by the indenture, add, sell, transfer,
exchange, or dispose of any of the collateral unless directed to
do so by the trustee in accordance with the indenture;
2. claim any credit on, or make any deduction from the principal,
interest or premium, if any, payable in respect of the transition
bonds, other than amounts properly withheld under the Internal
Revenue Code of 1986, as amended (the "Code");
3. assert any claim against any present or former transition bondholder
because of the payment of taxes levied or assessed upon the
issuer;
4. pay a dividend or make any other distribution unless (a) no event of
default has occurred and is continuing, (b) the funds distributed
are those distributed to the issuer as contemplated in clause 11
under " -- ALLOCATIONS AND PAYMENTS; PRIORITY OF DISTRIBUTIONS"
above, and (c) the capital subaccount for each series is at the
required level; or
5. engage in any business other than purchasing and owning the bondable
transition property, issuing transition bonds from time to time,
pledging its interest in the collateral to the trustee to secure the
transition bonds, and performing activities that are necessary,
suitable or convenient to accomplish the foregoing or incidental
thereto.
The Issuer May Not Engage in Any Other Financial Transactions. The issuer
may not issue, incur, assume or guarantee any indebtedness except for the
transition bonds and obligations under credit enhancement or hedge agreements
for particular series of the transition bonds as contemplated by the indenture
and the other basic documents. Also, the issuer may not, except as contemplated
by the indenture and the other basic documents, make any loan or advance or
credit to any person 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 acquire, any stock, obligations,
assets or securities of, or any other interest in, or make any capital
contribution to, any other person, except as contemplated by the indenture and
the other basic documents. The issuer will not make any expenditure for capital
assets or lease any capital asset other than bondable transition property
purchased from ACE pursuant to, and in accordance with, the sale agreement.
LIST OF TRANSITION BONDHOLDERS
Any transition bondholder or group of transition bondholders furnishing
reasonable proof of ownership of transition bonds for at least six months may,
by written request to the trustee, obtain access to the list of all transition
bondholders maintained by the trustee for the purpose of communicating with
other transition bondholders with respect to their rights under the indenture or
the transition bonds. The trustee may elect not to afford 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 trustee a written
statement as to the fulfillment of its obligations under the indenture. In
addition, the issuer will furnish to the trustee an
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opinion of counsel concerning filings made by the issuer on an annual basis and
before the effectiveness of any amendment to the sale agreement or the servicing
agreement.
TRUSTEE'S ANNUAL REPORT
If required by the Trust Indenture Act, the trustee will mail each year to
all transition bondholders a brief report relating to its eligibility and
qualification to continue as the trustee under the indenture, any amounts
advanced by it under the indenture, the amount, interest rate and maturity date
of indebtedness owing by the issuer to it in the trustee's individual capacity,
the property and funds physically held by the trustee as such, any additional
issue of a series of transition bonds not previously reported and any action
taken by it that materially affects the transition bonds of any series and that
has not been previously reported.
SATISFACTION AND DISCHARGE OF THE INDENTURE
The indenture will be discharged with respect to the transition bonds of
any series upon the delivery to the trustee of funds sufficient for the payment
in full of all of the transition bonds of such series with the trustee. In
addition, the issuer must deliver to the trustee the officer's certificate and
opinion of counsel specified in the indenture. The deposited funds will be
segregated and held apart solely for paying the transition bonds, and the
transition bonds will not be entitled to any amounts on deposit in the
collection account other than amounts on deposit in the defeasance subaccount
for that series of 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; or
2. its obligations to comply with some of the covenants in the
indenture, including all of the covenants described under " --
COVENANTS OF THE ISSUER" above.
The legal defeasance option is the right of the issuer to terminate at any
time its obligations under the indenture with respect to the transition bonds of
one or more series. The covenant defeasance option is the right of the issuer to
terminate at any time its obligations to comply with most of the covenants in
the indenture with respect to one or more series. 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, the series will 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.
If the issuer exercises the covenant defeasance option for any series, the final
payment of the transition bonds of the 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. If the issuer
exercises the legal defeasance option with respect to any series, no such
acceleration may occur with respect to an event of default of any type.
The issuer may exercise the legal defeasance option or the covenant
defeasance option with respect to a series of transition bonds only if:
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1. the issuer irrevocably deposits or causes to be deposited in trust
with the trustee cash or United States government obligations for
the payment of principal of, and interest and premium, if any, on,
that series to the expected final payment date or redemption date
therefor, as applicable, the deposit to be made in the defeasance
subaccount for that series;
2. the issuer delivers to the trustee a certificate from a nationally
recognized firm of independent accountants expressing its opinion
that the payments of principal and interest on the United States
government obligations when due and without reinvestment plus any
cash deposited in the defeasance subaccount for that series will
provide cash at times and in amounts sufficient to pay in respect of
the transition bonds of that series:
a. principal in accordance with the expected amortization
schedule therefor, and/or if that series is to be redeemed,
the redemption price on the redemption date therefor, and
b. 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 the deposit
and after giving effect thereto;
5. in the case of the legal defeasance option, the issuer delivers to
the trustee an opinion of counsel stating that:
a. the issuer has received from, or there has been published by,
the Internal Revenue Service a ruling, or
b. since the date of execution of the indenture, there has been a
change in the applicable federal income tax law,
in either case confirming that the holders of the transition bonds
of the series will not recognize income, gain or loss for federal
income tax purposes as a result of the exercise of the 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 the legal defeasance had not occurred;
6. in the case of the covenant defeasance option, the issuer delivers
to the 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 the 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 the covenant
defeasance had not occurred; and
7. the issuer delivers to the 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.
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There will be no other conditions to the exercise by the issuer of its
legal defeasance option or its covenant defeasance option.
THE TRUSTEE
[ ] will be the trustee under the indenture. The trustee may resign
at any time upon 30 days' written notice by so notifying the issuer. The holders
of a majority of the principal amount of outstanding transition bonds of all
series may remove the trustee by so notifying the trustee and may appoint a
successor trustee. The issuer will remove the trustee if (a) the trustee ceases
to be eligible to continue in this capacity under the indenture, (b) the trustee
becomes insolvent, (c) a receiver or other public officer takes charge of the
trustee or its property or (d) the trustee becomes incapable of acting. If the
trustee resigns or is removed or a vacancy exists in the office of trustee for
any reason, the issuer will be obligated promptly to appoint a successor trustee
eligible under the indenture. No resignation or removal of the trustee will
become effective until a successor trustee accepts the appointment. The trustee
must at all times satisfy the requirements of the Trust Indenture Act of 1939
and the Investment Company Act of 1940. The trustee must also have a combined
capital and surplus of at least $[50] million and a long term debt rating of at
least ["BBB-"] by Standard & Poor's Ratings Group, at least ["Baa3"] or better
by Moody's Investors Service and at least ["BBB-"] by Fitch. If the 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 will, without any further action, be the
successor trustee.
GOVERNING LAW
The indenture will be governed by the laws of the State of New Jersey.
