AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 15, 2002
REGISTRATION NO. 333- 59558
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 2 TO
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
P.O. BOX 15597
WILMINGTON, DELAWARE 19850-5597
(302) 429-3902
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
WILLIAM T. TORGERSON, ESQ.
EXECUTIVE VICE PRESIDENT AND GENERAL COUNSEL
PEPCO HOLDINGS, INC.
701 NINTH STREET NW
WASHINGTON, D.C. 20068
(202) 872-2590
(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(2)
--------------------------- ------------- ----------- -------- ------
Transition Bonds Issuable in
Series $2,000,000,000 100% $2,000,000,000 $183,750
(1) Estimated solely for the purpose of calculating the registration fee.
(2) Atlantic City Electric Transition Funding LLC filed a registration
statement on April 26, 2001, Form S-3 (File No. 333-59558), covering $1,000,000
of Transition Bonds Issuable in Series and paid a filing fee of $250 at the time
of the filing of such registration statement. Pursuant to Rule 457(p) under the
Securities Act, the Registrant has offset the $184,000 registration fee due
herewith with the total amount of the fee paid on April 26, 2001 covering the
aforementioned unissued securities.
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 , 2002
----------
PROSPECTUS SUPPLEMENT
To Prospectus Dated , 2002.
----------------
ATLANTIC CITY ELECTRIC TRANSITION FUNDING LLC
ISSUER OF THE TRANSITION BONDS
$
--------
TRANSITION BONDS, SERIES 2002-1
ATLANTIC CITY ELECTRIC COMPANY
SELLER AND SERVICER
INITIAL EXPECTED FINAL
PRINCIPAL INTEREST PRICE TO UNDERWRITING NET FINAL MATURITY
AMOUNT RATE PUBLIC DISCOUNTS PROCEEDS PAYMENT DATE DATE
------ ---- ------ --------- -------- ------------ ----
Class A-1 $ % $ % $
Class A-2 $ % $ % $
Class A-3 $ % $ % $
Class A-4 $ % $ % $
The total price to the public is $ . The total amount of the
---------
underwriting discounts and other fees is $ . The total amount of
---------
proceeds before deduction of expenses (estimated to be $ ) is
---------
$---------.
CONSIDER CAREFULLY [THE RISK FACTORS RELATING TO THE SERIES 2002-1 FLOATING RATE
TRANSITION BONDS BEGINNING ON PAGE S-26 OF THIS PROSPECTUS SUPPLEMENT AND] THE
RISK FACTORS BEGINNING ON PAGE 19 OF THE ACCOMPANYING PROSPECTUS BEFORE BUYING
THE TRANSITION BONDS.
THE SERIES 2002-1 TRANSITION BONDS ARE HIGHLY STRUCTURED. THERE CURRENTLY IS NO
SECONDARY MARKET FOR THE TRANSITION BONDS, AND THERE IS NO ASSURANCE THAT ONE
WILL DEVELOP.
The assets of the issuer consist principally of the bondable transition
property, which represents the irrevocable right to receive amounts sufficient
to recover a portion of Atlantic City Electric Company's bondable transition
costs, including the principal of and interest on the series 2002-1 transition
bonds and the expenses associated with the transition bonds. These amounts are
to be recovered through a nonbypassable transition bond charge, approved by the
New Jersey Board Public Utilities, payable by all of Atlantic City Electric
Company's customers and/or the customers of any electric distribution company
that succeeds to all or a significant part of the electric distribution business
of Atlantic City Electric Company within its present service territory, as
described further in this prospectus supplement and the accompanying prospectus.
The transition bonds represent obligations only of Atlantic City Electric
Transition Funding LLC, which is the issuer, and are backed only by the assets
of the issuer. The transition bonds do not represent obligations of Atlantic
City Electric Company or of any agency or instrumentality of the State of New
Jersey.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR PASSED ON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS SUPPLEMENT OR THE ACCOMPANYING
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
MORGAN STANLEY
BANC OF AMERICA SECURITIES
BANC ONE CAPITAL MARKETS, INC.
CREDIT SUISSE FIRST BOSTON
PNC CAPITAL MARKETS, INC.
WACHOVIA SECURITIES
The date of this prospectus supplement is ____________, 2002
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
Page
----
WHERE TO FIND INFORMATION IN THESE DOCUMENTS.............................................................. 5
SUMMARY OF TERMS.......................................................................................... 6
Securities Offered............................................................................... 6
Introduction..................................................................................... 7
The Collateral................................................................................... 9
Interest......................................................................................... 9
Principal........................................................................................ 10
Credit Enhancement............................................................................... 10
Optional Redemption.............................................................................. 10
Transition Bond Charge Adjustment Process........................................................ 10
Tax Status....................................................................................... 11
ERISA Considerations............................................................................. 11
Servicer's and Issuer's Mailing Address and Telephone Number of Principal Executive Office....... 11
RISK FACTORS.............................................................................................. 12
THE SERIES 2002-1 BONDS................................................................................... 12
General.......................................................................................... 12
Allocations and Payments; Priority of Distributions.............................................. 12
Interest Payments [Generally].................................................................... 14
Principal Payments............................................................................... 15
Optional Redemption.............................................................................. 18
Distribution Following Acceleration.............................................................. 18
[Interest Payments on Floating Rate Transition Bonds............................................. 18
Floating Rate Interest Determination............................................................. 19
Interest Rate Swap Agreements.................................................................... 20
Swap Counterparty................................................................................ 26
RISK FACTORS RELATING TO THE SERIES 2002-1 FLOATING RATE TRANSITION BONDS................................. 26
Termination of Swap Could Cause a Loss........................................................... 26
Ratings Downgrade of Any Floating Rate Class of Transition Bonds Could Cause a Loss for
Holders of Those Transition Bonds.............................................................. 26
Interest Payments on Series 2002-1 Bonds at Floating Rates Are Dependent on Swap Counterparties. 27]
CREDIT ENHANCEMENT........................................................................................ 27
Periodic Adjustment of the Transition Bond Charge................................................ 27
Collection Account and Subaccounts............................................................... 28
Issuance of Additional Series.................................................................... 32
REPORTS TO HOLDERS OF SERIES 2002-1 BONDS................................................................. 32
THE TRANSITION BOND CHARGES............................................................................... 33
DESCRIPTION OF ACE'S BUSINESS............................................................................. 33
SERVICING................................................................................................. 34
Servicing Fee.................................................................................... 34
Servicer Advances................................................................................ 34
UNDERWRITING THE SERIES 2002-1 BONDS...................................................................... 34
The Underwriters' Sales Price for the Series 2002-1 Bonds........................................ 34
No Assurance as to Resale Price or Resale Liquidity for the Series 2002-1 Bonds.................. 35
Various Types of Underwriter Transactions That May Affect the Price of the Series 2002-1 Bonds... 35
[MATERIAL INCOME TAX MATTERS FOR U.S. HOLDERS OF SERIES 2002-1 FLOATING RATE BONDS........................ 36
Payments of Interest............................................................................. 36
Potential Alternative Tax Characterizations of the Series 2002-1 Floating Rate Bonds............. 37]
RATINGS FOR THE SERIES 2002-1 BONDS....................................................................... 38
[LISTING AND GENERAL INFORMATION RELATED TO FLOATING RATE CLASSES......................................... 38]
S-4
WHERE TO FIND INFORMATION IN THESE DOCUMENTS
We provide information to you about the transition bonds in two
separate documents that progressively provide more detail:
(a) the accompanying prospectus, which provides general information, some
of which may not apply to your series of transition bonds; and
(b) this prospectus supplement, which describes the specific terms of your
series of transition bonds.
This prospectus supplement and the accompanying prospectus together
contain complete information about the offering of your series of transition
bonds. You are urged to read both documents. In particular, you should read the
information under the heading "RISK FACTORS," beginning on page 19 of the
accompanying prospectus [and, with respect to floating rate classes of this
series, "RISK FACTORS RELATING TO THE SERIES 2002-1 FLOATING RATE TRANSITION
BONDS," beginning on page 26 of this prospectus supplement].
This supplement begins with several sections describing these
securities:
- "SUMMARY OF TERMS" provides important amounts, dates and other
terms of your series;
- "THE SERIES 2002-1 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.
S-5
SUMMARY OF TERMS
The following section is only a summary of selected information and
does not provide you with all the information you will need to make your
investment decision. There is more detailed information in this prospectus
supplement and in the accompanying prospectus. To understand all of the terms of
the offering of the transition bonds, carefully read this entire document and
the accompanying prospectus.
SECURITIES OFFERED
THE SERIES 2002-1 TRANSITION BONDS
$
-----
ISSUER: ATLANTIC CITY ELECTRIC TRANSITION FUNDING LLC
SELLER AND SERVICER: ATLANTIC CITY ELECTRIC COMPANY
TRUSTEE: THE BANK OF NEW YORK
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 as
Outstanding Series: 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 0.10% 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
successor servicer may be paid an
annual servicing fee of up to 1.25% of
the initial principal balance of all
series of 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
S-6
Credit Enhancement for Transition bond charge adjustments;
the Series 2002-1 Bonds: overcollateralization, funded over the life of the
Series 2002-1 Bonds and expected to reach 0.5% of
the initial principal balance of the Series
2002-1 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 2002-1
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 2002-1 Bond.
However, the final payment on your Series
2002-1 Bond may be made after that date, and
your Series 2002-1 Bond will not be in
default unless it is not paid in full by its
final maturity date.
Optional Redemption: All Series 2002-1 Bonds are subject to
optional redemption in whole on any payment
date if the outstanding principal balance of
the Series 2002-1 Bonds has been reduced to
less than 5% of the initial principal
balance [, provided that no interest rate
swap agreement with respect to the Series
2002-1 Bonds remains in effect].
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
--------- --------- --------- ---------
ISIN Numbers
Common Code Numbers
CUSIP Numbers
INTRODUCTION
The New Jersey Electric Discount and Energy Competition Act, referred
to as the Competition Act, was enacted in February 1999 and amended in September
2002. 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 Public Utilities, referred to as the BPU. A customer is an end
S-7
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 anticipated
losses in the 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 those
contracts. These losses in value and other 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. In addition, by
amendment adopted in September 2002, the Competition Act authorizes a utility to
securitize what are referred to as basic generation service transition costs.
Basic generation service is electric generation service provided pursuant to the
Competition Act to customers who have not chosen a third party to supply them
with electric power, referred to as a third-party supplier. Basic generation
service transition costs are the amount by which a utility's payments to procure
power for basic generation service and related ancillary and administrative
costs from August 1, 1999 to July 31, 2003 exceeds net revenues from the charge
for that service established by the BPU. ACE may in the future seek
authorization to issue, through the issuer pursuant to the indenture governing
the Series 2002-1 Bonds, transition bonds in respect of basic generation service
transition costs.
Under the Competition Act, 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 or to recover basic
generation service transition costs 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 buy down or buy out that
power purchase agreement. The last of the power purchase agreements that will be
bought out or bought down using proceeds of the Series 2002-1 Bonds is scheduled
to expire on February 1, 2022.
Bondable transition property was created in favor of ACE by a bondable
stranded costs rate order issued by the BPU to ACE on September 20, 2002. This
order, any subsequent orders issued from time to time by the BPU to ACE
providing for the issuance of transition bonds and identified in this and other
supplements to the accompanying prospectus, and any orders supplemental to any
of the foregoing are collectively referred to as the BPU financing order. 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
S-8
- 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:
THE COLLATERAL
The Series 2002-1 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 2002-1 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 2002-1 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 2002-1 Bonds [other than floating
rate classes] will be calculated on the basis of a 360-day year of twelve 30-day
months. [Interest on floating rate classes will be calculated on the basis of
actual number of days divided by 360.] With respect to the first payment date,
interest will accrue from the issuance date.
You should also review the material under "THE SERIES 2002-1 BONDS --
INTEREST PAYMENTS" [GENERALLY] [AND "
-----
S-9
INTEREST PAYMENTS ON FLOATING RATE TRANSITION BONDS"] 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 2002-1 BONDS -- PRINCIPAL PAYMENTS" in this
prospectus supplement. The actual amount of principal paid on any payment date
on your Series 2002-1 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 2002-1 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 2002-1 Bond. The overcollateralization for these
securities will be funded over the life of the Series 2002-1 Bonds and is
expected to reach 0.5% of the initial principal balance of this series of
transition bonds. See Table 2 in this prospectus supplement.
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 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 2002-1 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 2002-1 Bonds may be redeemed in whole on any payment date if
the outstanding principal amount of the Series 2002-1 Bonds has been reduced to
less than 5% of the initial principal amount[, provided that no interest rate
swap agreement with respect to the Series 2002-1 Bonds remains in effect].
You should also review the material under "THE SERIES 2002-1 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 2002-1 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, by filing an adjustment request
with the BPU, which will become effective 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). These adjustments will continue until the
principal of, and interest and premium, if any, on, all classes of Series 2002-1
Bonds have been paid in full.
S-10
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 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 withholding taxes on interest
received on the transition bonds, provided proper certification as to non-United
States beneficial ownership is provided.
Holders of each class of Series 2002-1 Bonds agree to treat the Series
2002-1 Bonds as debt of ACE for United States federal, state and local tax
purposes.
For further information regarding the application of U.S. federal
income tax laws, you should see ["MATERIAL INCOME TAX MATTERS FOR U.S. HOLDERS
OF SERIES 2002-1 FLOATING RATE BONDS" in this prospectus supplement and]
"MATERIAL INCOME TAX MATTERS FOR THE TRANSITION BONDS" in the accompanying
prospectus.
In addition, in the opinion of LeBoeuf, Lamb, Greene & MacRae, L.L.P.,
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 2002-1 Bonds. See
"MATERIAL INCOME TAX MATTERS FOR THE TRANSITION BONDS -- MATERIAL STATE OF NEW
JERSEY TAX MATTERS" in the accompanying prospectus.
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 P.O. Box 15597,
Wilmington, Delaware 19850-5597, and its telephone number is (302) 429-3902.
S-11
RISK FACTORS
For a discussion of the material risks associated with an investment in
the Series 2002-1 Bonds, you should review the discussion under "RISK FACTORS,"
which begins on page 19 of the accompanying prospectus. [For a discussion of the
material risks associated with an investment in the Series 2002-1 Bonds paying
interest at a floating rate, you should review the discussion under "RISK
FACTORS RELATING TO THE SERIES 2002-1 FLOATING RATE BONDS," which begins on page
26 of this prospectus supplement.]
THE SERIES 2002-1 BONDS
GENERAL
The Series 2002-1 Bonds will be issued under and secured pursuant to a
base indenture to be dated as of _________, 2002 between the issuer and The Bank
of New York, as trustee, as supplemented by the Series 2002-1 supplement to that
base indenture. The Series 2002-1 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 2002-1
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 120 of the accompanying prospectus.
The issuer will pay interest and principal relating to the Series
2002-1 Bonds through DTC, or, if the Series 2002-1 Bonds are no longer in
book-entry form, at the offices of the trustee at 101 Barclay Street, Floor 8
West, New York, NY 10286, Attention: Asset Backed Securities. The issuer will
make payments by wire transfer in immediately available funds to the account
designated by DTC or its nominee if the Series 2002-1 Bonds are in book-entry
form. Otherwise, the issuer will make payments by check mailed first-class,
postage prepaid to a Series 2002-1 Bondholder's address as it appears as of the
record date on the register maintained by the trustee. After prior notice to the
Series 2002-1 Bondholders, the issuer will pay the final installment of
principal and premium, if any, only upon presentation and surrender of a Series
2002-1 Bond at a place specified in the notice. A beneficial owner of a Series
2002-1 Bond will receive payments from the securities intermediary through which
it holds the Series 2002-1 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 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.
All series of transition bonds will have the same transition bond
charge adjustment date. On each transition bond charge adjustment date, ACE, as
servicer, will provide the trustee with an estimate of the revenue requirement
of each series of transition bonds, and of the total revenue requirement for all
series of transition bonds, in each case for the period that begins on that
transition bond charge adjustment date and ends on the date immediately
preceding the next scheduled transition bond charge adjustment date.
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On the basis of these estimates, the trustee, on the business day
preceding each payment date occurring within this period, will allocate to each
series a portion of the total amount in the general subaccount of the collection
account equal to the portion of the total revenue requirement for all series in
the period represented by that series' revenue requirement for the period.
On each payment date, the trustee will pay as to each series the
amounts described in clauses 1 through 11 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 20th 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 any unpaid fees and expenses, provided
that indemnity amounts will be limited to $10,000,000 in the
aggregate for all payment dates and monthly fee disbursement
dates with respect to all series, unless the issuer has
received rating agency confirmation that a further amount will
not result in a reduction or withdrawal of the rating of the
outstanding transition bonds;
2. to the independent managers of the issuer, payment of that
series' portion of the managers' fees, plus any unpaid fees;
3. to the servicer, payment of that series' portion of the
servicing fee, plus any unpaid fees;
4. to the administrator, payment of that series' portion of the
administration fee, plus any unpaid fees and specified
expenses;
5. to the persons entitled thereto, payment of that series'
portion of the operating expenses of the issuer other than
those described in clauses 1 through 4 above (up to an
aggregate amount of $100,000 for all series under this clause
5 for each quarterly interest period ending on a payment date)
including all current and past due amounts, 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 [based in the case of any
floating rate class on the gross fixed amount for
that class] 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 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;
8. to the capital subaccount for that series, replenishment up to
the required capital amount;
9. 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;
10. to the issuer, release of an amount equal to investment
earnings on amounts in the capital subaccount for that series
since the preceding payment date, provided no event of default
exists and the release would not reduce amounts in that
subaccount below the required level; and
11. to the reserve subaccount for that series, allocation of any
remaining amount, subject to reallocation of that remainder to
another series in order to prevent or mitigate a payment
default of the other series on that payment date.
[In addition, if ACE enters into a hedge agreement in connection with
any series of transition bonds, the related prospectus supplement will specify
the terms governing the allocation of amounts payable to or received from the
related hedge counterparty and the basis, if any, on which amounts in the
reserve subaccount, the overcollateralization subaccount and the capital
subaccount for that series may be allocated to the hedge counterparty.]
After all Series 2002-1 Bonds have been paid, redeemed or defeased, and
all obligations of the issuer with respect to the Series 2002-1 Bonds have been
satisfied, amounts, if any, remaining in the Series 2002-1 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 [GENERALLY]
Interest on each class of Series 2002-1 Bonds will accrue from the date
of issuance at the interest rate indicated for that class on the cover of this
prospectus supplement. The issuer is required to pay interest quarterly on
__________, __________, __________ and __________ of each year, beginning
________, 2003, or, if any such day is not a business day, on the following
business day.
The issuer will pay interest on the Series 2002-1 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 2002-1 Bonds, the trustee will
distribute interest pro rata to each class of transition bonds based on the
amount of interest due on that class [based, in the case of any floating rate
class, on the gross fixed amount for that class, which gross fixed amount will
in turn be allocated to the related class subaccount]. The issuer will calculate
interest on the Series 2002-1 Bonds [other than floating rate classes] on the
basis of a 360-day year of
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twelve 30-day months. [Interest on floating rate classes will be calculated on
the basis of actual number of days divided by 360.] Interest on each class of
Series 2002-1 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 to the persons in whose names the
Series 2002-1 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.