HOW A BANKRUPTCY OF ACE OR THE
SERVICER MAY AFFECT YOUR INVESTMENT
Sale or Financing. ACE will represent and warrant in the sale agreement
that the sale of the bondable transition property in accordance with the sale
agreement constitutes a valid sale, assignment and absolute transfer by ACE to
the issuer of the bondable transition property. ACE will also represent and
warrant in the sale agreement, and it is a condition to the closing of the sale
of bondable transition property that ACE has taken the appropriate actions under
the Competition Act and the New Jersey Uniform Commercial Code, including filing
a financing statement, to perfect this sale. The Competition Act provides that a
transfer of bondable transition property by an electric utility to an assignee
that the parties have in the governing documentation expressly stated to be a
sale or other absolute transfer, in a transaction approved in BPU financing
order, will be treated as an absolute transfer of all the transferor's right,
title and interest, as in a sale or other absolute transfer, and not as a pledge
or other financing, of the relevant bondable transition property. The
Competition Act also provides that the characterization of a transfer as a sale
or other absolute transfer shall not be affected or impaired in any manner by
treatment of the transfer as a financing for federal or state tax purposes or
financial accounting purposes. ACE and the issuer will treat the transactions as
a sale under applicable law, although for financial reporting and federal and
state income and franchise tax purposes the transition bonds will be treated as
a financing and not a sale. See "THE COMPETITION ACT -- ACE AND OTHER UTILITIES
MAY SECURITIZE STRANDED COSTS" in this prospectus.
In the event of a bankruptcy of ACE, a party in interest in the bankruptcy
might take the position that the sale of the bondable transition property to the
issuer was a financing transaction and not a "sale or other absolute transfer,"
arguing for example that the treatment of the transaction for financial
reporting
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and tax purposes as a financing and not a sale lends weight to the position that
the transaction should be characterized as a financing and not a sale. As noted
above, the Competition Act specifically provides for the treatment of the
transaction as a sale as a matter of state law and that treatment is not
affected by treatment of the transfer as a financing for federal or state tax
purposes or financial accounting purposes. However, if a court were nonetheless
to characterize the transaction as a financing rather than a sale, the issuer
would be treated as a secured creditor of ACE in the bankruptcy case. Although,
as noted below, the issuer would in that case have a security interest in the
bondable transition property, it would not likely be entitled to have access to
the transition bond charge collections during the bankruptcy. As a result,
repayment on the bonds could be significantly delayed and a plan of
reorganization in the bankruptcy case might permanently modify the amount and
timing of payments to the issuer of the transition bond charge collections and
therefore the amount and timing of payments to the transition bondholders.
In order to mitigate the impact of the possible recharacterization of a
sale of bondable transition property as a financing transaction, the Competition
Act and the New Jersey Uniform Commercial Code provide that, if a financing
statement is filed and the transfer is thereafter held to constitute a financing
transaction and not a sale or other absolute transfer, this notice will be
deemed to constitute a filing with respect to a security interest. The sale
agreement provides that in the event that the sale and transfer of the bondable
transition property is determined by a court not to be a true and absolute sale
as contemplated by the Competition Act, then the sale and transfer shall be
treated as a pledge of the bondable transition property and the seller shall be
deemed to have granted a security interest to the issuer in the bondable
transition property, and to have incurred an obligation secured by this security
interest in an amount equal to the purchase price for the bondable transition
property. The sale agreement requires that financing statements under the
Uniform Commercial Code be filed in the appropriate offices in New Jersey. As a
result of these filings, the issuer would be a secured creditor of ACE and
entitled to recover against the security, which includes the bondable transition
property. None of this, however, mitigates the risk of payment delays and other
adverse effects caused by a bankruptcy of ACE. Further, if for any reason the
issuer were to fail to perfect its interest in the bondable transition property
and the transfer is thereafter deemed not to constitute a sale or other absolute
transfer, the issuer would be an unsecured creditor of ACE. In that event, the
issuer's sole source of payment for the transition bonds would be whatever it
recovered on its unsecured claim in the ACE bankruptcy case, the amount and
timing of which could differ materially from the amount and timing of payments
intended to fund the transition bonds. In addition, as stated below, if a
bankruptcy court were to find that the transfer to the issuer of the bondable
transition property was a financing transaction and that the issuer was properly
perfected but that transition bond charges with respect to electricity sold
after the bankruptcy filing of ACE were not present property but future
property, there can be no assurance that even a validly perfected security
interest in bondable transition property would attach to transition bond charges
with respect to electricity sold after the bankruptcy filing of ACE.
Status of Bondable Transition Property as Current Property. ACE has
represented in the sale agreement, and the Competition Act provides, that the
bondable transition property constitutes a vested, presently existing property
right upon its transfer to an assignee and receipt of consideration therefor.
Nevertheless, no assurance can be given that in the event of a bankruptcy of ACE
a party in interest in the bankruptcy would not attempt to take the position
that the bondable transition property comes into existence only as customers use
electricity. If a court were to adopt this position, no assurance can be given
that a security interest in favor of the transition bondholders would attach to
the transition bond charges in respect of electricity consumed after the
commencement of the bankruptcy case. If it were determined both that the
bondable transition property had not been sold to the issuer and that the
security interest in favor of the transition bondholders did not attach to the
transition bond charge in respect of electricity consumed after the commencement
of the bankruptcy case, then the issuer likely would be an unsecured creditor of
ACE. If so, there would be delays or reductions in payments on the transition
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bonds. Whether or not a court determined that the bondable transition property
had been sold to the issuer, no assurance can be given that a court would not
rule that any transition bond charge relating to electricity consumed after the
commencement of the bankruptcy cannot be transferred to the issuer or the
trustee.
In addition, in the event of a bankruptcy of ACE, a party in interest in
the bankruptcy might assert that the issuer should pay a portion of ACE's costs
associated with the generation, transmission or distribution of the electricity,
the consumption of which gave rise to the transition bond charge collections
used to make payments on the transition bonds.
Regardless of whether ACE is the debtor in a bankruptcy case, if a court
were to accept the argument that the bondable transition property comes into
existence only as customers use electricity, a tax or government lien or other
nonconsensual lien on property of ACE arising before the bondable transition
property came into existence could have priority over the issuer's interest in
the bondable transition property. The BPU may make adjustments to the transition
bond charge to mitigate this exposure, but there may be delays in implementing
these adjustments.
Consolidation of the Issuer and ACE. If ACE were to become a debtor in a
bankruptcy case, a party in interest in the bankruptcy may attempt to
substantively consolidate the assets and liabilities of the issuer and ACE. ACE
and the issuer have taken steps to attempt to minimize this risk, as discussed
under "ATLANTIC CITY ELECTRIC TRANSITION FUNDING LLC, THE ISSUER" in this
prospectus. However, no assurance can be given that if ACE or an affiliate of
ACE other than the issuer were to become a debtor in a bankruptcy case, a court
would not order that the assets and liabilities of the issuer be consolidated
with those of ACE or its affiliate. If the assets and liabilities were ordered
substantively consolidated, the claims of the transition bondholders against the
issuer would be treated as secured claims against the consolidated entities.
Payment of those claims could be subject to substantial delay and to adjustment
in timing and amount under a plan of reorganization in the bankruptcy case.
Claims in Bankruptcy; Challenge to Indemnity Claims. If ACE were to become
a debtor in a bankruptcy case, claims, including indemnity claims by the issuer
against ACE under the sale agreement and the other documents executed in
connection therewith, would be unsecured claims and would be subject to being
discharged in the bankruptcy case. In addition, a party in interest in the
bankruptcy may request that the bankruptcy court estimate any contingent claims
of the issuer against ACE. That party might then assert that these claims should
be estimated at zero or at a low amount because the contingency giving rise to
these claims is unlikely to occur. If ACE were to become a debtor in a
bankruptcy case and the indemnity provisions of the sale agreement were
triggered, a party in interest in the bankruptcy might challenge the
enforceability of the indemnity provisions. If a court were to hold that the
indemnity provisions were unenforceable, the issuer would be left with a claim
for actual damages against ACE based on breach of contract principles. The
actual amount of these damages would be subject to estimation or calculation by
the court.
No assurances can be given as to the result of any of the above-described
actions or claims. Furthermore, no assurance can be given as to what percentage
of their claims, if any, unsecured creditors would receive in any bankruptcy
proceeding involving ACE.
Enforcement of Rights by Trustee. Upon an event of default under the
indenture, the Competition Act permits the trustee to enforce the security
interest in the bondable transition property in accordance with the terms of the
indenture. In this capacity, the trustee is permitted to request the BPU to
order the sequestration and payment to transition bondholders of all revenues
arising with respect to the bondable transition property. The Competition Act
provides that this order will remain in full force and effect notwithstanding
bankruptcy, reorganization, or other insolvency proceedings with respect to the
utility or
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its assignee. There can be no assurance, however, that the BPU would issue such
an order after an ACE bankruptcy in light of the automatic stay provisions of
Section 362 of the United States Bankruptcy Code or, alternatively, that a
bankruptcy court would lift the automatic stay to permit such an action by the
BPU. In that event, the trustee under the indenture might seek an order from the
bankruptcy court lifting the automatic stay with respect to such an action by
the BPU, and an order requiring an accounting and segregation of the revenues
arising from the bondable transition property. There can be no assurance that a
court would grant either order.
Bankruptcy of Servicer. The servicer is entitled to commingle transition
bond charge collections with its own funds until each remittance date. The
Competition Act provides that the relative priority of a lien created under the
Competition Act is not defeated or adversely affected by the commingling of
transition bond charge collections arising with respect to the bondable
transition property with funds of the electric utility. However, in the event of
a bankruptcy of the servicer, a party in interest in the bankruptcy might
assert, and a court might rule, that transition bond charge collections
commingled by the servicer with its own funds and held by the servicer as of the
date of bankruptcy were property of the servicer as of that date and are
therefore property of the servicer's bankruptcy estate, rather than property of
the issuer. If the court so ruled, then it would likely also rule that the
trustee had only a general unsecured claim against the servicer for the amount
of commingled transition bond charge collections held as of that date and could
not recover the commingled transition bond charge collections held as of the
date of bankruptcy.
However the court rules on the ownership of the commingled transition bond
charge collections, the automatic stay arising upon the bankruptcy of the
servicer could delay the trustee under the indenture from receiving the
commingled transition bond charge collections held by the servicer as of the
date of the bankruptcy until the court grants relief from the stay. A court
ruling on any request for relief from the stay could be delayed pending the
court's resolution of whether the commingled transition bond charge collections
are property of the issuer or of the servicer, including resolution of any
issues regarding the tracing of proceeds.
ACE, as servicer, will be responsible for billing, collecting and
remitting the transition bond charge and for filing with the BPU to adjust this
charge. If it became a party in a bankruptcy proceeding, ACE might be excused
from its contractual obligations as servicer of the bondable transition
property. See "RISK FACTORS -- UNUSUAL NATURE OF BONDABLE TRANSITION PROPERTY
AND SERVICING RISKS" in this prospectus.
The servicing agreement provides that the trustee, as assignee of the
issuer, together with the other persons specified therein, may vote to appoint a
successor servicer that satisfies the rating agency condition. The servicing
agreement also provides that the trustee, together with the other persons
specified therein, may petition the BPU or a court of competent jurisdiction to
appoint a successor servicer that meets this criterion. However, the automatic
stay might delay a successor servicer's replacement of the servicer. Even if a
successor servicer may be appointed and may replace the servicer, a successor
may be difficult to obtain and may not be capable of performing all of the
duties that ACE as servicer was capable of performing. See "RISK FACTORS --
UNUSUAL NATURE OF BONDABLE TRANSITION PROPERTY AND SERVICING RISKS" in this
prospectus.
Other risks relating to bankruptcy may be found under "RISK FACTORS --
RISKS ASSOCIATED WITH POTENTIAL BANKRUPTCY PROCEEDINGS" in this prospectus.
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MATERIAL INCOME TAX MATTERS FOR THE TRANSITION BONDS
INCOME TAX STATUS OF THE TRANSITION BONDS
The issuer and ACE have received a private letter ruling from the Internal
Revenue Service, referred to as the IRS, to the effect that the transition bonds
will be classified as debt obligations of ACE. Based on that private letter
ruling and the assumptions contained therein, including a representation by ACE
that it will not make, or allow there to be made, any election to the contrary,
LeBoeuf, Lamb, Greene & MacRae, L.L.P., United States federal income tax counsel
to ACE and the issuer, has rendered its opinion that the issuer will not be
subject to United States federal income tax as an entity separate from ACE and
that the transition bonds will be debt obligations of ACE for U.S. federal
income tax purposes.
GENERAL
The following is a summary of the material United States federal income
tax consequences of the purchase, ownership and disposition of the transition
bonds applicable to an initial purchaser of transition bonds that, for U.S.
federal income tax purposes, is a Non-U.S. Holder as defined below, and also
summarizes the similar principal United States federal income tax consequences
to U.S. Holders, as defined below, who are initial purchasers. This summary has
been prepared by LeBoeuf, Lamb, Greene & MacRae, L.L.P., United States federal
income tax counsel to ACE and the issuer. Tax counsel is of the opinion that its
summary, as it relates to Non-U.S. Holders, is correct in all material respects.
Apart from that opinion and the opinion described in the preceding paragraph,
tax counsel will render no other opinions to the issuer with respect to the
transition bonds. This summary does not purport to furnish information in the
level of detail or with the attention to an investor's specific tax
circumstances that would be provided by an investor's tax adviser. This summary
also does not address the consequences to holders of the transition bonds under
state, local or foreign tax laws. This summary is based upon current provisions
of the Internal Revenue Code, Treasury Regulations promulgated thereunder,
current administrative rulings, judicial decisions and other applicable
authorities in effect as of the date hereof, all of which are subject to change,
possibly with retroactive effect. Legislative, judicial or administrative
changes may occur, perhaps with retroactive effect, which could affect the
accuracy of the statements and conclusions set forth herein as well as the tax
consequences to holders of the transition bonds.
IT IS RECOMMENDED THAT ALL PROSPECTIVE INVESTORS CONSULT THEIR TAX
ADVISERS REGARDING THE FEDERAL INCOME TAX CONSEQUENCES OF THE PURCHASE,
OWNERSHIP AND DISPOSITION OF TRANSITION BONDS IN LIGHT OF THEIR PARTICULAR
CIRCUMSTANCES, AS WELL AS THE EFFECT OF ANY FOREIGN, STATE, LOCAL OR OTHER LAWS.
As used herein, a U.S. Holder of a transition bond means an
investor that is a U.S. Person and a Non-U.S. Holder of a
transition bond means an investor that is not a U.S. Person. For
purposes of this discussion, a U.S. Person means:
1. an individual, who is a citizen or resident of the United States for
U.S. federal income tax purposes;
2. a corporation, partnership or other entity (treated as a corporation
or a partnership for federal income tax purposes) created or
organized in or under the laws of the United States, or any state or
the District of Columbia (other than a partnership that is not
treated as a U.S. person under any applicable Treasury Regulations);
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3. an estate, the net income of which is subject to United States
federal income taxation regardless of its source; or
4. a trust, if a court within the United States is able to exercise
primary supervision over the administration of each trust and one or
more United States persons have the authority to control all
substantial decisions of that trust. Certain trusts in existence on
or before August 20, 1996, that were treated as U.S. Persons under
the law in effect on such date that fail to qualify as U.S. Persons
under current law, may elect to continue to be treated as U.S.