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 2002-1 Bonds in accordance with the expected amortization schedule.
To the extent that more than one class of Series 2002-1 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, except in the case
of an optional redemption or an acceleration following an event of default, 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 2002-1 Bonds, Class A-1, until
this class is retired in full;
(2) to the holders of the Series 2002-1 Bonds, Class A-2, until
this class is retired in full;
(3) to the holders of the Series 2002-1 Bonds, Class A-3, until
this class is retired in full; and
(4) to the holders of the Series 2002-1 Bonds, Class A-4, until
this class is retired in full.
The issuer will not, however, pay principal of any class of Series
2002-1 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 2002-1 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 2002-1 Bonds. The expected final payment date for a
class of Series 2002-1 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 2002-1 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 2002-1 Bonds are issued on ________, 2002;
2. payments on the Series 2002-1 Bonds are made on each payment
date, commencing on ________, 2003;
3. the per annum servicing fee for the Series 2002-1 Bonds equals
0.10% of the initial principal balance of the Series 2002-1
Bonds, payable monthly;
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4. the per annum fee paid to the trustee under the indenture for
the Series 2002-1 Bonds equals $[__], payable monthly;
5. the per annum fee paid to the administrator of the issuer for
the Series 2002-1 Bonds equals $[__], payable monthly;
6. there are no net earnings on amounts on deposit in the
collection account;
7. per annum operating expenses for the Series 2002-1 Bonds,
including all fees, costs and charges of the issuer and the
trustee, other than those listed above, 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 2002-1
- ------------------------ --------- --------- --------- --------- -------------
Series issuance date......... --------- --------- --------- --------- -------------
__________................... --------- --------- --------- --------- -------------
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For various reasons, the actual principal balance of any class of the
Series 2002-1 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 2002-1 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 2002-1 Bonds.
OPTIONAL REDEMPTION
The issuer may redeem all of the outstanding Series 2002-1 Bonds, at
its option, on any payment date if the outstanding principal balance of the
Series 2002-1 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 2002-1 Bonds[, provided that no interest rate swap
agreement with respect to the Series 2002-1 Bonds remains in effect]. In the
case of redemption, the issuer will pay the Series 2002-1 Bondholders the
outstanding principal amount of the Series 2002-1 Bonds and interest accrued and
unpaid to the redemption date. The trustee will give notice of the redemption to
Series 2002-1 Bondholders at least five days and at most 45 days before the
redemption date. The Series 2002-1 Bonds will not be redeemed under any other
circumstances.
DISTRIBUTION FOLLOWING ACCELERATION
Upon an acceleration of the maturity of the transition bonds and the
sale or other liquidation of the collateral, the total outstanding principal
balance of and interest accrued on the Series 2002-1 Bonds and all other
outstanding series of transition bonds will be payable without priority of
interest over principal or principal over interest and without regard to series
or class, in the proportion that the total outstanding principal balance of, and
interest accrued on, the Series 2002-1 Bonds bears to the total outstanding
principal balances of, and interest accrued on, all transition bonds, provided
that any additional series of transition bonds may establish priorities among
classes within that series if and to the extent specified in the prospectus
supplement relating to that series. [For purposes of the preceding sentence,
interest includes net swap payments with respect to any class of Series 2002-1
Bonds paying interest at a floating rate.]
[INTEREST PAYMENTS ON FLOATING RATE TRANSITION BONDS
Interest on each class of Series 2002-1 Bonds paying interest at a
floating rate, each referred to as a floating rate class, will be paid, for all
interest accrual periods, at the rate equal to the London interbank offered
rate, referred to as LIBOR, for three-month United States dollar deposits,
[except with respect to the period from the date of issuance to and including
_________, 2003, when the rate will be based on interpolated LIBOR for United
States dollar deposits, in each case] determined on the applicable floating rate
interest determination date, as described below, plus the percentage spread
above LIBOR applicable to that class. The spread above LIBOR for any floating
rate class is referred to as the floating rate spread. LIBOR plus the floating
rate spread payable on each floating rate class is referred to as the floating
rate.
The floating rate spread for the class [ ] Series 2002-1 Bonds will be
[____%] per annum.
Interest on each floating rate class will be calculated on the basis of
the actual number of days from and including the preceding payment date, or, for
the first payment date, from and including the date of issuance of that class,
to but excluding the next payment date, divided by 360. The Luxembourg Stock
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Exchange will be advised of the floating rate and the amount of the interest
payment on any floating rate class listed on that exchange for each payment
date.
For the first interest accrual period, interest on each floating rate
class will be paid based on (1) for the period from and including the date of
issuance of that class to but excluding [ ], interpolated LIBOR for United
States dollar deposits determined two London banking days before the date of
issuance of that class, plus (2) for the period from and including [ ] to but
excluding [ ], LIBOR for three-month United States dollar deposits determined on
[ ], plus (3) for the period from and including [ ] to but excluding [ ], LIBOR
for three-month United States dollar deposits determined on [ ], plus (4) for
the period from and including [ ] to but excluding the [ ] payment date, LIBOR
for three-month United States dollar deposits determined on [ ]. Payment of the
sum of the amounts calculated for these three periods will be made on the [ ]
payment date.
On or prior to each payment date, the trustee, using LIBOR, will
calculate the amount of interest payable on each floating rate class for the
relevant interest accrual period.
There will be no minimum or maximum interest rate on any floating rate
class.
With respect to any floating rate class, if the interest rate swap
agreement relating to that class is terminated for any reason, interest on that
class will be paid at the gross fixed rate for that class, as described below,
until alternate arrangements can be made to pay the floating rate for that
class. If the swap counterparty defaults in its obligation to make floating rate
payments due under an interest rate swap agreement, the interest rate swap
agreement may terminate under the circumstances described below. See " --
INTEREST RATE SWAP AGREEMENTS -- AMOUNTS PAYABLE UNDER INTEREST RATE SWAP
AGREEMENTS" and" -- INTEREST RATE SWAP AGREEMENT EVENTS OF DEFAULT AND
TERMINATION EVENTS" below and "RISK FACTORS RELATING TO THE SERIES 2002-1
FLOATING RATE TRANSITION BONDS" in this prospectus supplement.
FLOATING RATE INTEREST DETERMINATION
The interest determination date for each floating rate class and each
payment date will be the day two London banking days prior to (1) the preceding
payment date or (2) in the case of the first payment date, the dates specified
above. A London banking day is a day on which commercial banks in London are
open for general business.
After the first payment date, interest on each floating rate class will
be paid at the rate equal to LIBOR as determined on each interest determination
date, plus the floating rate spread for that class.
The trustee will determine LIBOR in accordance with the following
provisions:
1. On each interest determination date, the trustee will determine LIBOR
based on the offered rate for deposits in United States dollars
commencing on the first day of that period that appears on page 3750 of
Bridge Telerate, Inc. as of 11:00 a.m., London time, on that interest
determination date. That display page is referred to as the Telerate
page. If no offered rate appears on that Telerate page, LIBOR for that
period will be determined as described in clause 2 below.
2. With respect to an interest determination date on which no offered rate
appears on the Telerate page, the trustee will request each of four
major banks in the London interbank market, selected by the trustee, to
provide the trustee with that bank's offered quotation for deposits in
United States dollars for the applicable period, commencing on the
second London banking day immediately following that interest
determination date, to prime banks in the London interbank
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market at approximately 11:00 a.m., London time, on that interest
determination date and in a principal amount that is representative for
a single transaction in United States dollars in that market at that
time. The applicable period is three months, except for the period from
the date of issuance of the Series 2002-1 Bonds to and including [ ],
when the applicable period is one month. If at least two such
quotations are provided, LIBOR will be the arithmetic mean of those
quotations. If fewer than two quotations are provided, LIBOR for that
period will be the arithmetic mean of the rates quoted at approximately
11:00 a.m. in The City of New York on that interest determination date
by major banks in The City of New York selected by the swap
counterparty for loans in United States dollars to leading European
banks, for the period commencing on the second London banking day
immediately following that interest determination date and in a
principal amount that is representative for a single transaction in
United States dollars in that market at that time.
If LIBOR cannot be determined in accordance with clause 1 or 2 above,
then that rate will be determined to be the same as the rate which applied (a)
during the previous period or (b) on the date of issuance in the case of a
failure to determine LIBOR for the first payment date.
On each interest determination date, the trustee will notify the
servicer, the issuer and the swap counterparty of LIBOR for the applicable
period as determined by the trustee, and the issuer will notify the Luxembourg
Stock Exchange of that rate to the extent any Series 2002-1 Bonds are listed on
that exchange and the rules of that exchange so require.
INTEREST RATE SWAP AGREEMENTS
The issuer will enter into an interest rate swap agreement with a swap
counterparty for each floating rate class, on or before the date of issuance of
that class. The purpose of each interest rate swap agreement is to convert the
cash flows allocable to each floating rate class, which for purposes of the
transition bond charge are determined based on the gross fixed rate for each
floating rate class, into cash flows that are based on a floating rate of
interest.
Amounts Payable Under Interest Rate Swap Agreements. Under each
interest rate swap agreement, for each interest accrual period the issuer will
be obligated to pay the related swap counterparty an amount equal to interest on
the related floating rate class at a fixed rate of interest, referred to as the
gross fixed rate for the related floating rate class, and the swap counterparty
will be obligated to pay the issuer an amount equal to interest at the floating
rate for that class. Those obligations will then be netted on the business day
before each payment date. Therefore, for each interest accrual period, either
the issuer will pay the swap counterparty only the amount, if any, by which
interest at the gross fixed rate exceeds interest at the floating rate, referred
to as the net swap payment, or the swap counterparty will pay the issuer only
the amount, if any, by which interest at the floating rate exceeds interest at
the gross fixed rate, referred to as the net swap receipt, as discussed below.
With respect to any payment date, the notional amount in effect under
each interest rate swap agreement for the interest accrual period prior to that
payment date will equal the principal balance of the related floating rate class
as of the close of business on the preceding payment date. With respect to the
first payment date, the notional amount in effect under each interest rate swap
agreement prior to that payment date will be equal to the initial principal
balance of the related floating rate class.
For each payment date with respect to each floating rate class, the
trustee will allocate to the subaccount established for that class, referred to
as a "class subaccount," an amount equal to interest at the gross fixed rate for
that class times the outstanding principal amount of that class for the
preceding interest accrual period, referred to as the gross fixed amount for
that class on that payment date. In
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addition, any net swap receipt under the related interest rate swap agreement
will be deposited in that class subaccount and will be available, together with
the gross fixed amount for that class, to pay interest due on that class on that
payment date. Any net swap payment will be paid to the related swap counterparty
only out of funds on deposit in that class subaccount and the remaining amount
in that class subaccount will be available to pay interest due on that class.
Specifically, for the first payment date, the issuer will pay a net
swap payment equal to the amount, if positive, equal to: (1) an amount equal to
the interest calculated on the outstanding principal amount for the related
floating rate class at the applicable gross fixed rate for the period from and
including the issuance date of the Series 2002-1 Bonds to but excluding the [ ]
payment date minus (2) the sum of: (a) the interest calculated on the notional
amount for that class at the applicable floating rate for the period from and
including that issuance date to but excluding [ ] plus (b) the interest
calculated on that notional amount at the applicable floating rate for the
period from and including [ ] to but excluding [ ] plus (c) the interest
calculated on that notional amount at the applicable floating rate for the
period from and including [ ] to but excluding [ ] plus (d) the interest
calculated on that notional amount at the applicable floating rate for the
period from and including to but excluding the [ ] payment date. If this amount
is a negative number, a net swap receipt in this amount will be paid to the
issuer by the swap counterparty.
For each payment date after the first payment date, the issuer will pay
a net swap payment equal to the amount, if positive, equal to: (1) the interest
calculated on the outstanding principal amount of the related floating rate
class at the applicable gross fixed rate for the period from and including the
previous payment date to but excluding that payment date minus (2) the interest
calculated on the notional amount for that class at the applicable floating rate
for that period. If this amount is a negative number, a net swap receipt in this
amount will be paid to the issuer by the swap counterparty.
The gross fixed rate for the floating rate class [ ] Series 2002-1
Bonds will be [ ]% percent per annum.
Each interest rate swap agreement may terminate under the circumstances
described below under " -- INTEREST RATE SWAP AGREEMENT EVENTS OF DEFAULT AND
TERMINATION EVENTS." In the event an interest rate swap agreement terminates
without a replacement interest rate swap agreement being established, the
interest payable on the related floating rate class will convert to the gross
fixed rate for that class. The gross fixed rate will be used to calculate
interest payable on that class starting on the last payment date at which
interest has been paid at the floating rate. See "RISK FACTORS RELATING TO THE
SERIES 2002-1 FLOATING RATE TRANSITION BONDS" in this prospectus supplement.
Swap Counterparty Ratings. The required long-term senior unsecured or
financial program ratings of each swap counterparty under each interest rate
swap agreement will be at least "Aa3" by Moody's Investors Service, Inc., either
at least "A+" or, for short-term obligations, "A-1" by Standard & Poor's Ratings
Group and, if a swap counterparty is rated by Fitch Ratings, "A+" or, for
short-term obligations, "F1" by Fitch Ratings. These ratings are referred to as
the swap counterparty minimum ratings.
Swap Counterparty Downgrade Event. An event referred to as a "swap
counterparty downgrade event" will occur if the swap counterparty no longer
meets the swap counterparty minimum ratings.
If a swap counterparty downgrade event occurs, the swap counterparty
will be required, within 30 days following that event, to either:
a. re-establish the swap counterparty minimum ratings; or
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b. establish alternative arrangements to maintain or restore the
ratings of the affected floating rate class that were in
effect prior to the swap counterparty downgrade event. These
alternative arrangements by the swap counterparty may include:
1. posting collateral, arranging for a guarantee or
taking similar action to maintain or restore the
ratings; and
2. assigning its rights and obligations under the
interest rate swap agreement to a replacement swap
counterparty that meets the swap counterparty minimum
ratings, or that has itself made arrangements which
will maintain or restore the ratings.
Posting collateral, arranging for a guarantee and other arrangements as
described in clauses 1 and 2 above are referred to in this prospectus supplement
as "satisfactory arrangements to maintain or restore the ratings" upon the swap
counterparty downgrade event.
At the end of that 30-day period, if the swap counterparty has failed
to make satisfactory arrangements to maintain or restore the ratings of a
floating rate class that were in effect prior to the swap counterparty downgrade
event, the issuer will appoint a recognized swap dealer that is a member of the
International Swaps and Derivatives Association, Inc. with capital and surplus
of at least $50 million, referred to as the swap agent, to, within an additional
30 days, either:
1. find a replacement swap counterparty that meets the
swap counterparty minimum ratings or that has made
satisfactory arrangements to maintain or restore the
ratings of the related floating rate class, referred
to as a "qualified replacement counterparty"; or
2. if a qualified replacement counterparty cannot be
found, find the highest rated replacement swap
counterparty available, in terms of long-term senior
unsecured or financial program credit rating assigned
by Moody's Investors Service, Inc. or Standard &
Poor's Ratings Group, that is higher than that of the
existing swap counterparty and that is approved by
the holders of at least 66-2/3% of the total
outstanding principal amount of the related floating
rate class, referred to as an "approved replacement
counterparty."
In the case of a qualified replacement counterparty or an approved
replacement counterparty, if there is more than one available replacement swap
counterparty with the same credit rating, the counterparty offering the interest
rate swap terms with the lowest overall cost to the issuer will be selected by
the issuer as the replacement swap counterparty. That replacement swap
counterparty must be willing to intermediate between the issuer and the prior
swap counterparty by entering into an interest rate swap agreement with the
prior swap counterparty that is substantially the same as the prior interest
rate swap agreement to hedge or offset the risk that the replacement swap
counterparty has to the issuer.
If a qualified replacement counterparty or an approved replacement
counterparty has been found, the prior swap counterparty will be required to
assign its rights and obligations under the interest rate swap agreement to that
replacement swap counterparty and the replacement swap counterparty will enter
into a new interest rate swap agreement with substantially the same terms as the
terminated agreement. If a replacement swap counterparty satisfying the above
criteria has not been found within that second 30-day period, a termination
event will occur under the interest rate swap agreement and the interest rate
swap agreement will terminate unless holders representing 66-2/3% of the total
outstanding principal amount of the related floating rate class vote to continue
the interest rate swap agreement with the existing swap counterparty.
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If the interest rate swap agreement is not terminated as described
above, the swap agent will be obligated every three months thereafter to renew
the search for a qualified replacement counterparty or an approved replacement
counterparty according to the above procedures. However, the replacement
counterparty will not be required to intermediate between the prior swap
counterparty and the issuer, as described above. At the end of each of these
three-month periods, if a swap counterparty meeting the above criteria has not
been found, the interest rate swap agreement will terminate unless holders
representing 66-2/3% of the total outstanding principal amount of the related
floating rate class vote to continue the interest rate swap agreement with the
existing swap counterparty.
All searches for replacement swap counterparties will be at the
reasonable cost of the swap counterparty being replaced.
Interest Rate Swap Agreement Events of Default and Termination Events.
The events under each interest rate swap agreement, referred to as swap events
of default, include:
- the failure of the issuer or the swap counterparty to pay any
amount when due under the interest rate swap agreement if that
failure is not remedied on or before the fifth business day
after that failure, unless, in the case of a failure by the
swap counterparty, the holders of 66-2/3% of the total
outstanding principal amount of the related floating rate
class vote to waive that default, within 30 days following
notice of the default, by the issuer or the trustee to the
swap counterparty;
- certain events of bankruptcy of the issuer or the swap
counterparty or a credit support provider of the swap
counterparty; or
- a merger of the issuer or the swap counterparty without an
assumption of its obligations under the interest rate swap
agreement.
The events under the interest rate swap agreement, referred to as
termination events, are:
- illegality, as described below;
- an acceleration of the related floating rate class; a swap
counterparty downgrade event, as described above, that is not
cured within the applicable time periods;
- any change in any applicable laws or in the interpretation of
any applicable laws which revokes or renders unenforceable any
of the swap counterparty's obligations under the interest rate
swap agreement; and
- any amendment, without the consent of the swap counterparty,
of the formation documents of the issuer, the sale agreement,
the bill of sale, the servicing agreement, the administration
agreement, the indenture, the underwriting agreement or the
interest rate swap agreement or the securities account control
agreement which, in the swap counterparty's reasonable and
good faith judgment, adversely affects its rights or
obligations under the interest rate swap agreement.
Each interest rate swap agreement may be terminated by either the
issuer or the swap counterparty upon an illegality, as described below. In
addition, upon acceleration of the transition bonds, other than as a result of
an uncured covenant default not involving a payment failure, either party may
elect to terminate. Any other swap event of default or a termination event can
lead to a termination of the interest rate swap agreement by the party not
responsible for that event. Moreover, as described
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above, the interest rate swap agreement will terminate following a swap
counterparty downgrade event if that event is not cured, there is no replacement
swap counterparty and the requisite holders of the related floating rate class
do not vote to continue with the existing swap counterparty. Except in the cases
described above, the issuer may terminate only at the direction of the holders
of 66-2/3% of the total outstanding principal amount of the related floating
rate class.
The issuer will not be obligated to pay any termination payment or any
other breakage amounts to the swap counterparty under any interest rate swap
agreement as a result of any termination event, any swap event of default, any
swap counterparty downgrade event or for any other reason, except following an
acceleration of the transition bonds and a liquidation of the collateral. Any
payment made by a replacement swap counterparty to enter into a replacement
interest rate swap agreement will be paid to the terminated swap counterparty.
Upon a termination of an interest rate swap agreement resulting from a
swap event of default, swap counterparty downgrade event or other termination
event, the swap counterparty may be liable to pay a termination payment to the
issuer, based on the market value of the interest rate swap agreement determined
in accordance with specified procedures set forth therein. Any termination
payment paid by the swap counterparty, including interest thereon, will first be
used to make any payment required to be paid to any replacement swap
counterparty and to the extent not so used will be deposited in the related
class subaccount and paid pursuant to the indenture to the holders of the
related floating rate class on the next payment date, pro rata based on the
principal amount held by each holder, as described below under "CREDIT
ENHANCEMENT -- COLLECTION ACCOUNT AND SUBACCOUNTS -- THE CLASS SUBACCOUNTS" in
this prospectus supplement.
Illegality means that due to the adoption of, or any change in, any
applicable law after the date on which a swap transaction is entered into, or
due to the promulgation of, or any change in, the interpretation by any court,
tribunal or regulatory authority with competent jurisdiction of any applicable
law after that date, it becomes unlawful for the issuer or the swap
counterparty:
- to perform any absolute or contingent obligation to make a
payment or delivery or to receive a payment or delivery in
respect of that swap transaction or to comply with any other
material provision of the interest rate swap agreement; or
- to perform, or for any credit support provider of that party
to perform, any contingent or other obligation which the party
or that credit support provider has under any credit support
document relating to that swap transaction.
Replacement of Interest Rate Swap Counterparty. Upon a termination
event or a swap event of default under an interest rate swap agreement, the
issuer is required to appoint a swap agent. Upon its appointment, the swap agent
will be required, for a period not exceeding 30 days, either to:
1. find a replacement swap counterparty who meets the
swap counterparty minimum ratings or who has made
such other arrangements as will result in the related
floating rate class receiving ratings from the rating
agencies not less than the ratings that would be
received if such replacement swap counterparty met
the swap counterparty minimum ratings; or
2. find the available replacement swap counterparty with
the highest available long-term senior unsecured or
financial program credit rating which is approved by
the holders of at least 66-2/3% of the total
outstanding principal amount of the related
S-24
floating rate class, if a replacement swap
counterparty satisfying clause 1 above cannot be
found.
In case of clause 1 or 2 above, if there is more than one available
replacement swap counterparty with the same credit rating, the counterparty
offering the interest rate swap terms with the lowest overall cost to the issuer
will be selected by the issuer as the replacement swap counterparty. If a
replacement swap counterparty satisfying the above criteria has been found, upon
the termination of the interest rate swap agreement, the replacement swap
counterparty will enter into an interest rate swap agreement with the issuer
having terms substantially the same as the original interest rate swap
agreement, effective as of the payment date immediately following the date of
the replacement agreement. If a replacement swap counterparty has not been
found, the swap agent will be required to renew such search every three months
until a replacement swap counterparty satisfying the above criteria has been
found and a replacement interest rate swap agreement has been entered into.
Assignment of Interest Rate Swap Agreements. Any swap counterparty may
assign its obligations under any interest rate swap agreement with the prior
written consent of the issuer or, without that consent, either:
- in a consolidation or amalgamation with or merger with or
into, or transfer of all or substantially all of its assets to
another entity which expressly assumes in a written agreement
the obligations of the swap counterparty under the interest
rate swap agreement, although if upon that consolidation,
amalgamation or merger a swap counterparty downgrade event has
occurred, it will be a termination event as described above;
or
- to a replacement swap counterparty following a swap
counterparty downgrade event as described above.
Enforcement, Amendment, Modification or Waiver of Interest Rate Swap
Agreements. If a swap event of default or termination event occurs and is
continuing, the trustee may, and at the direction of at least 66-2/3% of the
total outstanding principal amount of the related floating rate class shall,
exercise all rights, remedies, powers, privileges and claims of the issuer
against the related swap counterparty, and any right of the issuer to take this
action shall be suspended.
An interest rate swap agreement may be amended with the consent of the
trustee and the related swap counterparty, as long as the rating agency
condition is satisfied with respect to the amendment. Satisfaction of the rating
agency condition with respect to a proposed action means that each of Moody's
Investors Service, Inc., Standard & Poor's Ratings Group, and Fitch Ratings has
been notified of the proposed action and each of Standard & Poor's Ratings Group
and Fitch Ratings confirms in writing that the proposed action will not result
in the reduction or withdrawal of its then current rating of any series or class
of transition bonds, provided that Moody's Investors Service, Inc. must also
confirm this in writing where the proposed action is the issuance of an
additional series of transition bonds. In addition to having to satisfy the
rating agency condition, the amendment of the interest rate swap agreement may
not adversely affect in any material respect the interests of the transition
bondholders of the related floating rate class unless the holders of at least
66-2/3% of the total outstanding principal amount of that class direct the
trustee to consent to the amendment. Moreover, that amendment may not adversely
affect in any material respect the interests of any other transition bondholders
or the counterparty to any other interest rate swap agreement without the
consent of the holders of at least 66-2/3% of the total outstanding principal
balance of the transition bonds of all of those other series or classes, and
each counterparty to any other interest rate swap agreement, materially and
adversely affected thereby.
S-25
Except as set forth above under " -- SWAP COUNTERPARTY DOWNGRADE EVENT"
and " -- INTEREST RATE SWAP AGREEMENT EVENTS OF DEFAULT AND TERMINATION EVENTS"
in this prospectus supplement, with respect to any action proposed by the issuer
to amend, modify, waive, supplement or surrender the terms of any interest rate
swap agreement, or waive timely performance or observance by the swap
counterparty under any interest rate swap agreement, in a way which would
materially and adversely affect the interests of transition bondholders of the
related class, the issuer must satisfy the rating agency condition. Thereafter,
the trustee will consent to this proposed action only with the consent of (1)
66-2/3% of the total outstanding principal amount of the transition bonds of the
related class, and (2) the consent of the holders of at least 66-2/3% of the
total outstanding principal balance of each other series or class, and each
counterparty to any other interest rate swap agreement, materially and adversely
affected thereby.
SWAP COUNTERPARTY
The swap counterparty is [ ].
RISK FACTORS RELATING TO THE SERIES 2002-1
FLOATING RATE TRANSITION BONDS
In addition to the following risk factors applicable to the floating rate
classes, additional risk factors apply to all of the transition bonds of any
series. See "RISK FACTORS" in the accompanying prospectus.
TERMINATION OF SWAP COULD CAUSE A LOSS
Termination events, swap events of default or swap counterparty downgrade
events under any interest rate swap agreement may result in termination of that
interest rate swap agreement. Each interest rate swap agreement will terminate
if the related swap counterparty defaults in its obligation to make payments
under the interest rate swap agreement and the holders representing 66-2/3% of
the total outstanding principal amount of the related floating rate class do not
vote to waive that default. If any interest rate swap agreement is terminated,
the holders of the related floating rate class will receive a fixed rate of
interest equal to the gross fixed rate for that class, which will take effect
from the last payment date to which interest has been paid at a floating rate.
See "THE SERIES 2002-1 BONDS -- INTEREST RATE SWAP AGREEMENTS" in this
prospectus supplement. This rate could be substantially less than the floating
rate for that class at the time of the termination, which could adversely affect
the yield to maturity, and holders of the related floating rate class could
suffer a loss on their investment.
RATINGS DOWNGRADE OF ANY FLOATING RATE CLASS OF TRANSITION BONDS COULD CAUSE A
LOSS FOR HOLDERS OF THOSE TRANSITION BONDS
If a swap counterparty downgrade event occurs, and (1) the swap
counterparty fails to make satisfactory arrangements to maintain or restore the
prior ratings and (2) holders representing 66-2/3% of the total outstanding
principal amount of the related floating rate class either approve a replacement
swap counterparty that does not maintain or restore the prior ratings or such
holders vote to continue the existing interest rate swap agreement, that
floating rate class may be downgraded by the rating agencies. See "THE SERIES
2002-1 BONDS -- INTEREST RATE SWAP AGREEMENTS" in this prospectus supplement. In
that event, the trading price of the transition bonds of the related floating
rate class may be reduced, and holders of those transition bonds could suffer a
loss on their investment.
S-26
INTEREST PAYMENTS ON SERIES 2002-1 BONDS AT FLOATING RATES ARE DEPENDENT ON SWAP
COUNTERPARTIES
If any swap counterparty defaults in its obligation to make any payment
required to be made under the interest rate swap agreement, the agreement may
terminate in the absence of the required waiver by the holders of transition
bonds of the related floating rate class, and the holders of those transition
bonds will receive interest at the gross fixed rate for that class. There can be
no assurance that any alternate arrangements will be made to obtain a suitable
replacement swap counterparty or otherwise to obtain payment of the floating
rate for that class. The gross fixed rate for that class could be substantially
less than the floating rate for that class at the time of that failure to pay,
and holders of that class of transition bonds could suffer a loss on their
investment. See "THE SERIES TRANSITION 2002-1 BONDS -- INTEREST RATE SWAP
AGREEMENTS" in this prospectus supplement.]
CREDIT ENHANCEMENT
Credit enhancement for the Series 2002-1 Bonds is intended to protect you
against losses or delays in scheduled payments on your Series 2002-1 Bonds.
PERIODIC ADJUSTMENT OF THE TRANSITION BOND CHARGE
Credit enhancement for the Series 2002-1 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 2002-1 Bonds in
accordance with the expected amortization schedule set forth in Table 1 above
and to make timely interest payments on the transition bonds [(which in the case
of interest on any floating rate class will be calculated at the applicable
gross fixed rate)]. Adjustment requests will take into account amounts available
in the general subaccount and the reserve subaccount for the Series 2002-1 Bonds
and amounts necessary to fund the overcollateralization levels for the Series
2002-1 Bonds as then scheduled and to replenish the capital subaccount for the
Series 2002-1 Bonds to its required level, in addition to amounts payable on the
Series 2002-1 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. All adjustment requests will take all series of transition bonds into
account.
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;
- 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.
S-27
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 2002-1 Bonds and any other
series of transition bonds then outstanding and so that the outstanding
principal amount of Series 2002-1 Bonds conforms to the expected amortization
schedule. ACE as servicer will be obligated to file annual adjustment requests
until ______ and to file quarterly adjustment requests beginning ___________ so
long as the Series 2002-1 Bonds remain outstanding. ACE may in addition be
obligated to file further adjustment requests in connection with the issuance of
additional series of transition bonds. ACE is authorized under the BPU financing
order to file adjustment requests at least annually but not more frequently than
quarterly, except that monthly filings are permitted beginning two years before
expected maturity of the Series 2002-1 Bonds and continuing until the Series
2002-1 Bonds have been paid in full, to the extent necessary to ensure the
timely receipt of revenues equal in amount to required payments of principal and
interest and any other ongoing fees, costs and expenses related to the
Transition Bonds. The first annual adjustment will become effective on October
1, 2003. 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. 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. A manifest error is 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.
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. In addition, any indemnity amounts
received by the trustee will be deposited into the general subaccount. The
trustee will also establish under the collection account the following
subaccounts relating to the Series 2002-1 Bonds:
- 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 2002-1 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 2002-1 Bonds. On any payment date, if
amounts available in the series subaccount, overcollateralization subaccount and
reserve
S-28
subaccount for the Series 2002-1 Bonds are not sufficient to make scheduled
payments to the Series 2002-1 Bondholders [, which in the case of interest on
any floating rate class will be the gross fixed amount for that class on that
payment date,] 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 2002-1 Bonds to make those payments. The trustee will,
on each payment date thereafter, replenish any withdrawals from the capital
subaccount for the Series 2002-1 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 2002-1 Bonds has been set at a level sufficient to obtain
the ratings on the Series 2002-1 Bonds described below under "RATINGS FOR THE
SERIES 2002-1 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 2002-1 Bonds is intended to be funded over the expected life of
the series and is expected to reach $[_____] or 0.5% of the initial principal
amount of the series. The calculated overcollateralization level for each
payment date relating to the Series 2002-1 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 2002-1 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 2002-1 Bonds are not
sufficient on a particular payment date to make scheduled payments to the
holders of the Series 2002-1 Bonds [, which in the case of interest on any
floating rate class will be the gross fixed amount for that class on that
payment date], 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 2002-1 Bonds. The overcollateralization amount
has been set at a level sufficient to obtain the ratings on the Series 2002-1
Bonds described below under "RATINGS FOR THE SERIES 2002-1 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.
S-29
TABLE 2
CALCULATED OVERCOLLATERALIZATION LEVEL
Issuance or Payment Date Calculated Overcollateralization
Level
Series issuance date................... $ 0
__________............................. $_______
S-30
[The Class Subaccounts. Upon the issuance of any floating rate class of
Series 2002-1 Bonds, a class subaccount will be established for that floating
rate class. On the business day preceding each payment date, the trustee will
allocate to each class subaccount from the related series subaccount an amount
equal to the gross fixed amount for the related floating rate class on that
payment date. On the business day preceding the payment date, any net swap
payment will be paid to the related swap counterparty from that class
subaccount, or any net swap receipt from the related swap counterparty will be
deposited into that class subaccount. On the related payment date, amounts in
each class subaccount will be paid as interest to the holders of the related
floating rate class. In the event of a shortfall of funds in a class subaccount
to make a net swap payment due to the related swap counterparty and to pay
interest on the related floating rate class of transition bonds, those amounts
will be paid on a pro rata basis based on the relative amounts due in respect of
the swap and the interest on the class of transition bonds. Any termination
payment paid by a swap counterparty upon termination of the related interest
rate swap agreement, to the extent not paid to a replacement swap counterparty,
will be deposited in the class subaccount for the related floating rate class
and will be paid pursuant to the indenture to the holders of the related
floating rate class on the next payment date pro rata based on the principal
amount held by each holder. Any balance remaining in any class subaccount after
payments have been made to the holders of the related floating rate class on a
payment date will be transferred to the collection account for allocation on the
next payment date.]
The Reserve Subaccount. A reserve subaccount for the Series 2002-1 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 2002-1 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 2002-1 Bonds;
- to make payments of principal and interest on the Series 2002-1
Bonds [which in the case of interest on any floating rate class will
be the gross fixed amount for that class on that payment date];
- to replenish the capital subaccount for the Series 2002-1 Bonds; and
- to fund the overcollateralization subaccount for the Series 2002-1
Bonds.
The transition bond charge will be adjusted to eliminate any excess
amounts that have accumulated in the reserve subaccount for the Series 2002-1
Bonds.
If on any payment date amounts available in the series subaccount for the
Series 2002-1 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 2002-1 Bondholders [which in the case of
interest on any floating rate class will be the gross fixed amount for that
class on that payment date], 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 2002-1
Bonds to make those payments. If on any monthly fee disbursement date amounts
available in the general subaccount of the collection account (including
available investment earnings in the subaccounts of the collection account) 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 2002-1 Bonds
to make those payments. If on any payment date funds on deposit in the series
subaccount for the Series 2002-1 Bonds are insufficient to
S-31
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, in that order. In addition, if on any payment date
amounts available in the series subaccount of any particular 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 other series of transition
bonds, including the Series 2002-1 Bonds, to make those payments. See "THE
INDENTURE -- ALLOCATIONS AND PAYMENTS; PRIORITY OF DISTRIBUTIONS" in the
accompanying prospectus.
[No amounts in the series overcollateralization subaccount, the series
capital subaccount or the reserve subaccount may be used to cover any shortfalls
in interest on any floating rate class to the extent that shortfall is due to
the swap counterparty's failure to pay any net swap receipt due under the
related interest rate swap agreement. However, amounts in those subaccounts will
be available to pay the applicable gross fixed amount with respect to each
floating rate class.]
For a more detailed description of allocations to and payments from the
reserve subaccount for the Series 2002-1 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 2002-1 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 2002-1 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 2002-1 Bonds. See "RISK FACTORS -- OTHER RISKS ASSOCIATED
WITH AN INVESTMENT IN THE 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 2002-1 BONDS
On or prior to each payment date, the trustee will prepare and provide
statements to the holders of record of the Series 2002-1 Bonds. These statements
will be available to the beneficial owners of the Series 2002-1 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 2002-1 Bonds, you should review the material under "THE
INDENTURE -- REPORTS TO TRANSITION BONDHOLDERS" in the accompanying prospectus.
S-32
THE TRANSITION BOND CHARGES
The bondable stranded costs described in the financing order issued by the
BPU on September 20, 2002 are to be recovered from customers of ACE through
transition bond charges, subject to 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 AND BASIC
GENERATION SERVICE TRANSITION COSTS " in the accompanying prospectus.
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 2002-1 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 at least annually and as frequently
as quarterly (or monthly beginning two years prior to the scheduled maturity of
the Series 2002-1 Bonds). 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 2002-1 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.
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.
S-33
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 0.10% of the initial principal amount of all transition
bonds. If a successor servicer is appointed, the successor servicer may be paid
an annual servicing fee of up to 1.25% of the initial principal balance of all
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 2002-1 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 2002-1 Bonds.
UNDERWRITING THE SERIES 2002-1 BONDS
Subject to the terms and conditions set forth in the underwriting
agreement among the issuer, ACE, 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
2002-1 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
Banc of America Securities
Banc One Capital Markets, Inc.
Credit Suisse First Boston
Corporation
PNC Capital Markets, Inc.
Wachovia Securities, Inc.
In accordance with the underwriting agreement, the underwriters will take
and pay for all of the Series 2002-1 Bonds offered hereby, if any are taken.
THE UNDERWRITERS' SALES PRICE FOR THE SERIES 2002-1 BONDS
Series 2002-1 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 2002-1 Bonds to dealers at the initial public offering prices, less a
selling 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.
S-34
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 2002-1 BONDS
The Series 2002-1 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 2002-1 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 2002-1 Bonds.
VARIOUS TYPES OF UNDERWRITER TRANSACTIONS THAT MAY AFFECT THE PRICE OF THE
SERIES 2002-1 BONDS
The underwriters may engage in overallotment transactions, stabilizing
transactions, syndicate covering transactions and penalty bids with respect to
the Series 2002-1 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 2002-1 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 2002-1 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 2002-1 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 2002-1 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 2002-1 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.
Morgan Stanley, as financial advisor to ACE, has rendered certain
financial advisory services to ACE with regard to the issuer and has received a
customary fee from the issuer for such services.