Persons to the extent prescribed in the Treasury Regulations.
TAX CONSEQUENCES TO U.S. HOLDERS
Interest. Subject to the paragraph below, interest income on the
transition bonds, payable at a fixed rate or at a floating rate, will be
includible in income by a U.S. Holder when it is received, in the case of a U.S.
Holder using the cash receipts and disbursements method of tax accounting, or as
it accrues, in the case of a U.S. Holder using the accrual method of tax
accounting. ACE and the issuer expect that the transition bonds will not be
issued with original issue discount. If any series of transition bonds is in
fact issued with original issue discount, the prospectus supplement for such
series of transition bonds will address the tax consequences of the purchase of
transition bonds with original issue discount.
The preceding paragraph assumes that, in the case of any series or class
of floating rate transition bonds, such floating rate transition bonds will
qualify as "variable rate debt instruments" as defined in Treasury Regulation
section 1.1275-5(a) and that interest on such floating rate transition bonds
will be unconditionally payable, or will be constructively received under
section 451 of the Code, in cash or in property at least annually at a single
"qualified floating rate" or "objective rate." If such assumption is incorrect
with respect to a series or class of floating rate transition bonds, the
taxation of interest on such floating rate transition bonds will be addressed in
the related prospectus supplement.
Swap Transactions. In connection with the issuance of a class or more than
one class of floating rate transition bonds, the issuer may arrange for one or
more swap or hedge transactions. If the issuer enters into or arranges for any
hedge or swap transaction, the applicable prospectus supplement will include a
description of the U.S. federal income tax consequences to the issuer and the
transition bondholders.
Sale or Retirement of Transition Bonds. On a sale, exchange or retirement
of a transition bond, a U.S. Holder will have taxable gain or loss equal to the
difference between the amount received by the U.S. Holder and the U.S. Holder's
tax basis in the transition bond. A U.S. Holder's tax basis in its transition
bond is the U.S. Holder's cost, subject to adjustments. Gain or loss will
generally be capital gain or loss, and will be long-term capital gain or loss if
the transition bond was held for more than one year at the time of disposition.
If a U.S. Holder sells the transition bond between interest payment dates, a
portion of the amount received will reflect interest that has accrued on the
transition bond but that has not yet been paid by the sale date. To the extent
that amount has not already been included in the U.S. Holder's income, it is
treated as ordinary interest income and not as sale proceeds.
TAX CONSEQUENCES TO NON-U.S. HOLDERS
Withholding Taxation on Interest. Payments of interest income on the
transition bonds received by a Non-U.S. Holder that does not hold its transition
bonds in connection with the conduct of a trade or business in the United
States, will generally not be subject to United States federal withholding tax,
provided that the Non-U.S. Holder does not actually or constructively own 10% or
more of the total
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combined voting power of all classes of stock of ACE entitled to vote, is not a
controlled foreign corporation that is related to ACE through stock ownership
and ACE or its paying agent receives:
1. from a Non-U.S. Holder appropriate documentation to treat the
payment as made to a foreign beneficial owner under Treasury
Regulations issued under Section 1441 of the Code;
2. a withholding certificate from a person claiming to be a foreign
partnership and the foreign partnership has received appropriate
documentation to treat the payment as made to a foreign beneficial
owner in accordance with these Treasury Regulations;
3. a withholding certificate from a person representing to be a
"qualified intermediary" that has assumed primary withholding
responsibility under these Treasury Regulations and the qualified
intermediary has received appropriate documentation from a foreign
beneficial owner in accordance with its agreement with the IRS; or
4. a statement, under penalties of perjury from an authorized
representative of a Financial Institution, stating that the
Financial Institution has received from the beneficial owner a
withholding certificate described in these Treasury Regulations or
that it has received a similar statement from another Financial
Institution acting on behalf of the foreign beneficial owner.
In general, it will not be necessary for a Non-U.S. Holder to obtain or furnish
a United States taxpayer identification number to ACE or its paying agent in
order to claim any of the foregoing exemptions from United States withholding
tax on payments of interest. Interest paid to a Non-U.S. Holder will be subject
to a United States withholding tax of 30% upon the actual payment of interest
income, except as described above and except where an applicable tax treaty
provides for the reduction or elimination of this withholding tax. A Non-U.S.
Holder generally will be taxable in the same manner as a United States
corporation or resident with respect to interest income if the income is
effectively connected with the Non-U.S. Holder's conduct of a trade or business
in the United States. Effectively connected income received by a Non-U.S. Holder
that is a corporation may in some circumstances be subject to an additional
"branch profits tax" at a 30% rate, or if applicable, a lower rate provided by a
treaty.
Capital Gains Tax Issues. A Non-U.S. Holder generally will not be subject
to United States federal income or withholding tax on gain realized on the sale
or exchange of transition bonds, unless:
1. the Non-U.S. Holder is an individual who is present in the United
States for 183 days or more during the taxable year and this gain is
from United States sources; or
2. the gain is effectively connected with the conduct by the Non-U.S.
Holder of a trade or business in the United States and other
requirements are satisfied.
BACKUP WITHHOLDING
Backup withholding of United States federal income tax at a rate of 31%
may apply to payments made in respect of the transition bonds to registered
owners who are not "exempt recipients" and who fail to provide certain
identifying information (such as the registered owner's taxpayer identification
number) in the required manner. Generally, individuals are not exempt
recipients, whereas corporations and certain other entities generally are exempt
recipients. Payments made in respect of the transition bonds to a U.S. Holder
must be reported to the IRS, unless the U.S. Holder is an exempt recipient or
establishes an exemption. A U.S. Holder can obtain a complete exemption from the
back up withholding tax by filing
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Form W-9 (Payer's Request for Taxpayer Identification Number and Certification).
Compliance with the identification procedures described in the preceding section
entitled -- "Withholding Taxation on Interest" would establish an exemption from
backup withholding for those Non-U.S. Holders who are not exempt recipients.
In addition, upon the sale of a transition bond to (or through) a broker,
the broker must withhold 31% of the entire purchase price, unless either (1) the
broker determines that the seller is a corporation or other exempt recipient or
(2) the seller provides, in the required manner, certain identifying information
and, in the case of a Non-U.S. Holder, certifies that the seller is a Non-U.S.
Holder (and certain other conditions are met). The sale must also be reported by
the broker to the IRS, unless either (a) the broker determines that the seller
is an exempt recipient or (b) the seller certifies its non-U.S. status (and
certain other conditions are met). Certification of the registered owner's
non-U.S. status would be made normally on an IRS Form W-8BEN under penalties of
perjury, although in certain cases it may be possible to submit other
documentary evidence.
Any amounts withheld under the backup withholding rules from a payment to
a beneficial owner would be allowed as a refund or a credit against such
beneficial owner's United States federal income tax provided the required
information is furnished to the IRS.
MATERIAL STATE OF NEW JERSEY TAX MATTERS
In the opinion of [ ], special New Jersey tax counsel to ACE and the
issuer, interest from transition bonds received by a person who is not otherwise
subject to corporate or personal income tax in the State of New Jersey will not
be subject to these taxes. Neither the State of New Jersey nor any of its
political subdivisions presently impose intangible personal property taxes and
therefore New Jersey residents will not be subject to these taxes.