S-35
[MATERIAL INCOME TAX MATTERS FOR U.S. HOLDERS
OF SERIES 2002-1 FLOATING RATE BONDS
The following discussion is a summary of material United States federal
income tax consequences of the purchase, ownership and disposition of Series
2002-1 Bonds of a floating rate class by U.S. holders (as defined under
"MATERIAL INCOME TAX MATTERS FOR THE TRANSITION BONDS" in the accompanying
prospectus). You should consider the following discussion only in connection
with "Material Income Tax Matters for the Transition Bonds" in the accompanying
prospectus. The discussion in this prospectus supplement and in the accompanying
prospectus is based upon laws, regulations, rulings and decisions now in effect,
all of which are subject to change. The discussion below does not purport to
deal with all federal tax considerations applicable to all categories of
transition bondholders. Some holders, including banks, partnerships, regulated
investment companies, insurance companies, dealers in securities or currencies,
tax-exempt organizations, holders that hold the transition bonds as part of a
straddle, hedge, conversion transaction or other integrated investment, or
holders whose functional currency is not the U.S. dollar, may be subject to
special rules that are not discussed below. In addition, this discussion does
not address alternative minimum taxes or any state, local or foreign tax laws.
IT IS RECOMMENDED THAT ALL PROSPECTIVE PURCHASERS 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.
PAYMENTS OF INTEREST
Interest paid on any Series 2002-1 Bonds belonging to a floating rate
class will generally be taxable to a U.S. holder as ordinary interest income at
the time payments are accrued or received in accordance with such U.S. holder's
regular method of accounting for U.S. federal income tax purposes. ACE and the
issuer will treat those transition bonds as "variable rate debt instruments" for
federal income tax purposes. The interest on the floating rate class 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." Moreover, each purchaser of any Series
2002-1 Bonds belonging to a floating rate class will agree by virtue of their
purchase of those bonds to treat them as variable rate debt instruments for
federal income tax purposes.
In connection with the issuance of any Series 2002-1 Bonds of a floating
rate class, the issuer will enter into a swap with a swap counterparty. If a
swap termination event were to occur with respect to a swap related to that
floating rate class, the bonds of that class would become fixed rate bonds
calling for interest payments based on the gross fixed rate. In addition, if a
termination payment were to be made by the swap counterparty, the termination
payment would be credited to the class subaccount for that class of Series
2002-1 Bonds and distributed to the holders of that class. Although no such swap
termination event is anticipated, if one were to occur, ACE and the issuer would
treat it as a change in circumstances that would, for purposes of computing
taxable income on the floating rate class of Series 2002-1 Bonds, be treated as
a reissuance of the bonds. Any termination payment passed through to the holders
of 2002-1 Bonds of that floating rate class would reduce the adjusted issue
price on those bonds, which could in turn create original issue discount with
respect to the bonds deemed to have been reissued.
Characterization of floating rate Series 2002-1 Bonds as variable rate
debt instruments is not free from doubt. Notwithstanding the intent of ACE, the
issuer and each purchaser of floating rate transition
S-36
bonds to treat those bonds as variable rate debt instruments, alternative tax
characterizations of the bonds are possible.
POTENTIAL ALTERNATIVE TAX CHARACTERIZATIONS OF THE SERIES 2002-1 FLOATING RATE
BONDS
As noted above, the proper characterization of Series 2002-1 Bonds
belonging to a floating rate class is not clear. Accordingly, for example, the
Internal Revenue Service could assert on audit that those transition bonds are
in fact investment units made up of two components. The first component would be
a fixed rate debt instrument having a principal balance that would at all times
equal the principal balance of those transition bonds and an interest rate equal
to the gross fixed rate for those transition bonds. The second component would
be an undivided interest in the interest rate swap with the swap counterparty.
If this alternative characterization of an investment in Series 2002-1 Bonds
belonging to a floating rate class were to prevail, then the manner in which a
holder of any of those bonds would recognize income would differ from that
described above. Under that alternative characterization, each holder of a
Series 2002-1 Bond of a floating rate class would include in income the gross
fixed rate of interest on the transition bond in accordance with its regular
method of tax accounting. As the tax owner of an undivided interest in the swap
related to that class, the holder would account for net income and or net
expense with respect to the swap. The holder of a Series 2002-1 Bond of a
floating rate class would be treated as though it made quarterly periodic
payments based on the gross fixed rate to the swap counterparty and as though it
received quarterly periodic payments based on the floating rate paid by the swap
counterparty. For any taxable year, the holder of a Series 2002-1 Bond of a
floating rate class would include in, or deduct from, gross income the holder's
net swap income or expense. Net swap income or expense would be based on all
periodic payments recognized and attributable to the year.
Periodic payments made on any quarterly payment date would be allocated
ratably among the days in the quarter, and a holder of a Series 2002-1 Bond
belonging to a floating rate class would include or deduct its share of the net
periodic payments allocated to the year. Thus, if for a taxable year the sum of
periodic payments considered to have been made by a holder for the year were to
exceed the periodic payments considered to have been received by the holder for
the year, the holder would have net swap expense for the year. Generally, such
net swap expense would be deductible for the year as an ordinary deduction.
If, however, a holder of a Series 2002-1 Bond belonging to a floating rate
class were an individual, any net swap expense for any year would be treated as
a miscellaneous itemized deduction. In computing taxable income, an individual
is allowed to deduct miscellaneous itemized deductions only to the extent the
sum of such deductions exceeds two percent of the individual's adjusted gross
income. Further, an individual is not allowed a deduction for miscellaneous
itemized deductions in computing alternative minimum taxable income. Thus, for
any period for which the gross fixed rate on floating rate Series 2002-1 Bonds
exceeded the floating rate payments made to the issuer by the swap counterparty
under the related swap, an individual would include in income interest at the
gross fixed rate payable, but could be precluded from deducting all or a part of
the net swap expense for the period due to the limitations imposed on
miscellaneous itemized deductions.
If the underlying swap terminated and a payment were made as a result of
the termination, the receipt of such payment by a holder would be treated as
capital gain. Moreover, if a holder were to sell its interest in a Series 2002-1
Bond belonging to a floating rate class, it would be considered to have made or
to have received a termination payment with respect to its interest in the swap.
The holder would recognize gain or loss in the year that it terminated its
interest in the swap determined by reference to the amount of the termination
payment made or received and the holder's basis, if any, in the swap.
S-37
Other alternative characterizations of an investment in Series 2002-1
Bonds of a floating rate class may be possible, such as the characterization of
those bonds as contingent payment debt obligations. Investors are encouraged to
consult their tax advisors concerning the tax implications of an investment in
Series 2002-1 Bonds belonging to a floating rate class.
FOR FURTHER INFORMATION REGARDING THE FEDERAL INCOME TAX CONSEQUENCES OF
PURCHASING FLOATING RATE TRANSITION BONDS, SEE "MATERIAL INCOME TAX MATTERS FOR
TRANSITION BONDS" IN THE ACCOMPANYING PROSPECTUS.]
RATINGS FOR THE SERIES 2002-1 BONDS
It is a condition of any underwriter's obligation to purchase the Series
2002-1 Bonds that the Series 2002-1 Bonds be rated "AAA" both by Standard &
Poor's Ratings Group, a division of McGraw-Hill Companies, Inc. and by Fitch
Ratings and "Aaa" by Moody's Investors Service, Inc.
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 2002-1
Bonds, and, accordingly, there can be no assurance that the ratings assigned to
any class of Series 2002-1 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 2002-1 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 2002-1
Bonds other than payment in full of each class of Series 2002-1 Bonds by the
applicable final maturity date and the ability to make timely interest payments.
[LISTING AND GENERAL INFORMATION
RELATED TO FLOATING RATE CLASSES
Application will be made to list each floating rate class of Series 2002-1
Bonds on the Luxembourg Stock Exchange. There can be no assurance that any
floating rate class of Series 2002-1 Bonds will be listed on the Luxembourg
Stock Exchange or any other stock exchange. Purchasers of any class of Series
2002-1 Bonds should not rely on these transition bonds being listed on the
Luxembourg Stock Exchange or any other stock exchange. You should consult with
Kredietbank S.A. Luxembourgeoise, the Luxembourg listing agent for each floating
rate class, Boulevard Royal 43, L-2955 Luxembourg, phone number 352 47971,
referred to as the listing agent, to determine whether or not a particular
floating rate class is listed on the Luxembourg Stock Exchange.
In connection with the listing application, copies of the certificate of
incorporation and by-laws of ACE, the certificate of formation and amended and
restated limited liability company agreement of the issuer, as well as legal
notice relating to the issuance of the Series 2002-1 Bonds, will be deposited
prior to listing with the Chief Registrar of the District Court of Luxembourg,
where copies thereof may be obtained, free of charge, upon request. Once any
floating rate class has been so listed, trading of those transition bonds may be
effected on the Luxembourg Stock Exchange. Each floating rate class will be
submitted for clearing through the facilities of DTC, Clearstream and Euroclear.
See "THE TRANSITION BONDS -- TRANSITION BONDS WILL BE ISSUED IN BOOK-ENTRY FORM"
in the accompanying prospectus.
S-38
The International Securities Identification Number (referred to as ISIN),
Common Code number and the CUSIP number for each floating rate class are as
follows:
CLASS ISIN COMMON CODE CUSIP
The issuer represents that, as of the date of this prospectus supplement,
there has been no material adverse change in its financial position since the
date of its formation. The issuer is not involved in litigation or arbitration
proceedings relating to claims on amounts which are material in relation to the
issuance of any floating rate class nor, so far as the issuer is aware, is any
litigation or arbitration of this type involving it pending or threatened.
Except as disclosed in this prospectus supplement or the accompanying
prospectus, as of the date of this prospectus supplement, the issuer has no
outstanding loan capital, borrowings, indebtedness or contingent liabilities,
nor has the issuer created any mortgages, charges or guarantees.
The transactions contemplated in this prospectus supplement were
authorized by resolutions adopted by ACE's Board of Directors on or about [ ]
and by the issuer's managers on or about [ ].
If any floating rate class of Series 2002-1 Bonds is listed on the
Luxembourg Stock Exchange, copies of the indenture, the supplemental indenture
governing the Series 2002-1 Bonds, the sale agreement, the servicing agreement,
the administration agreement, the reports of independent public accountants
described in "THE SERVICING AGREEMENT -- COMPLIANCE REPORTS" in the accompanying
prospectus, the documents listed under "ATLANTIC CITY ELECTRIC COMPANY -- WHERE
TO FIND INFORMATION ABOUT ACE" in the accompanying prospectus and the reports to
transition bondholders referred to under "THE INDENTURE -- REPORTS TO TRANSITION
BONDHOLDERS" and " -- TRUSTEE'S ANNUAL REPORT" in the accompanying prospectus,
will be available free of charge at the offices of the trustee in The City of
New York and the listing agent in Luxembourg. Financial information regarding
ACE is included in its annual report on Form 10-K for the fiscal year ended
December 31, 2001 and is also available at the offices of the trustee in The
City of New York and the listing agent in Luxembourg. For so long as any
floating rate class is outstanding and listed on the Luxembourg Stock Exchange,
copies of each annual report on Form 10-K for subsequent fiscal years will also
be available at the offices of the trustee in The City of New York and the
listing agent in Luxembourg.
In the event that any floating rate class of Series 2002-1 Bonds is listed
on the Luxembourg Stock Exchange, certificated transition bonds are issued and
the rules of the Luxembourg Stock Exchange require a Luxembourg transfer agent,
the Luxembourg paying agent will be appointed as a transfer agent.
The indenture provides that the trustee and the paying agent will pay to
the issuer upon request any amounts held by them for the payment of principal of
and interest on any class of transition bonds, including without limitation any
floating rate class, which amounts remain unclaimed for two years after they
become due and payable. After payment to the issuer, holders of any class of
Series 2002-1 Bonds entitled to these funds must look to the issuer for payment
as general creditors unless an abandoned property law designates otherwise.
According to Chapter VI, Article 3, point A/II/2 of the Rules and
Regulations of the Luxembourg Stock Exchange, the floating rate transition bonds
will be freely transferable and therefore no transaction made on the Luxembourg
Stock Exchange will be cancelled.
S-39
The indenture, the series 2002-1 supplemental indenture, the sale
agreement, the servicing agreement and the administration agreement are governed
by the laws of the State of New Jersey. The certificate of formation and the
amended and restated limited liability company agreement are governed by the
laws of the State of Delaware.]
S-40
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 and the accompanying prospectus supplement 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 _______, 2002
PROSPECTUS
ATLANTIC CITY ELECTRIC TRANSITION FUNDING LLC
Issuer
ATLANTIC CITY ELECTRIC COMPANY
Seller and Servicer
Transition Bonds Issuable in Series
THE ISSUER
- - may periodically issue up to $2 billion aggregate principal amount of
transition bonds in one or more series, each with one or more classes; and
- - will own:
- bondable transition property, which is the right, created under New
Jersey's Competition Act, 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;
- 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.
THE TRANSITION BONDS
- - will be payable only from assets of the issuer;
- - will be supported by trust accounts held by the trustee for the transition
bonds and, if so stated in the applicable prospectus supplement, other
credit enhancement; and
- - will be issued in series, each of which the issuer may issue without the
consent of existing transition bondholders.
CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE 19 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 _______________, 2002.
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......................................................9
Credit Enhancement and Accounts.........................................................................14
Prefunding..............................................................................................15
State Pledge............................................................................................16
Payments of Interest and Principal......................................................................16
Optional Redemption.....................................................................................17
Payment Dates and Record Dates..........................................................................17
Servicing Compensation..................................................................................17
Tax Status..............................................................................................17
ERISA Considerations....................................................................................18
RISK FACTORS.....................................................................................................19
Limited Sources of Payment and Limited Credit Enhancement for the Transition Bonds Could Cause
Payment Delays or Losses..............................................................................19
Risks of Judicial, Legislative or Regulatory Action.....................................................19
Unusual Nature of Bondable Transition Property and Servicing Risks......................................22
The Electric Industry Generally.........................................................................27
Risks Associated with Potential Bankruptcy Proceedings..................................................28
Other Risks Associated with an Investment in the Transition Bonds.......................................32
FORWARD-LOOKING STATEMENTS.......................................................................................34
GLOSSARY OF DEFINED TERMS........................................................................................35
AVAILABLE INFORMATION............................................................................................35
INCORPORATION OF DOCUMENTS BY REFERENCE..........................................................................35
ATLANTIC CITY ELECTRIC COMPANY...................................................................................36
THE COMPETITION ACT..............................................................................................37
Recovery of Stranded Costs Is Allowed for ACE and Other New Jersey Utilities............................37
ACE and Other Utilities May Securitize Stranded Costs and Basic Generation Service Transition Costs.....38
ACE'S RESTRUCTURING..............................................................................................40
THE BPU FINANCING ORDER AND THE TRANSITION BOND CHARGE...........................................................42
The BPU Financing Order.................................................................................42
The Transition Bond Charge Adjustment Process...........................................................45
THE SERVICER OF THE BONDABLE TRANSITION PROPERTY.................................................................46
ACE.....................................................................................................46
Page
----
ACE's Customer Classes..................................................................................46
Electric Revenue, Number of Customers and Consumption...................................................47
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........................................................55
USE OF PROCEEDS..................................................................................................57
THE TRANSITION BONDS.............................................................................................57
General.................................................................................................58
Interest and Principal..................................................................................58
Floating Rate Transition Bonds..........................................................................59
Redemption..............................................................................................60
Credit Enhancement......................................................................................60
Prefunding..............................................................................................61
Book-Entry Form.........................................................................................61
Certificated Transition Bonds...........................................................................65
WEIGHTED AVERAGE LIFE AND YIELD CONSIDERATIONS FOR THE TRANSITION BONDS..........................................66
THE SALE AGREEMENT...............................................................................................67
ACE's Sale and Assignment of the Bondable Transition Property...........................................67
ACE's Representations and Warranties....................................................................68
ACE's Covenants.........................................................................................73
ACE's Obligation to Indemnify the Issuer and the Trustee................................................75
ACE's Obligation to Undertake Legal Action..............................................................76
Successors to ACE.......................................................................................76
Treatment of the Assignment of Bondable Transition Property.............................................76
THE SERVICING AGREEMENT..........................................................................................77
Servicing Procedures....................................................................................77
Transition Bond Charge Collections......................................................................79
Servicer Advances.......................................................................................79
Servicer Compensation; Releases.........................................................................79
Third-Party Suppliers...................................................................................79
Servicer Duties.........................................................................................80
Representations and Warranties..........................................................................80
Servicer Indemnification................................................................................81
Monthly Fee Disbursement Date and Payment Date Statements...............................................82
Compliance Reports......................................................................................83
Matters Regarding the Servicer..........................................................................83
Servicer Defaults.......................................................................................84
Rights Upon Servicer Default............................................................................85
Termination.............................................................................................85
Page
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THE INDENTURE....................................................................................................86
Security................................................................................................86
Issuance in Series or Classes...........................................................................87
Collection Account......................................................................................88
Allocations and Payments; Priority of Distributions.....................................................91
Reports to Transition Bondholders.......................................................................95
Modification of the Indenture...........................................................................96
Events of Default.......................................................................................99
Covenants of the Issuer................................................................................103
List of Transition Bondholders.........................................................................105
Annual Compliance Statement............................................................................105
Trustee's Annual Report................................................................................105
Satisfaction and Discharge of the Indenture............................................................105
Legal Defeasance and Covenant Defeasance...............................................................105
The Trustee............................................................................................107
Governing Law..........................................................................................107
HOW A BANKRUPTCY OF ACE OR THE SERVICER MAY AFFECT YOUR INVESTMENT..............................................108
MATERIAL INCOME TAX MATTERS FOR THE TRANSITION BONDS............................................................111
Classification of the Transition Bonds.................................................................112
Tax Consequences to U.S. Holders.......................................................................112
Tax Consequences to Non-U.S. Holders...................................................................113
Backup Withholding.....................................................................................114
Material State of New Jersey Tax Matters...............................................................114
ERISA CONSIDERATIONS............................................................................................115
Plan Asset Issues for an Investment in the Transition Bonds............................................115
Prohibited Transaction Exemptions......................................................................116
Special Considerations Applicable to Insurance Company General Accounts................................117
General Investment Considerations For Prospective Plan Investors in the Transition Bonds...............117
PLAN OF DISTRIBUTION............................................................................................118
RATINGS.........................................................................................................119
LEGAL MATTERS...................................................................................................119
EXPERTS.........................................................................................................119
GLOSSARY OF DEFINED TERMS.......................................................................................120
INDEX TO FINANCIAL STATEMENTS OF ATLANTIC CITY ELECTRIC TRANSITION
FUNDING LLC.....................................................................................................F-1
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, Pepco
Holdings, Inc., 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.
1
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 19 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 mailing address is P.O. Box 15597, Wilmington,
Delaware 19850-5597, and its telephone number is (302)
429-3902.
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 September 30,
2002, ACE served approximately 511,300 customers, covering areas
in which approximately 900,000 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: The Bank of New York 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);
2
- 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 electric public 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." In addition, New Jersey electric public
utilities are permitted to recover net losses incurred in
procuring power for basic generation service to customers
during the transition to a competitive market. An electric
public utility may recover stranded costs and basic generation
service transition 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 electric public 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.
3
- 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.