ERISA CONSIDERATIONS
ERISA and Section 4975 of the Internal Revenue Code impose restrictions
on:
1. employee benefit plans (as defined in Section 3(3) of ERISA) that
are subject to Title I of ERISA;
2. plans (as defined in Section 4975(e)(1) of the Internal Revenue
Code) that are subject to Section 4975 of the Internal Revenue Code,
including individual retirement accounts and Keogh plans;
3. any entities the underlying assets of which include plan assets by
reason of a plan's investment in such entities, each of the entities
described in 1, 2 and 3, being referred to as a "Plan"; and
4. persons who have specified relationships to Plans as "parties in
interest" under ERISA and/or "disqualified persons" under the
Internal Revenue Code which collectively are referred to as "Parties
in Interest."
Moreover, based on the reasoning of the United States Supreme Court in John
Hancock Mut. Life Ins. Co. v. Harris Trust and Sav. Bank, 510 U.S. 86 (1993), an
insurance company's general account may be deemed to include assets of the Plans
investing in the general account, such as through the purchase of an annuity
contract. ERISA also imposes specific duties on persons who are fiduciaries of
Plans subject to
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ERISA, and ERISA and Section 4975 of the Internal Revenue Code prohibit
specified transactions between a Plan and Parties in Interest with respect to
the Plan. Violations of these rules may result in the imposition of excise taxes
and other penalties and liabilities under ERISA and Section 4975 of the Internal
Revenue Code.
PLAN ASSET ISSUES FOR AN INVESTMENT IN THE TRANSITION BONDS
The Plan Asset Regulation is a regulation issued by the United States
Department of Labor that states that if a Plan makes an "equity" investment in a
corporation, partnership, trust or other specified entities, the underlying
assets and properties of the entity will be deemed for purposes of ERISA and
Section 4975 of the Internal Revenue Code to be assets of the investing Plan
unless an exception set forth in the Plan Asset Regulation applies. Pursuant to
the Plan Asset Regulation, an equity interest is any interest in an entity other
than an instrument that is treated as indebtedness under applicable law and
which has no substantial equity features. Although there is little statutory or
regulatory guidance on this subject, and there can be no assurances in this
regard, it appears that the transition bonds should not be treated as an equity
interest for purposes of the Plan Asset Regulation. Accordingly, the assets of
the issuer should not be treated as the assets of Plans investing in the
transition bonds.
PROHIBITED TRANSACTION EXEMPTIONS
It should be noted, however, that without regard to the treatment of the
transition bonds as equity interests under the Plan Asset Regulation, ACE and/or
its affiliates, as a provider of services to Plans, may be deemed to be Parties
in Interest with respect to those Plans. The purchase and holding of transition
bonds by or on behalf of one or more of such Plans could result in a prohibited
transaction within the meaning of Section 406 or 407 of ERISA or Section 4975 of
the Internal Revenue Code. However, the purchase and holding of transition bonds
may be subject to one or more statutory or administrative exemptions from the
prohibited transaction rules of ERISA and Section 4975 of the Internal Revenue
Code.
Examples of Prohibited Transaction Class Exemptions. Potentially
applicable prohibited transaction class exemptions, issued by the United States
Department of Labor, known as PTCE's, include the following:
1. PTCE 90-1, which exempts specific transactions involving insurance
company pooled separate accounts;
2. PTCE 95-60, which exempts specific transactions involving insurance
company general accounts;
3. PTCE 91-38, which exempts specific transactions involving bank
collective investment funds;
4. PTCE 84-14, which exempts specific transactions effected on behalf
of a Plan by a "qualified professional asset manager"; and
5. PTCE 96-23, which exempts specific transactions effected on behalf
of a Plan by specific "in-house" asset managers.
It should be noted, however, that even if the conditions specified in one
or more of the above PTCEs are met, the scope of relief provided by the PTCEs
may not necessarily cover all acts that might be construed as prohibited
transactions.
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PRIOR TO MAKING AN INVESTMENT IN THE TRANSITION BONDS OF ANY SERIES, A
PLAN INVESTOR MUST DETERMINE WHETHER, AND EACH FIDUCIARY CAUSING THE TRANSITION
BONDS TO BE PURCHASED BY, ON BEHALF OF OR USING PLAN ASSETS OF A PLAN THAT IS
SUBJECT TO THE PROHIBITED TRANSACTION RULES OF ERISA OR SECTION 4975 OF THE
INTERNAL REVENUE CODE, INCLUDING WITHOUT LIMITATION AN INSURANCE COMPANY GENERAL
ACCOUNT, SHALL BE DEEMED TO HAVE REPRESENTED AND WARRANTED THAT, AN EXEMPTION
FROM THE PROHIBITED TRANSACTION RULES APPLIES, SO THAT THE USE OF PLAN ASSETS OF
THE PLAN TO PURCHASE AND HOLD THE TRANSITION BONDS DOES NOT AND WILL NOT
CONSTITUTE OR OTHERWISE RESULT IN A NON-EXEMPT PROHIBITED TRANSACTION IN
VIOLATION OF SECTION 406 OR 407 OF ERISA OR SECTION 4975 OF THE INTERNAL REVENUE
CODE.
SPECIAL CONSIDERATIONS APPLICABLE TO INSURANCE COMPANY GENERAL ACCOUNTS
It should be noted that the Small Business Job Protection Act of 1996
added new Section 401(c) of ERISA which clarifies the application of ERISA and
Section 4975 of the Internal Revenue Code to the assets of insurance company
general accounts. Pursuant to Section 401(c) of ERISA, the Department of Labor
was required to issue regulations (known as the General Account Regulations)
with respect to insurance policies issued on or before December 31, 1998 that
are supported by an insurer's general account. The Department of Labor issued
final General Account Regulations on January 5, 2000. The General Account
Regulations provide guidance on which assets held by the insurer constitute
"plan assets" for purposes of the fiduciary responsibility provisions of ERISA
and Section 4975 of the Internal Revenue Code. The General Account Regulations
create a safe harbor under which insurance companies which meet certain
requirements are not deemed ERISA fiduciaries and the underlying assets of the
insurer's general account are not deemed plan assets. The General Account
Regulations only apply to policies issued on or before December 31, 1998. The
General Account Regulations do not exempt the assets of insurance company
general accounts from treatment as "plan assets" for policies issued after
December 31, 1998. Under Section 401(c) of ERISA and the final General Account
Regulations, no liability under the fiduciary responsibility and prohibited
transaction provisions of ERISA and Section 4975 of the Internal Revenue Code
may result on the basis of a claim that the assets of the general account of an
insurance company constitute the plan assets of any Plan for conduct which
occurs prior to July 5, 2001, the applicability date of the General Account
Regulations. This provision does not apply in cases of avoidance of the General
Account Regulations or actions brought by the Secretary of Labor relating to
particular breaches of fiduciary duties that also constitute breaches of state
or federal criminal law. The plan asset status of insurance company separate
accounts is unaffected by new Section 401(c) of ERISA, and separate account
assets continue to be treated as the plan assets of any Plan invested in a
separate account. The final General Account Regulations should not adversely
affect the applicability of PTCE 95-60 to purchases of transition bonds by
insurance company general accounts.