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:
4
[FLOWCHART]
5
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 September 20, 2002, the BPU issued to ACE a bondable
stranded costs rate order providing, among other things, for the
issuance of transition bonds. This order, any subsequent bondable
stranded costs rate orders issued from time to time by the BPU to
ACE providing for the issuance of transition bonds and identified
in supplements to this prospectus, and any orders supplemental to
any of the foregoing are collectively 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 and/or the
customers of any electric distribution company that succeeds to
all or a significant part of the electric distribution
business of ACE within its present service territory:
- 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, independent managers 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.
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
6
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, and/or to
recover basic generation service transition costs. See
"Transaction Overview" above and "USE OF PROCEEDS" in this
prospectus.
Servicing the Bondable Transition ACE, in its capacity as servicer of the bondable transition
Property: 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 AND BASIC GENERATION SERVICE TRANSITION COSTS" in this
prospectus. The transition bond charge is assessed as a uniform,
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
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
7
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 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 following the next date on which the transition
bond charge is adjusted.
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 or monthly to the
extent permitted in the BPU financing order. The date on which an
8
adjustment to the transition bond charge is made is referred to
as a transition bond charge adjustment date. All series of
transition bonds will have the same 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" in this summary, 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;
- amounts available from trust accounts held by the trustee; and
- any indemnity payments received by the trustee. These
accounts are described in greater detail under "THE
INDENTURE -- COLLECTION ACCOUNT" in this prospectus.
Allocations and Payments; Priority of The transition bond charge collections will be remitted by the
Distributions: 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, ACE, as servicer,
will provide the trustee with an estimate of the revenue
requirement of each series of transition bonds, and of the total
revenue requirement for all series of transition bonds, in each case
for the period that begins on that transition bond charge
adjustment date and ends on the date immediately preceding the
next scheduled transition bond charge adjustment date.
9
On the basis of these estimates, the trustee, on the business day
preceding each payment date occurring within this period,
will allocate to each series a portion of the total amount in
the general subaccount of the collection account equal to the
portion of the total revenue requirement for all series in
the period represented by that series' revenue requirement for
the period.
On each payment date, the trustee will pay as to each series the
amounts as described in clauses 1 through 11 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 20th 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 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 any unpaid fees and expenses, provided
that indemnity amounts will be limited to $10,000,000 in the
aggregate for all payment dates and monthly fee disbursement
dates with respect to all series, unless the issuer has received
rating agency confirmation that a further amount will not
result in a reduction or withdrawal of the rating of the
outstanding transition bonds;
2. to the independent managers of the issuer, payment of that
series' portion of the managers' fees plus any unpaid fees;
3. to the servicer, payment of that series' portion of the
servicing fee plus any unpaid fees;
4. to the administrator, payment of that series' portion of
the administration fee and any unpaid fees, plus specified
expenses;
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5. to the persons entitled thereto, payment of that series'
portion of the operating expenses of the issuer other than
those described in clauses 1 through 4 above (up to an
aggregate amount of $100,000 under this clause 5 for each
quarterly interest period ending on a payment date)
including all current and past due amounts, 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
- 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 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;
8. to the capital subaccount for that series, replenishment
up to the required capital amount;
9. 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
10. to the issuer, release of an
amount equal to investment earnings
on amounts in the capital subaccount
for that series since the preceding
payment date, provided no event of
default exists and the release would
not reduce amounts in that subaccount
below the required level; and
11. to the reserve subaccount for
that series, allocation of any
remaining amount, subject to
reallocation of that remainder to
another series in order to prevent or
mitigate a payment default of the
other series on that payment date.
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, if and to the extent
specified in the related prospectus supplement.
If and to the extent specified in the related prospectus
supplement, if 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.
If a class of any series of transition bonds bears
interest at a floating rate, the related prospectus
supplement will specify the priority and other terms
determining the basis on which amounts in the series
subaccount for that series may be deposited in and
withdrawn from the class subaccount, if any, established
for that class and the basis, if any, on which amounts in
the reserve subaccount, the overcollateralization
subaccount and the capital subaccount for that series may
be allocated to the class subaccount.
In addition, if ACE enters into a hedge agreement in
connection with any series of transition bonds, the
related prospectus supplement will specify the terms
governing the allocation of amounts payable to or
received from the related hedge counterparty and the
basis, if any, on which amounts in the reserve
subaccount, the overcollateralization subaccount and the
capital subaccount for the series may be allocated to the
hedge counterparty.
12
[FLOW CHART]
13
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,
indemnity payments 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:
- from the reserve subaccount for that
series for allocations in clauses (1)
through (10);
- from the overcollateralization
subaccount for that series for allocations
in clauses (1) through (7); and
- from the capital subaccount for that
series for allocations in clauses (1)
through (7).
In addition, in order to avoid a default in
the payment of interest or legally due
principal on another series of transition
14
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 the general subaccount of
the collection account (including available
investment earnings in the subaccounts of the
collection account) 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 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
15
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 an electric
public 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 COMPETITION
ACT -- ACE AND OTHER UTILITIES MAY SECURITIZE
STRANDED COSTS AND BASIC GENERATION SERVICE
TRANSITION 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
based upon reasonable conditions and of a
character appropriate to a significant and
legitimate 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 Interest on each series or class of transition
Principal: 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
16
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 and to the
extent 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
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. 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. All series and all classes within
a series will have the same payment dates.
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 0.10% of
the initial principal balance of all
transition bonds issued to date. If a
successor servicer is appointed, the successor
servicer may be paid an annual servicing fee
of up 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 to the effect that, for U.S. federal
income tax purposes, the transition bonds will
be classified as obligations of ACE. In
addition, in the opinion of LeBoeuf, Lamb,
Greene & MacRae, L.L.P., 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.
17
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 withholding taxes on
interest received in the transition bonds,
provided proper certification as to non-United
States beneficial ownership is provided. See
"MATERIAL INCOME TAX MATTERS FOR THE
TRANSITION BONDS" 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 FOR THE TRANSITION BONDS -- 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.
18
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 related bills of sale and the servicing
agreement;
- trust accounts held by the trustee; and
- if so stated in the applicable prospectus supplement, other forms of
credit enhancement.
The transition bonds will not be insured or guaranteed by ACE (in its
capacity as servicer or otherwise), its direct parent, Conectiv, its ultimate
parent, Pepco Holdings, Inc., 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 THAT 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 and amended in September 2002. 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 right 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 adjustments 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
19
and interpreting the legislation. See "THE BPU FINANCING ORDER AND THE
TRANSITION 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 should 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. Moreover, ACE will not be obligated to indemnify you as a
result of a change in law, including subsequent judicial reinterpretation of
constitutional law. See "THE SALE AGREEMENT - ACE'S REPRESENTATIONS AND
WARRANTIES" in this prospectus.
In October and November 1999, appeals were filed challenging the validity
of a BPU financing order and restructuring order issued to another New Jersey
electric utility. The Appellate Division of the New Jersey Superior Court
unanimously affirmed these BPU financing and restructuring orders and the New
Jersey Supreme Court affirmed the Appellate Division decision. One of the
appellants in this case filed a petition for review of the New Jersey Supreme
Court's decision with the United States Supreme Court, which the United States
Supreme Court subsequently denied.
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 or increase awareness of legal risks associated
with the transition bonds. 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 or
liquidity 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. In the
past, bills have been introduced in Congress prohibiting the recovery of
stranded costs. Such a prohibition could negate the existence of bondable
transition property. Although Congress has never passed such a bill, 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 become law, what their final form or effect will be.
There is no assurance that the courts would consider such a preemption a
"taking" from the transition bondholders. Moreover, even if such a preemption of
the Competition Act and/or the BPU financing order by the federal government
were considered a "taking" under the United States Constitution for which the
government had to pay just compensation to transition bondholders, there is no
assurance that this 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.
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
20
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 AND BASIC GENERATION SERVICE
TRANSITION 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,
absent a demonstration that such action was based upon reasonable conditions and
of a character appropriate to a significant and legitimate public purpose
justifying such action, repeal or amend the Competition Act by means of the
legislative process, or take or refuse to take (through the BPU or otherwise)
any action required under its pledge described above, so as to substantially
impair the rights of the owners of the bondable transition property or the
transition bondholders, including action to limit, alter, impair or reduce the
value or amount of the bondable transition property.
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 executive, administrative or 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 a substantial property interest of the transition bondholders in the bondable
transition property and deprive the transition bondholders of their reasonable
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 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
21
outcome of any such litigation cannot be predicted with certainty. Accordingly,
you could incur a loss of your investment.
ACE will be obligated under the sale agreement to take legal or
administrative action to protect the issuer and to block or overturn attempts to
repeal the Competition Act or the BPU financing order in a manner adverse to
you, the issuer or the trustee. ACE will also 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. These will include the
representation 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, constitutional amendment or subsequent judicial
reinterpretation of constitutional law 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 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 electric public 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 the 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.
22
These include, among other things, changes in political, social and economic
conditions, weather, 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 in payments of principal and interest
not being made at all.
For calendar year 2001, forecasted usage exceeded actual usage by 1.19%
owing to economic conditions that proved weaker than forecast. 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 although 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 COULD RESULT IN UNRELIABLE FORECASTING OR IN
CHANGES IN ACE'S BILLING PRACTICES THAT ARE ADVERSE TO YOUR INTERESTS
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 the 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.
23
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.
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 dated March 30, 2001 providing for the
restructuring of ACE under the Competition Act, referred to as the final
restructuring order, ACE was 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, by 7% by January 1, 2001 and
by 10.2% by August 1, 2002. 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. The initial transition bond charge adjustment date is not
expected to occur until after the end of the four-year transition period and so
the overall rate cap should have no effect on the amount of the transition bond
charge so long as no additional transition bonds are issued before the end of
that period. See " -- ISSUANCE OF ADDITIONAL SERIES OF TRANSITION BONDS WHOSE
HOLDERS MAY HAVE INTERESTS THAT CONFLICT WITH YOUR INTERESTS" below. Moreover,
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 that period, ACE will not be subject to
limitations similar to the overall rate cap that may have an impact on its
ability to increase the transition bond charges. If the transition bond charge
continues to be treated as a component of the electricity rates that ACE will
charge its customers and limitations similar to the overall rate cap are imposed
on ACE after the end of the four-year transition period, the transition bond
charge would have to fall, taken together with other such charges imposed by
ACE, within those limitations, and as a consequence ACE as servicer may be
unable to increase the transition bond charge to an amount that, together with
the other charges, would exceed the limitations.
ACE does not presently anticipate that limitations similar to the overall
rate cap will be imposed following the end of the four-year transition period.
ACE further believes it would be able to defer the imposition of other charges
to the extent necessary to allow it to implement any required increases in the
transition bond charge without exceeding any such limitation, having an order
from the BPU authorizing
24
such deferrals. In addition, ACE would undertake to oppose any attempt to impose
a limitation similar to the overall rate cap or to rescind or modify that
limitation if it would adversely affect the transition bonds (or, alternatively,
seek relief from the limitation in order to avoid the same result). However,
there can be no assurance that such measures would be effective on a timely
basis. Consequently, you may experience material delays in payment of, or losses
on, your transition bonds if ACE as servicer were 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.
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.
25
IT MAY BE MORE DIFFICULT TO COLLECT THE TRANSITION BOND CHARGE FROM THIRD-PARTY
SUPPLIERS THAN FROM ACE'S CUSTOMERS
Customers of ACE may pay the transition bond charge to third parties who
supply them with electric power. See "THE COMPETITION ACT -- ACE AND OTHER
UTILITIES MAY SECURITIZE STRANDED COSTS AND BASIC GENERATION SERVICE TRANSITION
COSTS" in this prospectus. These third-party suppliers will be obligated to
forward the charge to ACE, as servicer. 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. To that extent, the
servicer will be relying on the credit of the third-party supplier rather 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, with the potential consequence that customers served by
third-party suppliers have a higher rate of delinquencies and write-offs than
those served by ACE. Although a third-party supplier will be required to post a
cash deposit or comparable security with ACE, equal to two months' maximum
estimated collections of all charges if it does not maintain at least a "Baa2"
and "BBB" (or the equivalent) long-term unsecured credit rating from Moody's
Investors Service, Inc. and Standard & Poor's Ratings Group, a division of
McGraw-Hill Companies, Inc., there can be no assurances that the deposit will be
sufficient to compensate fully for a remittance default by a third-party
supplier. A remittance 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. A shortfall in
transmission bond charge collections by a third-party supplier that was not
recovered from third-party suppliers through cash deposits or other security
would be included in a subsequent transition bond charge adjustment. However,
any security or adjustment 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 BPU FINANCING ORDER" in this prospectus.
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. 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
26
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 arrangements. 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 " -- RISKS ASSOCIATED WITH POTENTIAL BANKRUPTCY
PROCEEDINGS" below.
INABILITY TO TERMINATE SERVICE TO CERTAIN DELINQUENT CUSTOMERS
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. In addition, in August 2002 New Jersey adopted legislation
directing the BPU to provide for continuation of electrical service during
periods of excessive heat to residential customers who are protected under the
winter moratorium. The BPU implemented an interim program and has established a
rulemaking proceeding to address the issue. 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. ACE's inability to
shut off service may lead to an increase in payment delinquencies, which in turn
could result in delays in transition bond charge 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 electric public 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 AND BASIC GENERATION SERVICE
TRANSITION COSTS" in this prospectus. However, a substantial reduction in the
number of customers from whom transition bond charges would be collected
27
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 developments may result in the introduction to
increasing numbers of retail customers of ACE economically
attractive alternatives to purchasing electric energy through ACE's
transmission and distribution system. Previously, only the largest
industrial and institutional users with large process steam or
thermal requirements could use cogeneration or self-generation
installations cost-effectively. Manufacturers of self-generation
facilities continue, however, to develop smaller-scale, more
fuel-efficient generation units such as microturbines, fuel cells
and renewable energy sources, which may enable increasing numbers of
retail customers to generate electricity on a cost-effective basis.
In addition to such trends, 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. 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 AND BASIC GENERATION SERVICE TRANSITION 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 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.
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;
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- 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
bondable transition 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.
Although a bankruptcy court generally follows state property law on issues
such as those addressed by the provisions described above, 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:
- 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, from using funds in the trust accounts to make payments on
your 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;
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- 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;
- ACE might be excused from its contractual obligations as servicer
under the servicing agreement;
- 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.
In addition, 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.
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 transition bond charge collections from the other
funds it collects from its customers. Transition bond charge collections will be
segregated only when 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
- 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.
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
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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 and that the treatment of the transaction for financial reporting and
federal and state income and franchise tax purposes as a financing transaction
and not a sale lends weight to that position. In a recent bankruptcy court case
involving LTV Steel Company, the debtor obtained an interim emergency motion to
use collections from accounts and inventory that it had sold on the grounds that
the sales were in fact disguised financings. The circumstances under which the
LTV Steel Company ruling would be followed by other courts are not certain. 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.
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 under the automatic stay provisions of the United States Bankruptcy
Code. This could result in material delays in payment or in losses on your
transition bonds and could materially reduce the value of your investment.
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OTHER RISKS ASSOCIATED WITH AN INVESTMENT IN THE TRANSITION BONDS
RISKS ASSOCIATED WITH CREDIT ENHANCEMENT OR INTEREST RATE SWAP TRANSACTIONS
The related prospectus supplement will set forth the risk factors, if any,
associated with any credit enhancement or interest rate swap arrangements 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 CREDIT 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, and subsequent
limitations, if any, similar to the overall rate cap may 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 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 ACE 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.
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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 later than as
provided in the expected amortization schedule, 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, constitutional amendment or
subsequent judicial reinterpretation of constitutional provisions or if the
federal government, the State of New Jersey or the BPU or any other governmental
agency of the State of New Jersey attempts to limit, alter or in any way impair
or reduce 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 and agreement 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 under the sale agreement as seller, or under the
servicing agreement as 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.
In the event that ACE becomes obligated to indemnify transition
bondholders, it is likely that the ratings on the transition bonds will be
downgraded as a result of the circumstances causing the breach and the fact that
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
33
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;
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
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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 120 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. Information filed
with the SEC can also be inspected at the SEC's Internet site 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 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
35
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, P.O. Box 15597, Wilmington, Delaware 19850-5597.
Telephone requests for these copies should be directed to the issuer at (302)
429-3902.
ATLANTIC CITY ELECTRIC COMPANY
ACE is a regulated electric public utility incorporated under the laws of
the State of New Jersey on April 28, 1924 and is a direct wholly owned
subsidiary of Conectiv and an indirect wholly owned subsidiary of Pepco
Holdings, Inc., each of 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 September 30, 2002, ACE served approximately 511,300
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 900,000. ACE's customer base consists primarily of residential and
commercial customers. For the nine months ended September 30, 2002, the
percentages of regulated electric retail revenues contributed by customer class
were as follows: residential, 50.7%; commercial, 41.0% and industrial, 8.3%. ACE
reported net income after extraordinary items of $28.2 million on revenue of
$828.2 million for the nine months ended September 30, 2002 as compared with net
income after extraordinary items of $60.3 million on revenue of $810.9 million
for the nine months ended September 30, 2001.
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. On August 1, 2002, Conectiv and Potomac Electric Power Company,
known as PEPCO, became wholly owned subsidiaries of Pepco Holdings, Inc.
pursuant to an agreement and plan of merger. As a result of the second of these
mergers, Pepco Holdings, Inc. owns, directly or indirectly, ACE, PEPCO, Delmarva
Power & Light Company and the nonutility subsidiaries that each merger party had
formerly held. As registered holding companies under the Public Utility Holding
Company Act of 1935, Pepco Holdings, Inc. and Conectiv are subject to certain
restrictions on the operations of registered holding companies and their
subsidiaries. Pepco Holdings, Inc. is also the parent of various nonutility
businesses.
The mergers 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.
Where to Find Information About ACE. ACE files annual, quarterly and
current reports and other information with the SEC under File No. 1-3559.
Reports and other information filed with the SEC are available to the public
over the Internet at the SEC's web site at http://www.sec.gov. You may also read
36
and copy any of these SEC filings at the SEC's public reference room in
Washington, D.C. located at 450 Fifth Street, N.W. Please call the SEC at
1-800-SEC-0330 for further information about the operation of the public
reference room. Some of ACE's securities are listed on the New York Stock
Exchange, and such reports and other information can also be inspected and
copied at the offices of such exchange on the 7th Floor, 20 Broad Street, New
York, New York. For so long as any transition bonds are listed on the Luxembourg
Stock Exchange and the rules of that exchange so require, copies of these
documents will be available for inspection by the holders of any listed
transition bonds at the office of the listing agent in Luxembourg. ACE also
provides information through its website at www.conectiv.com.
THE COMPETITION ACT
The New Jersey Electric Discount and Energy Competition Act, referred to
as the Competition Act, signed into law in February 1999 and amended in
September 2002, 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 financial, customer protection and other
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 retail
electric market in New Jersey.
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 anticipated losses
in the 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 losses in value and other costs are known collectively 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.
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ACE AND OTHER UTILITIES MAY SECURITIZE STRANDED COSTS AND BASIC GENERATION
SERVICE TRANSITION 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. In
addition, by amendment adopted in September 2002, the Competition Act authorizes
a utility to securitize what are referred to as basic generation service
transition costs, which are the amount by which a utility's payments to procure
power for basic generation service and for related ancillary and administrative
costs exceeds net revenues from the charge for the service established by the
BPU. ACE may in the future seek authorization to issue transition bonds in
respect of basic generation service transition costs to be funded through a
transition bond charge.
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 an electric public 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 a scheduled amortization upon issuance of up
to: (1) 15 years if the proceeds from the transition bonds are to be used to
reduce stranded costs related to utility-owned generation or to recover basic
generation service transition costs 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 that 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 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 an
electric public utility or any
38
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 electric public 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 an electric public 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.
Upon a finding that on-site generation facilities installed after August
1, 1999 (the starting date of retail competition under the Competition Act) have
displaced customer purchases from ACE so as to reduce the amount of
kilowatt-hours distributed by ACE to 92.5% of the kilowatt-hours it distributed
in 1999, the Competition Act provides that the BPU will impose a transition bond
charge on any power consumption displaced by on-site generation facilities,
exempting facilities installed before the date of the finding. The Competition
Act would under these circumstances also exempt from the transition bond charge
power consumption by any on-site customer that is derived from an on-site
generation facility that the customer or its agent installed, or for which it
made substantial financial and contractual commitments in planning and
development, on or before February 9, 1999 (the effective date of the
Competition Act). Included in the latter exemption are expansions of exempt
facilities that occur after February 9, 1999 for the continued provision of
power.
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:
39
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 electric public 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
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 an electric public 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 on terms
commensurate with market practices;
3. the electric public utility acts as collector or servicer of the
related transition bond charge; or
4. 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, Final Restructuring Order and Divestiture 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 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 BPU's more detailed decision and
40
order, referred to as the final restructuring order, is dated March 30, 2001. On
November 23, 1999, ACE filed a petition with the BPU seeking approval to divest
its nuclear base-load generating assets. As part of the proceedings to review
this petition, the determination of recoverable stranded costs relating to these
generating assets was litigated. On July 21, 2000, the BPU issued its decision
and order approving the divestiture of ACE's nuclear generating assets. On
September 17, 2001, the BPU issued its decision and order establishing the level
of recoverable stranded costs associated with those assets.
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
supplier for generation services, the customer may receive separate billings for
those generation services directly from the third-party supplier or they may
receive combined billings for all charges, either from ACE or, if permitted by
the BPU, from the third-party supplier pursuant to an agreement between ACE and
the third-party supplier. If the third-party 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
suppliers for billings and collections.
Basic Generation Service. On June 29, 2001, ACE and the three other
investor-owned electric utilities in New Jersey filed with the BPU a generic
proposal to use a single, statewide auction process for the procurement of
supply to meet the full electricity requirements of retail customers that have
not chosen a third-party supplier. By order dated December 11, 2001, the BPU
approved with modifications and clarifications the auction proposal made by the
four electric utilities for the provision of basic generation service for the
period from August 1, 2002 through July 31, 2003. In February 2002, ACE
participated in a statewide auction for the procurement of New Jersey's basic
generation service needs for that period. The winning bidders in the auction
have entered into full requirement service agreements with ACE. Under these
agreements, the winning bidders are to provide the energy, capacity,
transmission and ancillary services for approximately 80% of ACE's basic
generation service load. ACE will provide the balance of the basic generation
service supply from its to-be-divested fossil generation units and its power
purchase contracts with nonutility generators of electricity. At a public agenda
meeting held on November 5, 2002, the BPU again authorized the use of an auction
process to provide basic generation service beginning August 1, 2003.
ACE Must Reduce its Electric Rates. Pursuant to the stipulation and the
final restructuring order, ACE was 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, by 7% by January 1, 2001 and
by 10.2% by August 1, 2002. 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 so long
as it is in effect. 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.
41
Third-Party Suppliers. Pursuant to the Competition Act and the final
restructuring order, customers may choose to purchase electric power from
third-party suppliers and later return to ACE as their supplier of basic
generation service. Any third-party supplier is 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. Any third-party
supplier billing retail customers 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 obligation.
THE BPU FINANCING ORDER AND THE TRANSITION BOND CHARGE
THE BPU FINANCING ORDER
ACE's Petition and the BPU Financing Order. On June 25, 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 $2
billion of bondable stranded costs, including within this aggregate amount
associated transaction costs and the cost of retiring equity and debt securities
of ACE. These costs are recoverable through the issuance of transition bonds in
a like principal amount 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 September 20, 2002 authorizing the issuance of up to $440 million
aggregate principal amount of transition bonds. ACE may from time to time in the
future file petitions with the BPU requesting the issuance under the Competition
Act of financing orders authorizing additional issuances of transition bonds in
connection with the recovery of additional stranded costs and/or of basic
generation service transition costs.
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 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 buy down or buy out that power purchase
agreement. The last of ACE's long term power purchase agreements is scheduled to
expire on January 1, 2025.
The final structure, pricing and other terms of the transition bonds, and
any related hedging arrangements entered in to in order to protect ACE's
customers against interest rate exposure, 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 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 ACE's customers and/or the customers of any electric
distribution company that succeeds to all or a significant part of the electric
distribution business of ACE within its present service territory, 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
42
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 uniform, 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 directs ACE to file, as part of its next base rate
filing, data showing the impact of the timing of customer payments of the
transition bond charge to ACE versus payments by ACE as servicer 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. Furthermore, in determining its cash working capital
requirements in base rate proceedings, ACE will exclude from its cash balances
any transition bond charges collections not yet remitted to the trustee. Not
more than nine months after the initial issuance of transition bonds, ACE will
file with the BPU a reconciliation statement for its upfront transaction costs
and capital reduction costs. Based on the amount of these costs, an adjustment
will be made to ACE's deferred balance under the final restructuring order.
Earnings of proceeds of the initial transition bond issuance used to pay
transaction costs will be credited to the beginning balance of deferred costs
associated with ACE's deferred balance.
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 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 charges billed and collected for
kilowatt-hours of electricity delivered 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
43
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 retail
electric 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 metering, billing and
other 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 ACE's 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 in a timely manner to enable the servicer to fulfill
its obligations;
- 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 long-term unsecured credit rating from Moody's Investors
Service, Inc. of at least "Baa2" and from Standard & Poor's Ratings
Group of at least "BBB" (or the equivalent), it must lodge with ACE
(or a successor servicer) a cash deposit or comparable security
equal to two months' maximum estimated collections of all 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 electric public 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 an electric public 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 electric public 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 electric public 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
44
immediately appoint a successor servicer, 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
- 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 following 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, with resulting adjustments in 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 quarter (or monthly to the extent permitted in
the BPU financing order) with resulting adjustments to increase or
decrease the transition bond charge to become effective on the first
day of the
45
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; 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, any such filing to be made at least 90 days prior
to the proposed effective date and to be subject to BPU approval
before implementation.
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 transition bond charge will also be adjusted in connection with the
issuance of a new series of transition bonds, and any new series of transition
bonds may provide for additional transition bond charge adjustment dates.
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.
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.
46
ELECTRIC REVENUE, NUMBER OF CUSTOMERS AND CONSUMPTION
The following table shows the amount of billed electric revenue per
customer class for the periods indicated 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
-------------------------------------------------------------
12/31/97 12/31/98 12/31/99
----------------- ----------------- -----------------
% OF % OF % OF
$ (000S) TOTAL $ (000S) TOTAL $ (000S) TOTAL
------- ------ ------- ------ ------- ------
RESIDENTIAL......... 443,829 46.98 437,576 46.68 444,942 47.58
COMMERCIAL.......... 391,270 41.41 391,248 41.73 387,247 41.41
INDUSTRIAL.......... 109,682 11.61 108,634 11.59 102,966 11.01
------- ------ ------- ------ ------- ------
TOTAL............... 944,781 100.00 937,458 100.00 935,155 100.00
FOR THE YEAR ENDED 9 MONTHS ENDED
--------------------------------------- -----------------
12/31/00 12/31/01 9/30/02
----------------- ----------------- -----------------
% OF % OF % OF
$ (000S) TOTAL $ (000S) TOTAL $ (000S) TOTAL
------- ------ ------- ------ ------- ------
RESIDENTIAL......... 412,792 50.92 430,853 49.41 359,128 50.74
COMMERCIAL.......... 318,781 39.32 357,896 41.04 290,161 41.00
INDUSTRIAL.......... 79,106 9.76 83,325 9.55 58,499 8.26
------- ------ ------- ------ ------- ------
TOTAL............... 810,679 100.00 872,074 100.00 707,788 100.00
The following table shows the average number of customers in each customer
class for the periods indicated and the percentage that each customer class
bears to the total number of customers.
47
TABLE 2
AVERAGE NUMBER OF CUSTOMERS (CUSTOMER BILLS)
FOR THE YEAR ENDED
----------------------------------------------------------------
12/31/97 12/31/98 12/31/99
------------------- ------------------ ------------------
AVG. # OF % OF AVG. # OF % OF AVG. # OF % OF
CUSTOMERS TOTAL CUSTOMERS TOTAL CUSTOMERS TOTAL
--------- ----- --------- ----- --------- -----
RESIDENTIAL......... 422,967 87.94 427,590 87.89 431,527 87.88
COMMERCIAL.......... 56,975 11.85 57,926 11.90 58,507 11.92
INDUSTRIAL.......... 1,018 0.21 1,005 0.21 1,001 0.20
------- ------ -------- ------ ------- ------
TOTAL............... 480,960 100.00 486,521 100.00 491,035 100.00
FOR THE YEAR ENDED 9 MONTHS ENDED
----------------------------------------- ------------------
12/31/00 12/31/01 9/30/02
------------------- ------------------ ------------------
AVG. # OF % OF AVG. # OF % OF AVG. # OF % OF
CUSTOMERS TOTAL CUSTOMERS TOTAL CUSTOMERS TOTAL
--------- ----- --------- ----- --------- -----
RESIDENTIAL......... 436,967 87.87 443,865 87.84 449,315 87.88
COMMERCIAL.......... 59,325 11.93 60,421 11.96 60,959 11.92
INDUSTRIAL.......... 1,007 0.20 1,016 0.20 1,013 0.20
------- ------ ------- ------ ------- ------
TOTAL............... 497,299 100.00 505,302 100.00 511,287 100.00
The following table shows the total billed electric consumption in
gigawatt-hours (i.e., millions of kilowatt-hours), referred to as gWh, for the
periods indicated for each customer class and the percentage each customer class
bears to the total consumption.
48
TABLE 3
BILLED ELECTRIC CONSUMPTION (GWH)
FOR THE YEAR ENDED
-------------------------------------------------------------------------------
12/31/97 12/31/98 12/31/99
---------------------- ----------------------- ----------------------
GWH % OF TOTAL GWH % OF TOTAL GWH % OF TOTAL
--- ---------- --- ---------- --- ----------
RESIDENTIAL.................. 3,455 41.63 3,544 41.10 3,708 42.07
COMMERCIAL................... 3,590 43.26 3,771 43.73 3,847 43.64
INDUSTRIAL................... 1,253 15.10 1,309 15.18 1,260 14.29
----- ------ ----- ------ ----- ------
TOTAL........................ 8,298 100.00 8,624 100.00 8,815 100.00
FOR THE YEAR ENDED 9 MONTHS ENDED
-------------------------------------------------- ----------------------
12/31/00 12/31/01 9/30/02
---------------------- ----------------------- ----------------------
GWH % OF TOTAL GWH % OF TOTAL GWH % OF TOTAL
--- ---------- --- ---------- ----- ----------
RESIDENTIAL.................. 3,765 42.45 3,857 43.08 3,170 44.18
COMMERCIAL................... 3,860 43.53 3,956 44.19 3,131 43.64
INDUSTRIAL................... 1,243 14.02 1,140 12.73 874 12.18
----- ----- ----- ----- ----- -----
TOTAL........................ 8,868 100.00 8,953 100.00 7,175 100.00
PERCENTAGE CONCENTRATION WITHIN ACE'S LARGE COMMERCIAL AND INDUSTRIAL CUSTOMERS
For the period ended December 31, 2001, the ten largest electric customers
represented approximately 8.6% of ACE's kilowatt-hour sales. The customers are
in the commercial and industrial customer classes. Casino-hotels are included in
the commercial class and represent approximately 6.9% of ACE's kilowatt-hour
sales for the period ended December 31, 2001. 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.
49
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.
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, 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.
50
TABLE 4
ANNUAL FORECAST VARIANCE OF THE AMOUNT OF ELECTRICITY CONSUMED (GWH)
1996 1997 1998 1999 2000 2001
---- ---- ---- ---- ---- ----
RESIDENTIAL CUSTOMERS CONSUMPTION
Forecasted 3,578 3,525 3,631 3,620 3,619 3,813
Actual 3,587 3,455 3,544 3,708 3,765 3,857
Variance 0.25% (1.99%) (2.40%) 2.43% 4.03% 1.15%
COMMERCIAL CUSTOMERS CONSUMPTION
Forecasted 3,553 3,655 3,738 3,859 3,896 3,968
Actual 3,545 3,590 3,771 3,847 3,860 3,910
Variance (0.23%) (1.78%) 0.88% (0.31%) (0.92%) (1.46%)
INDUSTRIAL CUSTOMERS CONSUMPTION
Forecasted 1,168 1,255 1,264 1,301 1,216 1,234
Actual 1,214 1,253 1,309 1,260 1,243 1,140
Variance 3.94% (0.16%) 3.56% (3.15%) 2.22% (7.62%)
TOTAL
Forecasted 8,299 8,435 8,634 8,780 8,731 9,062
Actual 8,346 8,298 8,624 8,815 8,868 8,954
Variance 0.57% (1.62%) (0.12%) 0.40% 1.57% (1.19%)
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, 2001, ACE mailed out to its customers an average of 25,860 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 final 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
51
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 EquiFax
identification process for new applicants.
ACE receives approximately 85% of its total bill payments via U.S. mail.
ACE receives the remainder of bill payments at local offices and other
third-party pay offices or 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 ten 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
governmental accounts. Some governmental accounts have difficulty paying within
the 20 days due to cash flow, payment approval and other factors. Governmental
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 ten-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 ten 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
52
other active service accounts with ACE. If any unpaid balance remains after six
months of collection 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 customers for the periods indicated. Among the factors which
may affect write-off and delinquency data are the overall economy, weather and
changes in collection practices. Beginning in 2000, ACE experienced an increase
in delinquencies and net write-offs as a percentage of billed revenue. These
results were largely attributable to problems experienced during the
introduction and implementation of a new customer service and billing computer
system in 1999. Implementation of the new computer system caused delays in
billing and also diverted resources from collection efforts. In addition, the
new system initially did not allow for effective processing of overdue accounts.
ACE has taken steps to resolve the problems experienced with the new billing
system, and the processing and collection of current customer bills returned to
normal execution levels at the end of 2001. Due to the processing of the backlog
of overdue accounts accumulated during 2000 and 2001, delinquencies and net
write-off statistics are not expected to return to pre-implementation levels for
a few years.
ACE does not expect, but cannot assure, that the delinquency or write-off
experience with respect to transition bond charge collections will differ
substantially from its historical experience with respect to collection of other
charges. However, changes in general economic conditions and the retail electric
market, including but not limited to the introduction of third party electric
power suppliers who may be permitted to provide consolidated billing to ACE's
customers, could mean that historical delinquency and write-off rates may not be
indicative of future rates.
53
TABLE 5
DELINQUENCIES AS A PERCENTAGE OF TOTAL BILLED REVENUES
FOR THE YEAR ENDED 9 MONTHS
--------------------------------------------------------- ENDED
12/31/97 12/31/98 12/31/99(A) 12/31/00 12/31/01 9/30/02(B)
-------- -------- ----------- -------- -------- ----------
RESIDENTIAL
30-59 Days 0.56% 0.64% -- 0.75% 0.71% 1.43%
60-89 Days 0.20 0.29 -- 0.52% 0.61% 0.63%
90+ Days 0.15 0.22 -- 2.02% 2.85% 1.37%
NON-RESIDENTIAL
30-59 Days 0.47% 0.52% -- 1.50% 1.11% 0.83%
60-89 Days 0.06 0.07 -- 0.87% 0.45% 0.17%
90+ Days 0.05 0.06 -- 1.11% 0.74% 0.29%
TOTAL DELINQUENCY STATISTICS
30-59 Days -- -- 0.15% -- -- --
60-69 Days -- -- 0.06 -- -- --
90+ Days -- -- 0.08 -- -- --
(a) As of November 30, 1999. December 1999 data are not available due to
system conversion.
(b) Based upon revenues for the twelve-month period from October 1, 2001 to
September 30, 2002.
TABLE 6
NET WRITE-OFF AS A PERCENTAGE OF BILLED RETAIL ELECTRIC REVENUES
FOR THE YEAR ENDED 9 MONTHS
--------------------------------------------------------------- ENDED
12/31/97 12/31/98 12/31/99 12/31/00 12/31/01 9/30/02
-------- -------- -------- -------- -------- -------
RESIDENTIAL 0.26% 0.25% 0.32% 0.27% 0.60% 0.95%
NON-RESIDENTIAL 0.04 0.07 0.06 0.08 0.25 0.27
TOTAL 0.30 0.32 0.38 0.35 0.85 1.22
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
54
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. ACE is 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 in 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;
4. entering into and performing under the basic documents and other
agreements relating to the activities set forth in clauses 1 through
3 above; and
5. performing activities permitted to limited liability companies under
Delaware law that are related or incidental to these purposes and
necessary, suitable or convenient to accomplish these purposes.
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 no less
than three and no more than 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
55
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 supplier, employee, immediate family member, officer, director,
manager, contractor, customer (other than a ratepayer or customer of
ACE in the ordinary course of business) or material creditor of ACE
or the issuer or any of their respective affiliates; or
3. a person who, other than through service as a manager of the issuer,
controls ACE or its affiliates.
The remaining managers will be employees of ACE's affiliate, PHI Service
Company, the administrator of the issuer.
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 POSITION AT PHI SERVICE COMPANY
Thomas S. Shaw 55 Director Director, President and Chief Operating Officer
James P. Lavin 55 Controller Vice President and Controller
Barbara S. Graham 54 -- Senior Vice President
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 member of the issuer will not be subject in
that capacity to any personal liability to any person in connection with the
assets or affairs of the issuer, and will have the same limitation on personal
liability as is extended to stockholders of for profit Delaware corporations.
The limited liability company agreement further provides that no manager of the
issuer will be subject in that capacity to any personal liability to any person
other than the issuer or its member in connection with the assets or affairs of
the issuer. These protections from personal liability will apply to the fullest
extent permitted by applicable law.
In addition, under the issuer's limited liability company agreement, the
member and managers of the issuer are indemnified to the fullest extent
permitted by applicable law. Any indemnification and advancement of expenses
provided to a member or a manager will not exclude any other rights to which
56
the indemnified person may be entitled under other agreements. No
indemnification, unless ordered by a court, may be made to or on behalf of the
member or any manager if a final adjudication established that its acts or
omissions involved intentional misconduct, fraud or a knowing violation of the
law and was material to the cause of action.