GENERAL INVESTMENT CONSIDERATIONS FOR PROSPECTIVE PLAN INVESTORS IN THE
TRANSITION BONDS
Prior to making an investment in the transition bonds, prospective Plan
investors should consult with their legal advisors concerning the impact of
ERISA and the Internal Revenue Code and the potential consequences of an
investment in the transition bonds with respect to their specific circumstances.
Moreover, each Plan fiduciary should take into account, among other
considerations:
1. whether the fiduciary has the authority to make the investment;
2. whether the investment constitutes a direct or indirect transaction
with a Party in Interest;
3. the composition of the Plan's portfolio with respect to
diversification by type of asset;
4. the Plan's funding objectives;
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5. the tax effects of the investment; and
6. whether under the general fiduciary standards of investment prudence
and diversification an investment in the transition bonds is
appropriate for the Plan, taking into account the overall investment
policy of the Plan and the composition of the Plan's investment
portfolio.
Governmental plans and some church plans are generally not subject to the
fiduciary responsibility provisions of ERISA or the provisions of Section 4975
of the Internal Revenue Code. However, these plans may be subject to
substantially similar rules under state or other federal law, and may also be
subject to the prohibited transaction rules of Section 503 of the Internal
Revenue Code.
The sale of transition bonds to a Plan shall not be deemed a
representation by ACE, the issuer or the underwriters that this investment meets
all relevant legal requirements with respect to Plans generally or any
particular Plan.
PLAN OF DISTRIBUTION
The transition bonds of each series may be sold to or through the
underwriters by a negotiated firm commitment underwriting and public reoffering
by the underwriters. The transition bonds may also be sold to or through 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 trustee intend that transition bonds will be offered through
various methods from time to time. The issuer also intends 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. There can be no
assurance that a secondary market for any series of transition bonds will
develop or, if one does develop, that it will continue.
Compensation to Underwriters. 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. Any discounts or commissions received
by the underwriters 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.
Other Distribution Issues. Under agreements which may be entered into by
ACE, the issuer and the trustee, underwriters and agents who participate in the
distribution of the transition bonds may be entitled to indemnification by ACE
and the issuer against liabilities specified therein, including under the
Securities Act. The underwriters may, from time to time, buy and sell the
transition bonds, but there can
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be no assurance that an active secondary market will develop and there is no
assurance that this market, if established will continue.
RATINGS
It is a condition to any underwriter's obligation to purchase the
transition bonds that each series or class receive the ratings indicated in the
related prospectus supplement.
Limitations of Security Ratings. 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 series or 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 series or class of transition bonds is revised or
withdrawn, the liquidity of this 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 transition bonds by
the applicable final date for such series or class and the ability to make
timely interest payments.
LEGAL MATTERS
Some legal matters relating to the issuer and the issuance of the
transition bonds will be passed upon for the issuer by LeBoeuf, Lamb, Greene &
MacRae, L.L.P., a limited liability partnership including professional
corporations, New York, New York and for the underwriters by Latham & Watkins,
New York, New York. Some legal matters relating to ACE will be passed upon for
ACE by ____________. Some legal matters relating to the federal tax consequences
of the issuance of the transition bonds will be passed upon for the issuer by
LeBoeuf, Lamb, Greene & MacRae, L.L.P. Some legal matters relating to State of
New Jersey tax consequences of the issuance of the transition bonds will be
passed upon for the issuer by ______________. Some legal matters relating to
Atlantic City Electric Transition Funding LLC will be passed upon by
________________.
EXPERTS
The balance sheet of the issuer as of __________, 2000 included in this
prospectus has been audited by ____________________________, independent public
accountants, as stated in their report included in this prospectus.
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GLOSSARY OF DEFINED TERMS
Set forth below is a glossary of defined terms used in this prospectus.
"ACE" means Atlantic City Electric Company.
"adjustment request" means each request filed by the servicer with the BPU
for adjustments to the transition bond charge based on actual collections of the
transition bond charge and updated assumptions by the servicer as to the
projected future usage of electricity by customers on which transition bond
charges are assessed, expected delinquencies and write-offs and future payments
and expenses relating to the bondable transition property and the transition
bonds.
"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 the indenture, the administration agreement, sale
agreement, servicing agreement, any bills of sale for the bondable transition
property arising under the BPU financing order, the issuer's limited liability
company agreement or the certificate of formation filed with the Secretary of
State of the State of Delaware to establish the issuer.
"bondable stranded costs rate order" means an order issued by the BPU
pursuant to the Competition Act which creates bondable transition property, such
as a BPU financing order.
"bondable transition property" means the right, created pursuant to the
Competition Act and the BPU Financing Order, to collect transition bond charges,
to pay other expenses specified in the indenture and to fund the trust accounts.
"BPU" means the New Jersey Board of Public Utilities.
"BPU Financing Order" means the financing order issued by
the BPU to ACE on __________.
"business day" means any day other than a Saturday or Sunday or a day on
which banking institutions in New York, New York are required or authorized by
law or executive order to close.
"capital subaccount" for a series means a subaccount of the collection
account in which the amount of capital required to be held by the issuer for
that series of transition bonds will be deposited by the issuer on the date of
issuance of that series.
"Clearstream" means Clearstream Bank, societe anonyme.
"collection account" means the single collection account for all series of
transition bonds established by the issuer and held by the trustee under the
indenture.
"collections curve" means an annually prepared forecast, prepared by the
servicer, of the percentages of amounts billed in each calendar month that are
expected to be received during that month and each of the following six months.
"collections curve payment" means the sum of the amounts paid to the
trustee over the seven month period following a particular month based on the
collections curves for that month.
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"Competition Act" means the New Jersey Electric Discount and Energy
Competition Act, enacted in February 1999.
"customer" means an end user of electricity that is connected to any part
of ACE's transmission and distribution system and located within ACE's service
territory.
"defeasance subaccount" means a subaccount of the collection account which
will be established in the event that funds are remitted to the trustee in
connection with the exercise of the legal defeasance option or the covenant
defeasance option, as described under "THE INDENTURE -- LEGAL DEFEASANCE AND
COVENANT DEFEASANCE."
"DTC" means The Depository Trust Company.
"Euroclear" means the Euroclear System.
"expected amortization schedule" means, with respect to any series or
class of transition bonds, the expected amortization schedule for the principal
balance for that series or class, as set forth in the related prospectus
supplement.
"event of default" means an event of default under the indenture,
including the events of default described under "THE INDENTURE -- EVENTS OF
DEFAULT."
"final restructuring order" means the order issued by the BPU on [ ]
providing for the restructuring of ACE under the Competition Act.
"general subaccount" means a subaccount of the collection account into
which funds received from collections, any indemnity amounts remitted by the
servicer to the trustee and investment earnings will initially be deposited.
"Internal Revenue Code" means the Internal Revenue Code of 1986, as the
same may be amended, modified, or supplemented from time to time.
"issuer" means Atlantic City Electric Transition Funding
LLC.
"overcollateralization subaccount" for a series means a subaccount of the
collection account into which the overcollateralization amount for that series
will be deposited over the expected life of a series of transition bonds.
"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 the servicer, the trustee and
the issuer that the 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.
"reconciliation date" means the fifteenth day of each month (or if that
day is not a business day, the next succeeding business day) commencing with the
eighth month after transition bond charges are first billed to customers, on
which date the servicer will reconcile the actual transition bond charge
collections to the collections curve payments previously made to the trustee for
the month that is seven months prior to the month in which the reconciliation
date occurs.