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, among other things:
1. take all reasonable steps to continue its identity as a separate
legal entity;
2. make it apparent to third parties 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. conduct its business in its own name and so as not to mislead others
as to the identity of the entity or assets with which they are
concerned, and correct any known misunderstanding regarding its
separate identity.
The principal place of business of the issuer is 800 King Street,
Wilmington, Delaware 19899 and its telephone number is (302) 429-3902.
Administration Agreement. The administrator, PHI Service Company, 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/or to recover basic generation service transition costs, as well as 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.
57
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. Notification to each of Moody's Investors Service,
Inc., Standard & Poor's Ratings Group, and Fitch Ratings of a proposed action
and confirmation in writing from each of Standard & Poor's Ratings Group and
Fitch Ratings that the proposed action will not result in the reduction or
withdrawal of its then current rating of any series or class of transition bonds
is referred to as satisfaction of the rating agency condition with respect to
the proposed action, provided that Moody's Investors Service, Inc. must also
confirm this in writing where the proposed action is the issuance of an
additional series of transition bonds.
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 direct 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.
58
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 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 or before 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 interest
rate swap transactions. If the issuer enters into or arranges for any interest
rate 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 swap transaction to be made by or to the
issuer or to the trustee, as assignee of the issuer;
- deposits in and withdrawals from the class subaccount or
subaccounts, if any, of the collection account established for that
class or those classes of floating rate transition bonds and that
transaction;
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- the formula for calculating the floating rate of interest of that
class or those classes prior to termination of that transaction;
- the rights of transition bondholders with respect to the termination
of or specified other events related to that transaction; and
- 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 and to the extent 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. 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;
- additional overcollateralization;
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- 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 DTC, Clearstream and Euroclear. DTC will act as securities
depository for the transition bonds and will hold the global bond or bonds
representing the transition bonds. The transition bonds will be issued as
registered securities registered in the name of Cede & Co., DTC's partnership
nominee, or in such other name as an authorized representative of DTC may
request. 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 direct
participants and to facilitate the clearance and settlement of securities
transactions between direct 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 a wholly
owned subsidiary of The Depository Trust & Clearing Corporation, which in turn
is owned by a number of direct participants of DTC and members of the National
Securities Clearing Corporation, Government Securities Clearing Corporation, MBS
Clearing Corporation and Emerging Markets Clearing Corporation, as well as by
the New York Stock Exchange, Inc., the American Stock Exchange LLC and the
National Association of Securities Dealers, Inc. Access to DTC's system is also
available to others such as both U.S. and non-U.S. securities brokers and
dealers, banks, trust companies and clearing corporations, referred to as
indirect participants, that clear through or maintain a custodial relationship
with a direct participant either directly or indirectly. The DTC rules
applicable to its participants are on file with the Securities and Exchange
Commission. More information about DTC can be found at www.dtcc.com.
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.
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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 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
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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.
Purchases. Purchases of transition bonds under the DTC system must be made
by or through direct participants, which will receive a credit for the
transition bonds on DTC's records. The ownership interest of each actual
purchaser of each transition bond, referred to as a beneficial owner, is in turn
to be recorded on direct and indirect participants' records. Beneficial owners
will not receive certificates representing their ownership interests in
transition bonds, except in the event that use of the book-entry system for
transition bonds is discontinued. Nor will beneficial owners receive written
confirmation from DTC of their purchases. Beneficial owners are, however,
expected to receive written confirmations providing details of their
transactions, as well as periodic statements of their holdings, from the direct
or indirect participants through which the beneficial owners entered into the
transactions.
Book-Entry Transfers. Except under the circumstances described below,
while any book-entry transition bonds of a series are outstanding, DTC is
required under DTC's rules to make book-entry transfers among direct
participants on whose behalf it acts with respect to the book-entry transition
bonds. Transfers of ownership interests in transition bonds are to be
accomplished by entries made on the books of direct and indirect participants
acting on behalf of beneficial owners. To facilitate subsequent transfers, all
transition bonds deposited by direct participants with DTC will be registered in
the name of DTC's partnership nominee, Cede & Co., or such other name as an
authorized representative of DTC may request. The deposit of transition bonds
with DTC and their registration in the name of Cede & Co. (or another nominee)
do not effect any change in the ownership interest of any beneficial owner. DTC
has no knowledge of the actual beneficial owners of transition bonds. DTC's
records reflect only the identity of the direct participants to whose accounts
transition bonds are credited, which may or may not be the beneficial owners.
The direct and indirect participants will remain responsible for keeping account
of their holdings on behalf of their customers. Since DTC can only act on behalf
of direct participants, who in turn act on behalf of indirect participants, the
lack of certificated transition bonds may limit the ability of beneficial owners
to pledge transition bonds to persons or entities that do not participate in the
DTC system and take other actions with respect to their transition bonds.
Transmission of Payments. In addition, DTC is required to receive and
transmit payments of principal of, and interest on, the book-entry transition
bonds. Payments on the transition bonds will be made to Cede & Co. or such other
nominee as an authorized representative of DTC may request. DTC's practice is to
credit direct participants' accounts, upon DTC's receipt of funds and
corresponding detail information from the issuer or the trustee, on payment
dates in accordance with their respective holdings shown on DTC's records.
Payments by participants to beneficial owners will be governed by standing
instructions and customary practices, as is the case with securities held for
the accounts of customers in bearer form or registered in "street name," and
will be the responsibility of the participants and not of DTC, the issuer or the
trustee, subject to such statutory or regulatory requirements as may be in
effect from time to time. Payments to Cede & Co. (or other nominee) will be the
responsibility of the issuer or the trustee, disbursement of such payments to
direct participants will be the responsibility of DTC, and the disbursement of
such payments to the beneficial owners will be the responsibility of the direct
and indirect participants.
Notices and Consents. Conveyance of notices and other communications by
DTC to direct participants, by direct participants to indirect participants, and
by direct participants and indirect participants to beneficial owners will be
governed by arrangements among them, subject to such statutory
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or regulatory requirements as may be in effect from time to time. Beneficial
owners of transition bonds may wish to take steps to augment the transmission to
them of notices of significant events with respect to the transition bonds such
as redemptions, tenders, defaults and proposed amendments to related documents.
For example, they may wish to ascertain that the nominee holding transition
bonds for their benefit has agreed to obtain and transmit notices to them.
Neither DTC nor Cede & Co. (or any other DTC nominee) will consent with respect
to any transition bonds unless authorized by a direct participant in accordance
with DTC's procedures. Under its usual procedures, DTC mails an omnibus proxy to
the issuer as soon as possible after the record date. The omnibus proxy assigns
Cede & Co.'s consenting rights to those direct participants to whose accounts
transition bonds are credited on the record date (identified in a listing
attached to the omnibus proxy). Accordingly, although transition bondholders
will not possess certificated transition bonds, DTC's rules provide a mechanism
by which transition bondholders will receive payments, be able to transfer their
interests, receive notices and consent with respect to their transition bonds.
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.
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
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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 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. 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.
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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 thereto with the consent
of the trustee if the rating agency condition has been satisfied with respect to
the amendment. Amendments of the sale agreement are also subject to requirements
under the indenture. See "THE INDENTURE -- MODIFICATIONS TO THE SALE AGREEMENT,
THE SERVICING AGREEMENT, THE ADMINISTRATION AGREEMENT AND ANY HEDGE AGREEMENT OR
INTEREST RATE SWAP AGREEMENT."
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 New
Jersey Uniform Commercial Code, the transfer of the initial bondable transition
property will be perfected as against all third persons. In addition, upon the
execution of a subsequent bill of sale and the filing of a financing statement
under the New Jersey Uniform Commercial Code, a transfer of subsequent bondable
transition property will also be perfected against all third persons. 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. Subsequent bondable
transition property is any 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;
a. 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
b. 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 perfected 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
68
not have an 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 governmental agency of the State of New
Jersey 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 agency of the
State of New Jersey may take any action that substantially
impairs the rights of transition bondholders whose bonds are
secured by the bondable transition property absent a
demonstration that the action is based upon reasonable
conditions and of a character appropriate to a significant and
legitimate public purpose 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 a substantial property interest of the
transition bondholders in the bondable transition property and
deprive the transition bondholders of their reasonable
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 final 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;
69
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 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 and, to the fullest extent
permitted by law, the assignee will have all of the rights
originally held by ACE with respect to the bondable transition
property set forth in the Competition Act, other than the
rights of a public utility, including the right to collect any
amounts payable by any customer or third-party supplier in
respect of the property;
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 bondable 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 in all
jurisdictions in which it is required to be so qualified 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
70
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 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),
71
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 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. None of ACE's representations or warranties is to be construed as a
representation or warranty that there will be no change in law by legislative
enactment, constitutional amendment or subsequent judicial reinterpretation of
constitutional law, or that the federal government, the State of New Jersey or
the BPU or any other governmental agency of the State of New Jersey will not
attempt to alter or to limit or in any way impair or reduce the value of the
bondable transition property or transition bond charges approved by the BPU
financing order in breach of the pledge and agreement of the State of New Jersey
under the Competition Act.
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.
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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;
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;
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8. 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
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;
9. 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;
10. 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;
11. ACE will deliver to the issuer file-stamped copies of, or filing
receipts for, any document filed as described in clause 10 above, as
soon as available following such filing;
12. 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
a. 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
of its representations and warranties in the sale agreement,
or
b. to block or overturn any attempts to cause a repeal of,
modification of or supplement to the Competition Act, the BPU
financing order, any issuance advice letter, the final
restructuring order (to the extent it affects the rights of
the transition bondholders or the value or validity of the
bondable transition property) or the rights of the transition
bondholders by legislative enactment or constitutional
amendment that would be adverse to the issuer, the trustee or
the transition bondholders;
13. 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
74
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;
14. ACE will use the proceeds from the sale of the bondable transition
property in accordance with the BPU financing order and the
Competition Act; and
15. in connection with the issuance of any transition bonds, upon
request from the issuer, ACE will execute and deliver such further
instruments and do such further acts as may be necessary to carry
out more effectively the provisions and purposes of the sale
agreement and the related bill of sale.
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:
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
75
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 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 a
significant part of the electric 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.
If one or more persons acquire the properties and assets of ACE
substantially as a whole and become the successor or successors to ACE in
accordance with the sale agreement, ACE will be released from its obligations
under the sale agreement on satisfaction of the foregoing conditions.
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.
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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 if the rating agency condition has been satisfied with
respect to the amendment. Amendments to the servicing agreement are also subject
to requirements under the indenture. See "THE INDENTURE -- MODIFICATIONS TO THE
SALE AGREEMENT, THE SERVICING AGREEMENT, THE ADMINISTRATION AGREEMENT AND ANY
HEDGE AGREEMENT OR INTEREST RATE SWAP AGREEMENT."
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. obtaining meter readings, 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;
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:
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1. ACE or any successor to ACE's electric public 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 electric public
utility business which acts as servicer, maintains (i) a
short-term rating of "A-1" or better by Standard & Poor's
Ratings Group, (ii) either a short-term rating of "P-1" or a
long-term rating on its senior, unsecured debt of "Baa2" or
better by Moody's Investors Service, Inc. and (iii) a
long-term rating on its senior, unsecured debt of "BBB" or
better by Fitch Ratings, 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 succeeding 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 preceding calendar
month. If remittances are to be made daily, then on each business day beginning
on the second business day following the date on which daily remittance
procedures begin, the servicer will remit an amount equal to the transition bond
charge collections estimated to have been received, on the second business day
prior to the remittance date, in payment of charges billed during the six month
period running through the end of the preceding calendar month and during the
month in which the remittance date occurs. In either case, estimates will be
based on the collections curve in effect on the remittance date.
On the 15th day of each month (or, if that is not a business day, on the
next succeeding business day), commencing with the eighth month after transition
bond charges are first billed to customers, the servicer will reconcile
estimated payments of transition bond charges to actual collections of
transition bond charges for the month that is seven months prior to the month in
which the reconciliation occurs. The day on which a reconciliation occurs for a
prior month is referred to as the reconciliation date relating to that month. 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 estimated payments of transition bond charges 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 for a particular month
exceeds the actual transition bond charge collections for that month, the
servicer may either reduce the amount it remits on the reconciliation date
relating to that month and, if necessary, on succeeding remittance dates, by the
amount of the excess payment, or require the trustee to pay to it the excess
amount from the collection account. If the collections curve payment for a
particular month is less than actual transition bond charge collections for that
month, the servicer will remit the shortfall to the trustee on the
reconciliation date relating to that month.
The servicer will file adjustment requests with the BPU at least annually,
but it may file adjustment requests quarterly or monthly as permitted by the BPU
financing order. In either case, the servicer will file these adjustment
requests at least 30 days in advance of the date on which it proposes
78
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. Any such filing must be made at least 90 days prior to the proposed
effective date and will be subject to BPU approval before implementation. 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 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 "Baa2" and a "BBB" (or the equivalent) long-term unsecured credit rating from
Moody's Investors Service, Inc. and Standard & Poor's Ratings Group,
respectively, the third-party supplier must pay a
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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, 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, in servicing the issuer's bondable transition property the servicer
will:
1. 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;
2. follow customary standards, policies and procedures;
3. use all reasonable efforts, consistent with its customary servicing
procedures, to enforce and maintain rights in respect of bondable
transition property; and
4. calculate the transition bond charge in compliance with the
Competition Act, the BPU financing order and any applicable tariffs;
Nevertheless, 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. The servicer may
take any other actions to the extent they would be in accordance with its
customary billing and collection practices conducted on its own behalf.
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 and has obtained all necessary licenses and approvals in
all jurisdictions in which the ownership or lease of property or the
conduct
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of its business (including the servicing of the bondable transition
property as required by the servicing agreement) requires such
licenses or approvals, except where the failure to so qualify or the
failure to obtain such necessary licenses and approvals would not be
reasonably likely to have a material adverse effect on the
servicer's business, operations, assets, revenues or properties or
to adversely affect the servicing of the bondable transition
property;
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.
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
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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.
MONTHLY FEE DISBURSEMENT DATE AND PAYMENT DATE STATEMENTS
For each monthly fee disbursement date, the servicer will provide to the
trustee a statement setting forth the amounts of fees and disbursements to be
paid on that date. For each payment date, the servicer will provide to the
issuer, the trustee and each rating agency a statement indicating, with respect
to the bondable transition property, among other things:
1. the amount to be paid to transition bondholders of each series and
class in respect of interest on that payment date;
2. the amount to be paid to transition bondholders of each series and
class in respect of principal on that payment date;
3. the scheduled transition bond principal balance and the transition
bond principal balance for each series and class as of that payment
date;
4. the amount on deposit in the overcollateralization subaccount for
each series as of the end of that payment date and the scheduled
overcollateralization level for that series, in each case as of that
payment date;
5. the amount on deposit in the capital subaccount for each series as
of the end of that payment date and the required capital amount for
that series;
6. the amount, if any, on deposit in the reserve subaccount for each
series as of the end of that payment date;
7. the amount paid to the counterparty under the hedge agreement since
the preceding payment date and on or before that payment date;
8. the amount paid to any swap counterparty (on a gross and a net basis
separately stated) under any interest rate swap agreement since the
preceding payment date and on or before that payment date;
9. the amounts paid to the trustee pursuant to the indenture's
allocation provisions since the preceding payment date and on that
payment date;
10. the amounts paid to the issuer pursuant to the indenture's
allocation provisions since the preceding payment date and on that
payment date;
11. the amounts paid to the independent managers pursuant to the
indenture's allocation provisions since the preceding payment date
and on that payment date; and
12. the amounts paid to the servicer pursuant to the indenture's
allocation provisions since the preceding payment date and on that
payment date; and
13. the amounts paid to the administrator pursuant to the indenture's
allocation provisions since the preceding payment date and on that
payment date; and
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14. the amount of any other transfers and payments to be made on that
payment date pursuant to the indenture's allocation provisions.
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 TRANSITION BONDHOLDERS." 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 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 later 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, notice with respect to
any servicer default will also 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 the
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. The servicer has agreed
to give the issuer, each rating agency, and the trustee notice of any servicer
default under the servicing agreement or other basic documents promptly after
acquiring knowledge thereof. In addition, as long as any transition bonds are
listed on the Luxembourg Stock Exchange and the rules of that exchange so
require, this notice will also be given by publication in a daily newspaper in
Luxembourg, which is expected to be the Luxemburger Wort.
MATTERS REGARDING THE SERVICER
ACE may assign its obligations under the servicing agreement to any
successor 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 or companies that succeed to all
or a significant part of the electric distribution business of the servicer and
so long as:
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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.
If one or more persons acquire the properties and assets of ACE
substantially as a whole and become the successor or successors to ACE in
accordance with the servicing agreement, ACE will be released from its
obligations under the servicing agreement on satisfaction of the foregoing
conditions. ACE may not resign from its obligations under the servicing
agreement except in the foregoing manner or upon a determination that the
performance by ACE of these obligations is no longer permissible under
applicable law, as evidenced by an opinion of counsel. If ACE resigns upon a
determination of this type, the resignation will become effective only when a
successor servicer has assumed ACE's obligations 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 the 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
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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.
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. Only a successor servicer that is an electric public
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 arrangements. 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.
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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;
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
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 or from any subaccount thereunder 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.
The transition bond charge and the subaccounts of each series will secure all
series; provided 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.
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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 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 default has occurred and is
continuing or will result from the issuance of the additional series of
transition bonds, an opinion of counsel to the issuer to the effect that, among
other things, a financing order issued by the BPU authorizing the additional
series of transition bonds has become final and nonappealable, and written
notice from each rating agency that the issuance of the additional series of
transition bonds will not result in the reduction or withdrawal of any rating on
any outstanding transition bonds by that rating agency.
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 to pay:
1. assumed operating expenses when incurred; plus
2. any amounts due under any hedge agreement or any interest rate swap
agreement when due; plus
3. any deposits required to be made of overcollateralization amounts
into the overcollateralization subaccount for the new series as set
forth in the related prospectus supplement and any deposits required
to be made of overcollateralization amounts for any outstanding
series of transition bonds as set forth in their respective
overcollateralization schedules; plus
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4. interest on the transition bonds of the new series at their
respective interest rates when due as set forth in the related
prospectus supplement and on any then outstanding series of
transition bonds when due; plus
5. principal of the transition bonds of the new series in accordance
with the expected amortization schedule set forth in the related
prospectus supplement and of any then outstanding series of
transition bonds in accordance with their respective expected
amortization schedules; plus
6. any deposits required to be made in the capital subaccounts on any
then outstanding series of transition bonds.
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 so long as the trustee
has a credit rating from each rating agency in one of its generic
rating category which signifies investment grade; 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) for any eligible investment having a maturity of greater
than one month, a long-term unsecured debt rating of
"AA-" by Standard & Poor's Ratings Group and Fitch
Ratings and "Aa3" by Moody's Investors Service, Inc., or
(2) for any eligible investment having a maturity one month
or less, a certificate of deposit rating of "A-1+" by
Standard & Poor's Ratings Group, "F1+" by Fitch Ratings
and "P-1" by Moody's Investors Service, Inc., 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. one or more series subaccounts;
3. a capital subaccount for each series;
4. an overcollateralization subaccount for each series;
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5. a reserve subaccount for each series;
6. if required by the indenture supplement relating to a series, a
class subaccount for any class of transition bonds in the series
that bears interest at a floating rate; and
7. if required by the indenture, 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.