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"remittance date" means the date each month when the servicer makes
remittances on account of the transition bond charges to the trustee.
"reserve subaccount" for a series means a subaccount of the collection
account into which will be deposited the excess, if any, of collections of
transition bond charges allocated to a particular series of transition bonds as
described under clause 12 in "THE INDENTURE -- ALLOCATIONS AND PAYMENTS;
PRIORITY OF DISTRIBUTIONS."
"series subaccount" means a subaccount of the collection account,
established upon each issuance of a new series of transition bonds.
"servicer default" means a default of the servicer under the servicing
agreement, including the defaults described under "THE SERVICING AGREEMENT --
SERVICER DEFAULTS."
"stranded costs" means the costs of investments in electricity generation
assets and other obligations that cannot be recovered through market-based
energy supply rates in a competitive electricity generation market.
"third party suppliers" means suppliers of electric power to ACE's
customers, other than ACE.
"transition bond charge" means an irrevocable nonbypassable charge that is
assessed on a public electric utility's electric customers within its service
territory who use its transmission and distribution system.
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INDEX TO FINANCIAL STATEMENTS OF ATLANTIC CITY ELECTRIC TRANSITION FUNDING LLC
Page
----
Report of Independent Accountants.......................................... F-2
Statement of Net Assets Available for Issuer Activities.............. F-3
Statement of Changes in Net Assets Available for Issuer Activities... F-4
Notes to Financial Statements.............................................. F-5
F-1
147
REPORT OF INDEPENDENT ACCOUNTANTS
To the Owners
of Atlantic City Electric Transition Funding LLC
In our opinion, the accompanying statement of net assets available for
issuer activities of Atlantic City Electric Transition Funding LLC and related
statements of changes in net assets available for issuer activities present, in
all material respects, net asset available for issuer activity of Atlantic City
Electric Transition Funding LLC at __________, ____ and the changes in its net
assets available for issuer activities for the period from (date of inception)
through (date) in conformity with generally accepted accounting principles.
These financial statements are the responsibility of Atlantic City Electric
Transition Funding LLC's management; our responsibility is to express an opinion
on these financial statements based on our audit. We conducted our audit of
these statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for the opinion expressed above.
F-2
148
_________________________
______ ________________,______
Atlantic City Electric Transition Funding LLC
Statement of Net Assets Available for Issuer Activities as of
________________,______
ASSETS
Cash $
Unamortized debt issuance costs $
-----------------
Total Assets $
Due to related party (Note ____) $
-----------------
Net Assets available for issuer activities $
=================
See accompanying notes to financial statements.
F-3
149
ATLANTIC CITY ELECTRIC TRANSITION FUNDING LLC
Statement of Changes in net assets available for issuer activities for the
period from _________, ____ (date of inception) to __________, ____
Additions:
Contribution by Grantor $
Deductions:
Changes in Net Assets Available for Activities $
Net Assets Available for Activities at Inception ______, ____ $
-----------
Net Assets Available for Activities at _______, ____ $
===========
See accompanying notes to financial statements.
F-4
150
ATLANTIC CITY ELECTRIC TRANSITION FUNDING LLC
Notes to Financial Statements
1. Nature of Operations
Atlantic City Electric Transition Funding LLC (the "Company"), a limited
liability company established by ACE under the laws of the State of Delaware,
was formed on [ ], ____ pursuant to a limited liability company agreement of
ACE, as sole member of the Company. ACE is an operating electric and gas utility
and is a wholly owned subsidiary of Conectiv.
The Company was organized for the sole purpose of purchasing and owning
the bondable transition property (B.P.), issuing transition bonds (Bonds),
pledging its interest in B.P. and other collateral to the trustee to
collateralize the Bonds, and performing activities that are necessary, suitable
or convenient to accomplish these purposes. B.P. represents the irrevocable
right of ACE, or its successor or assignee, to collect a nonbypassable
transition bond charge (TBC) from customers pursuant to bondable stranded costs
rate orders (BPU financing order) issued _______, ____ and ________, ____ by the
State of New Jersey Board of Public Utilities (BPU) in accordance with the
Electric Discount and Energy Competition Act enacted in New Jersey in February
1999. The BPU financing order authorize the TBC to be sufficient to recover
[$_____] aggregate principal amount of Bonds, plus an amount sufficient to
provide for any credit enhancement, to fund any reserves and to pay interest,
redemption premiums, if any, servicing fees and other expenses relating to the
Bonds. The Company's organizational documents require it to operate in a manner
so that it should not be consolidated in the bankruptcy estate of ACE in the
event ACE becomes subject to a bankruptcy proceeding. Both ACE and the Company
will treat the transfer of B.P. to the Company as a sale under applicable law.
The Bonds will be treated as debt obligations of the Company.
For financial reporting and federal and State of New Jersey income and
franchise tax purposes, the transfer of B.P. to the Company will be treated as a
financing arrangement and not as a sale. Furthermore, the results of operations
of the Company will be consolidated with ACE for financial and income tax
reporting purposes.
2. Significant Accounting Policies
BASIS OF PRESENTATION
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions. These estimates and assumptions affect the reported amount of
revenues, expenses, assets, and liabilities and disclosure of contingencies.
Actual results could differ from these estimates.
CASH AND CASH EQUIVALENTS
The Company considers all liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents.
UNAMORTIZED DEBT ISSUANCE COSTS
The costs associated with the anticipated issuance of the Bonds have been
capitalized and will be amortized over the life of the Bonds utilizing the
effective interest method.
F-5
151
INCOME TAXES
The Company is a wholly owned subsidiary of ACE which has elected not to
be taxed as a corporation for federal income tax purposes. The Company will be
treated as a division of ACE and will not be treated as a separate taxable
entity.
3. The Bonds
The purpose of the Company is to issue Bonds pursuant to authority granted
by the BPU in the BPU financing order. The Company intends to issue Bonds in
series (Series) from time to time, the maturities and interest rates of which
will depend upon market conditions at the time of issuance. The proceeds will be
used to fund the purchase of B.P. from ACE. The Bonds will be collateralized by
the B.P. and other assets of the Company. Under applicable law, the Bonds will
not be an obligation of ACE or secured by the assets of ACE. Also under
applicable law, the Bonds will be recourse to the Company and will be
collateralized on a pro rata basis by the B.P. and the equity and assets of the
Company. The source of repayment will be the TBC authorized pursuant to BPU
financing order, which charges will be collected from ACE customers by ACE, as
servicer.
TBC collections will be deposited monthly by ACE with the Company and used
to pay the expenses of the Company, to pay debt service on the Bonds and to fund
credit enhancement for the Bonds. The Company will also pledge the capital
contributed by ACE to secure the debt service requirements of the Bonds. The
debt service requirements will include an overcollateralization subaccount, a
capital subaccount and a reserve subaccount which will be available to bond
holders. Any amounts collateralizing the Bonds will be returned to the Company
upon payment of the Bonds.
4. Significant Agreements and Related Party Transactions
Under the servicing agreement to be entered into by the Company and ACE
concurrently with the issuance of the first Series of Bonds, ACE, as servicer,
will be required to manage and administer the B.P. of the Company and to collect
the TBC on behalf of the Company. The Company will pay an annual servicing fee
equal to [$ ], which will be determined when the Bonds are issued.
All debt issuance costs incurred to date have been or will be paid by ACE
and reimbursed by the Company upon issuance of the Bonds.
F-6
152
================================================================================
The date of this prospectus supplement is ____________, 2001.
Dealers will deliver a prospectus supplement and prospectus when acting as
underwriters of theses 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 90 days after the date of this
prospectus supplement.
================================================================================
153
PART II
ITEM 14. Other Expenses of Issuance and Distribution
The following is an itemized list of the estimated expenses to be incurred
in connection with the offering of the securities being offered hereunder other
than underwriting discounts and commissions.
Registration Fee $ 250
-------
Printing and Engraving Expenses $ *
-------
Trustee's Fees and Expenses $ *
-------
Legal Fees and Expenses $ *
-------
Blue Sky Fees and Expenses $ *
-------
Accountants' Fees and Expenses $ *
-------
Rating Agency Fees $ *
-------
Miscellaneous Fees and Expenses $ *
-------
Total $ *
=======
- ------------
* To be provided by amendment.
ITEM 15. Indemnification of Members and Managers.
Section 18-108 of the Delaware Limited Liability Company Act provides
that, subject to specified standards and restrictions, if any, as are set forth
in the limited liability company agreement, a limited liability company shall
have the power to indemnify and hold harmless any member or manager or other
person from and against any and all claims and demands whatsoever.
The limited liability company agreement (the "LLC Agreement") of Atlantic
City Electric Transition Funding LLC provides that, to the fullest extent
permitted by law, Atlantic City Electric Transition Funding LLC shall indemnify
its members and managers against any liability incurred in connection with any
proceeding in which any member or manager may be involved as a party or
otherwise by reason of the fact that the member or manager is or was serving in
its capacity as a member or manager, unless this liability is based on or arises
in connection with the member's or manager's own willful misconduct or gross
negligence, the failure to perform the obligations set forth in the LLC
Agreement, or taxes, fees or other charges on, based on or measured by any fees,
commissions or compensation received by the managers in connection with any of
the transactions contemplated by the LLC Agreement and related agreements.
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ITEM 16. Exhibits
Exhibit No. Description
1.1 Form of Underwriting Agreement.*
4.1 Limited Liability Company Agreement of Atlantic City Electric
Transition Funding LLC.*
4.2 Certificate of Formation of Atlantic City Electric Transition
Funding LLC.*
4.3 Form of Indenture.*
4.4 Form of Transition Bonds.*
5.1 Opinion of LeBoeuf, Lamb, Greene & MacRae, L.L.P., relating to
Legality of the Transition Bonds.*
8.1 Opinion of LeBoeuf, Lamb, Greene & MacRae, L.L.P. with Respect
to Material Federal Tax Matters.*
8.2 Opinion of [ ] with respect to material State of New Jersey
tax matters.*
10.1 Form of Sale Agreement.*
10.2 Form of Servicing Agreement.*
10.3 Petition of ACE to the New Jersey Board of Public Utilities,
dated ________.*
10.4 Financing Order of the BPU issued _________.*
23.1.1 Consent of LeBoeuf, Lamb, Greene & MacRae, L.L.P. (included in
its opinion filed as Exhibits 5.1 and 8.1).*
23.1.2 Consent of [ ] (Included in its opinion filed as Exhibit
8.2).*
23.2 Consent of ________________.*
24.1 Power of Attorney.*
25.1 Statement of Eligibility under the Trust Indenture Act of 1939, as
amended, of [ ], as Trustee under the Indenture.*
27.1 Financial Data Schedule.*
99.1 Final Recovery Order of the BPU issued _____________.*
99.2 Internal Revenue Service Private Letter Ruling pertaining to
Transition Bonds.*
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* To be filed by amendment
ITEM 17. Undertakings
The undersigned Registrant on behalf of Atlantic City Electric Transition
Funding LLC (the "Issuer") hereby undertakes as follows:
a. (1) to file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement: (i) to include
any prospectus required by Section 10(a)(3) of the Securities Act of 1933, as
amended; (ii) to reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent post-effective
amendment thereof) which, individually or in the aggregate, represent a
fundamental change in the information set forth in the registration statement.
Notwithstanding the foregoing, any increase or decrease in volume of securities
offered (if the total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) of the Securities Act of 1933,
as amended, if, in the aggregate, the changes in volume and price represent no
more than a twenty percent change in the maximum aggregate offering price set
forth in the "Calculation of Registration Fee" Table in the effective
registration statement; and (iii) to include any material information with
respect to the plan of distribution not previously disclosed in the registration
statement or any material change in this
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information in the registration statement; provided, however, that (a)(1)(i) and
(a)(i)(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 relevant post-effective amendment shall
be deemed to be a new registration statement relating to the securities offered
therein, and the offering of these 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 an 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 these 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 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 this indemnification is against public
policy as expressed in the Act and is, theretofore, unenforceable. In the event
that a claim for indemnification against these liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer of
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by the 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
this indemnification by it is against public policy as expressed in the
Securities Act of 1933 and will be governed by the final adjudication of this
issue.
d. That, for purposes of determining any liability under the Securities
Act of 1933, as amended, the information omitted from the form of prospectus
filed as part of this registration statement in reliance upon 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 these securities at that
time shall be deemed to be the initial bona fide offering thereof.
f. The undersigned registrant hereby undertakes to file an application
for the purpose of determining the eligibility of the trustee to act under
subsection (a) of Section 310 of the Trust Indenture Act of 1939, as amended, in
accordance with the rules and regulations prescribed by the Commission under
Section 305(b)(2) of the Trust Indenture Act of 1939, as amended.
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
the Registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form S-3 and that the security rating
requirement of Form S-3 will be met by the time of sale, and has duly caused
this registration statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of ______, State of New Jersey, on
___________.
Atlantic City Electric
Transition Funding LLC
By: _______________________________
Name:
Title:
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
Date: By: _______________________________
Name:
Title:
Date: By: _______________________________
Name:
Title:
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INDEX TO EXHIBITS
Exhibit No. Description
1.1 Form of Underwriting Agreement.*
4.1 Limited Liability Company Agreement of Atlantic City Electric
Transition Funding LLC.*
4.2 Certificate of Formation of Atlantic City Electric Transition
Funding LLC.*
4.3 Form of Indenture.*
4.4 Form of Transition Bonds.*
5.1 Opinion of LeBoeuf, Lamb, Greene & MacRae, L.L.P., relating to
Legality of the Transition Bonds.*
8.1 Opinion of LeBoeuf, Lamb, Greene & MacRae, L.L.P. with Respect
to Material Federal Tax Matters.*
8.2 Opinion of [ ] with respect to material State of New Jersey
tax matters.*
10.1 Form of Sale Agreement.*
10.2 Form of Servicing Agreement.*
10.3 Petition of ACE to the New Jersey Board of Public Utilities,
dated ________.*
10.4 Financing Order of the BPU issued _________.*
23.1.1 Consent of LeBoeuf, Lamb, Greene & MacRae, L.L.P. (included in
its opinion filed as Exhibits 5.1 and 8.1).*
23.1.2 Consent of [ ] (Included in its opinion filed as Exhibit
8.2).*
23.2 Consent of ________________.*
24.1 Power of Attorney.*
25.1 Statement of Eligibility under the Trust Indenture Act of 1939, as
amended, of [ ], as Trustee under the Indenture.*
27.1 Financial Data Schedule.*
99.1 Final Recovery Order of the BPU issued _____________.*
99.2 Internal Revenue Service Private Letter Ruling pertaining to
Transition Bonds.*
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* To be filed by amendment