As long as any transition bonds are listed on the Luxembourg Stock
Exchange, and to the extent the rules of that exchange so require, the issuer
will have a listing agent, a paying agent and a transfer agent in Luxembourg.
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 or certificates of deposit of
depository institutions or trust companies meeting standards
specified in the indenture;
3. commercial paper or other short-term unsecured debt obligations of
any corporation organized under the laws of the United States (other
than those of ACE) 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;
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 depository institutions or trust companies meeting
standards specified in the indenture;
7. repurchase obligations with respect to any security or whole loan
entered into with a financial institution or a broker/dealer meeting
standards specified in the indenture; or
8. any other investment permitted by the rating agencies, subject to
standards specified in the indenture.
These eligible investments are not expected to 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
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mature in an aggregate amount expected to be 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 a defeasance subaccount
established for the series. United States government obligations are direct
obligations, or certificates representing an ownership interest in direct
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 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 10 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.
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Class Subaccount. If so specified in the prospectus supplement relating to
a series of transition bonds that includes a class of transition bonds that
bears interest at a floating rate, a class subaccount will be established with
respect to that class. The related indenture supplement will specify the
priority and other terms determining the basis on which amounts in the related
series subaccount are to be deposited in and withdrawn from any class subaccount
established for that class. See " -- ALLOCATIONS AND PAYMENTS; PRIORITY OF
DISTRIBUTIONS" below.
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 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, ACE, as servicer, will
provide the trustee with an estimate of the revenue requirement of each series
of transition bonds, and of the total revenue requirement for all series of
transition bonds, in each case for the period that begins on that transition
bond charge adjustment date and ends on the date immediately preceding the next
scheduled transition bond charge adjustment date.
On the basis of these estimates, the trustee, on the business day
preceding each payment date occurring within this period, will allocate to each
series a portion of the total amount in the general subaccount of the collection
account equal to the portion of the total revenue requirement for all series in
the period represented by that series' revenue requirement for the period.
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On each payment date, the trustee will pay as to each series the amounts
as described in clauses 1 through 11 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 any unpaid fees and expenses, provided that indemnity
amounts will be limited to $10,000,000 in the aggregate for all
payment dates and monthly fee disbursement dates with respect to all
series, unless the issuer has received rating agency confirmation
that a further amount will not result in a reduction or withdrawal
of the rating of the outstanding transition bonds;
2. to the independent managers of the issuer, payment of that series'
portion of the managers' fees, plus any unpaid fees;
3. to the servicer, payment of that series' portion of the servicing
fee, plus any unpaid fees;
4. to the administrator, payment of that series' portion of the
administration fee, plus any unpaid fees and specified expenses;
5. to the persons entitled thereto, payment of that series' portion of
the operating expenses of the issuer other than those described in
clauses 1 through 4 above (up to an aggregate amount of $100,000 for
all series under this clause 5 for each quarterly interest period
ending on a payment date) including all current and past due
amounts, 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
- 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;
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7. 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;
8. to the capital subaccount for that series, replenishment up to the
required capital amount;
9. 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;
10. to the issuer, release of an amount equal to investment earnings on
amounts in the capital subaccount for that series since the
preceding payment date, provided no event of default exists and the
release would not reduce amounts in that subaccount below the
required level; and
11. to the reserve subaccount for that series, allocation of any
remaining amount, subject to reallocation of that remainder to
another series in order to prevent or mitigate a payment default of
the other series on that payment date.
If a class of any series of transition bonds bears interest at a floating
rate, the related prospectus supplement will specify the priority and other
terms determining the basis on which amounts in the series subaccount for that
series may be allocated to a class subaccount, if any, established for that
class as well as the basis on which amounts in the series subaccount, the
reserve subaccount, overcollateralization subaccount and capital subaccount for
that series may be allocated to the class subaccount.
In addition, if ACE enters into a hedge agreement in connection with any
series of transition bonds, the related prospectus supplement will specify the
terms governing the allocation of amounts payable to or received from the
related hedge counterparty and the basis, if any, on which amounts in the
reserve subaccount, overcollateralization subaccount and capital subaccount for
the series may be allocated to the hedge counterparty.
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, if and to
the extent specified in that prospectus supplement. In the case of an
acceleration upon an event of default or in the case of a redemption, the
revenue requirements of each series of transition bonds will be redetermined
taking into account the principal amount due as a result of the acceleration or
redemption, as the case may be. Upon an acceleration of the maturity of the
transition bonds and the sale or other liquidation of the collateral, the total
outstanding principal balance of and interest accrued on all outstanding series
of transition bonds will be payable without priority of interest over principal
or principal over interest and without regard to series or class, in the
proportion that the total outstanding principal balance of, and interest accrued
on, each series and class of transition bonds bears to the total outstanding
principal balances of, and interest accrued on, all series and classes of
transition bonds, provided that a particular series of transition bonds may
establish priorities among classes within that series if and to the extent
specified in the prospectus supplement relating to that series. For purposes of
the preceding sentence, interest will include net swap
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payments with respect to any class of transition bonds paying interest at a
floating rate if so specified in the related 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;
- 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 10 with respect to that series;
- from the overcollateralization subaccount for that series for
allocations in clauses 1 through 7 with respect to that series; and
- from the capital subaccount for that series for allocations in
clauses 1 through 7 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 general subaccount of the collection account (including
available investment earnings in the subaccounts of the collection account) 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.
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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, where specified below, the period since the previous payment
date:
1. the amount to be paid on that payment date to those transition
bondholders in respect of principal, expressed as a dollar amount
per thousand;
2. the amount to be paid on that payment date to those transition
bondholders in respect of interest, expressed as a dollar amount per
thousand;
3. the projected transition bond balance for that series and each class
included in that series, and the transition bond balance for that
series as of the close of that payment date;
4. the amount on deposit in the overcollateralization subaccount for
that series and in the scheduled overcollateralization level for
that series, in each case as of the close of that payment date;
5. the amount on deposit in the capital subaccount for that series as
of the close of that payment date and the required capital amount
for that series;
6. the amount, if any, on deposit in the reserve subaccount for that
series as of the close of that payment date, and any amounts
transferred from the reserve subaccount since the previous payment
date, including amounts paid on that payment date, to make payments
on another series;
7. the amount to be paid to each hedge or swap counterparty;
8. the amount paid to the trustee since the previous payment date,
including amounts paid on that payment date;
9. the amount paid to the issuer since the previous payment date,
including amounts paid on that payment date;
10. the amount paid to the servicer since the previous payment date,
including amounts paid on that payment date;
11. the amount paid to the administrator since the previous payment
date, including amounts paid on that payment date;
12. the amount paid to the independent managers since the previous
payment date, including amounts paid on that payment date; and
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13. any other transfers and payments to be made pursuant to the
indenture since the previous payment date, including amounts
transferred or paid on that payment date.
If any of the transition bonds are listed on the Luxembourg Stock Exchange
and the rules of that exchange so require, the trustee will arrange for
publication of notification of the statement's availability in a daily newspaper
in Luxembourg, which is expected to be the Luxemburger Wort.
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, to better
assure, convey and confirm to the trustee the collateral, or to
subject additional property to the lien of the indenture;
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 convey, assign or pledge any property to the trustee for the
benefit of the transition bondholders, the trustee and any swap
counterparty;
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;
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; or
9. 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
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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, that:
1. the action does 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 is satisfied with respect to the 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 required to
approve any supplemental indenture, or for any 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. reduce the percentage of the outstanding transition bonds, or of a
series or class of transition bonds, required to approve amendments
to the sale agreement, the administration agreement, the servicing
agreement or any hedge agreement or interest rate swap agreement;
6. 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;
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7. decrease the required capital amount, the overcollateralization
amount or the scheduled overcollateralization level with respect to
any series or any payment date;
8. 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;
9. reduce 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;
10. permit the creation of any lien ranking prior to or on a parity with
the lien of the indenture with respect to any of the collateral for
the transition bonds or, except as otherwise 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
11. 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, the servicing agreement and any hedge agreement or
interest rate swap agreement, and to compel or secure the performance and
observance by ACE, the servicer and any hedge or swap counterparty 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, the servicing
agreement and any hedge agreement or interest rate swap agreement.
If an event of default occurs and is continuing, the trustee may, and at
the direction of (1) the holders of a majority of the principal amount of
outstanding transition bonds of all series, with respect to the sale agreement,
the servicing agreement and the administration agreement, and (2) the holders of
the percentage of the principal amount of outstanding transition bonds of the
class specified in the related prospectus supplement, with respect to any hedge
agreement or interest rate swap agreement, will, exercise all rights, remedies,
powers, privileges and claims of the issuer against ACE, the servicer or any
swap counterparty under or in connection with the sale agreement, the
administration agreement, the servicing agreement and any interest rate swap
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, the Servicing Agreement, the
Administration Agreement and any Hedge Agreement or Interest Rate Swap
Agreement. With the consent of the trustee, the sale agreement and the servicing
agreement may be amended, so long as the rating agency condition is satisfied,
at any time and from time to time without the consent of the transition
bondholders or the counterparty to any hedge agreement or interest rate swap
agreement. However, as evidenced by an officer's certificate, an amendment to
the sale agreement or the servicing agreement may not adversely affect in any
material respect the interest of any transition bondholder or the counterparty
to any hedge or
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swap agreement without the consent of the holders of a majority of the principal
amount of outstanding transition bonds of each series or class, and each
counterparty to any hedge or swap transaction, materially and adversely affected
by the amendment.
Also, a hedge agreement or interest rate swap agreement may be amended
with the consent of the trustee and the related swap counterparty, so long as
the rating agency condition is satisfied. However, no such amendment may
materially adversely affect the interest of any other series or class of
transition bondholders or any related counterparty without the consent of the
holders of at least 66-2/3% of the principal amount of outstanding transition
bonds of each of those series or classes and without the consent of each of the
counterparties so affected.
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, the servicing agreement or the administration agreement,
as the case may be, or
2. proposes to waive timely performance or observance by ACE, the
servicer or any swap counterparty under the sale agreement, the
servicing agreement, the administration agreement, or any hedge
agreement or interest rate swap agreement, as the case may be,
in each case in a way that would materially and adversely affect the interests
of transition bondholders or the counterparty to any hedge or swap transaction,
the issuer must first notify the rating agencies of the proposed amendment,
modification, termination or surrender. 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 and any hedge
or swap counterparty of the proposed action and that the rating agency condition
has been satisfied with respect thereto. With respect to any proposed action
related to the sale agreement, the servicing agreement or the administration
agreement, the trustee will consent to the proposed action only with the consent
of the holders of a majority of the principal amount of outstanding transition
bonds of each series or class, and each counterparty to any hedge or swap
transaction, materially and adversely affected thereby and only upon
satisfaction of the rating agency condition. The Trustee will consent to any
proposed action related to any hedge agreement or interest rate swap agreement
only with the consent of each counterparty materially and adversely affected
thereby and only upon satisfaction of the rating agency condition with respect
to the action. For so long as any of the transition bonds are listed on the
Luxembourg Stock Exchange and the rules of that exchange so require, notice of
any such proposed action will be published in a daily newspaper in Luxembourg,
which is expected to be the Luxemburger Wort, promptly following its
effectiveness.
Termination of an Interest Rate Swap Agreement. Upon the occurrence of any
event that permits the issuer to terminate any interest rate swap agreement, the
issuer may terminate that agreement only if it is permitted to do so under the
terms specified in the related prospectus supplement.
EVENTS OF DEFAULT
An "Event of Default" is defined in the indenture as:
1. a default for five business days in the payment of any interest on
any transition bond;
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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.
If an event occurs or circumstance is actually known to a responsible
officer of the trustee that with the passage of time or giving of notice or both
would become an event of default, the trustee will notify each rating agency and
each holder of transition bonds of the event or circumstance within 90 days
after it occurs or, where the event or circumstance becomes an event of default
under the indenture before 90 days have lapsed, as soon as practicable after the
event of default has occurred and is actually known by a responsible officer of
the trustee. Other than in the case of a failure to pay principal of or interest
on any transition bond, the trustee may withhold the giving of this notice if
and so long as a committee of its responsible officers of the trustee in good
faith determines that this is in the interests of transition bondholders.
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
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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
New Jersey Uniform Commercial Code or the Competition Act or any
other applicable law and take any other appropriate 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. In such an event, ACE will take the legal or
administrative actions described under "THE SALE AGREEMENT -- ACE'S COVENANTS"
to protect the issuer and to block or overturn any such violation.
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 or otherwise liquidated, the indenture provides
for the allocation of the net proceeds in accordance with the payment date
allocation provisions described above under "THE INDENTURE -- ALLOCATIONS AND
PAYMENTS; PRIORITY OF DISTRIBUTIONS." 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.
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;
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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.
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 (or, if less than all series or classes are affected, of the
affected series or classes) 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;
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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.
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, the servicing
agreement, the administration agreement and any hedge agreements and
interest rate swap agreements 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.
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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.
The issuer may not, among other things:
1. except as expressly permitted by the indenture or any other basic
document, 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 under the Internal Revenue Code of 1986, as amended (the
"Code"), any credit on, or make any deduction from the principal,
interest or premium payable in respect of, the transition bonds
other than amounts properly withheld from such payments under the
Code or pursuant to any Interest Rate Swap Agreement;
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 or would result from the
distribution, (b) the funds distributed are those released to the
issuer as contemplated in clause 10 under " -- ALLOCATIONS AND
PAYMENTS; PRIORITY OF DISTRIBUTIONS" above or are otherwise not
subject to the lien of the indenture, and (c) the distribution would
not cause amounts on deposit in the capital subaccount for any
series to fall below 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, entering into agreements 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, guarantee or otherwise become liable for any
indebtedness except for the transition bonds and obligations under credit
enhancement, hedge agreements or interest rate swap agreements for particular
series or classes of 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.
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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 opinion of counsel
concerning filings made by the issuer on an annual basis and filings, if any,
made in connection with any amendment to the sale agreement or the servicing
agreement in order to protect the interest of the issuer and the trustee in the
bondable transition property.
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.
As long as any of the transition bonds are listed on the Luxembourg Stock
Exchange and the rules of that exchange so require, the trustee will publish or
cause to be published, following the preparation of its annual report, in a
daily newspaper in Luxembourg expected to be the Luxemburger Wort, a notice to
the effect that the information referred to in the preceding paragraph will be
available for review at the main office of the listing agent in Luxembourg.
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 the series with the trustee and the
execution and delivery by the trustee of instruments acknowledging the
satisfaction and discharge. 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
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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:
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
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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.
There will be no other conditions to the exercise by the issuer of its
legal defeasance option or its covenant defeasance option.
THE TRUSTEE
The Bank of New York 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" by
Moody's Investors Service, Inc. and at least "BBB-" by Fitch Ratings. 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.
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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 AND BASIC GENERATION SERVICE TRANSITION 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 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
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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
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.
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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 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.
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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.
MATERIAL INCOME TAX MATTERS FOR THE TRANSITION BONDS
The following discussion is a summary of material United States federal
income tax consequences of the purchase, ownership and disposition of the
transition bonds by U.S. holders (as defined below) and non-U.S. holders (as
defined below). This discussion only applies to initial purchasers of the
transition bonds who hold the transition bonds as capital assets (generally,
assets held for investment). This discussion is based upon the Internal Revenue
Code of 1986 as amended (the "Code"), treasury regulations (including proposed
treasury regulations) issued thereunder, Internal Revenue Service ("IRS")
rulings and pronouncements and judicial decisions now in effect, all of which
are subject to change, possibly with retroactive effect. This discussion does
not address all aspects of United States federal income taxation that may be
relevant to purchasers in light of their particular circumstances, such as
purchasers who are subject to special tax treatment (for example, (1) banks,
partnerships, regulated investment companies, insurance companies, dealers in
securities or currencies or tax-exempt organizations, (2) persons holding
transition bonds as part of a straddle, hedge, conversion transaction or other
integrated investment, or (3) persons whose functional currency is not the U.S.
dollar). In addition, this discussion does not address alternative minimum taxes
or any state, local or foreign tax laws.
IT IS RECOMMENDED THAT ALL PROSPECTIVE PURCHASERS 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.
For purposes of this summary, a "U.S. holder" is a beneficial owner of a
transition bond that is, for United States federal income tax purposes (1) a
person who is a citizen or resident of the United States, (2) a corporation
created or organized in or under the laws of the United States or any state
thereof or the District of Columbia, (3) an estate the income of which is
subject to United States federal income taxation regardless of its source, or
(4) a trust if (a) a court within the United States is able to exercise primary
supervision over the administration of such trust and one or more United States
persons have the authority to control all substantial decisions of the trust or
(b) such trust has in effect a valid election to be
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treated as a domestic trust for United States federal income tax purposes. A
"non-U.S. holder" is a beneficial owner of a transition bond that is not a U.S.
holder.
CLASSIFICATION OF THE TRANSITION BONDS
The issuer and ACE have received a private letter ruling from the IRS to
the effect that for United States federal income tax purposes (i) the transition
bonds will be classified as obligations of ACE, (ii) the issuance of the
transition bonds will not result in gross income to ACE, and (iii) the issuance
of the BPU financing order will not result in gross income to 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 for United States federal income tax purposes (i) the issuer will
not be subject to United States federal income tax as an entity separate from
ACE, (ii) the transition bonds will be obligations of ACE, (iii) the issuance of
the transition bonds will not result in gross income to ACE, and (iv) the
issuance of the BPU financing order will not result in gross income to ACE. In
connection with the issuance of each new series of transition bonds, LeBoeuf,
Lamb, Greene & MacRae, L.L.P., will render its opinion to the effect that for
United States federal income tax purposes (i) the issuer will not be subject to
United States federal income tax as an entity separate from ACE, (ii) the
relevant series of transition bonds will be obligations of ACE, (iii) the
issuance of the relevant series of transition bonds will not result in gross
income to ACE, (iv) the issuance of the relevant BPU financing order will not
result in gross income to ACE, and (v) in the case of a subsequent issuance of
transition bonds only, such issuance will not adversely affect the
characterization of any then outstanding transition bonds as obligations of ACE.
The issuer, ACE and each beneficial owner of a transition bond (by
acquiring a beneficial interest) agree to treat the transition bonds as debt of
ACE for United States federal income tax purposes. The remainder of this
discussion assumes that the transition bonds will constitute debt of ACE for
United States federal income tax purposes.
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
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enters into or arranges for any hedge or swap transaction, the applicable
prospectus supplement will include a description of the United States 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 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, is not a bank receiving interest described in Section
881(c)(3)(A) of the Code 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
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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 30%
(rate scheduled to be reduced gradually to 28% by year 2006) 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 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 30% (rate scheduled to be reduced gradually to 28% by
year 2006) 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 LeBoeuf, Lamb, Greene & MacRae, L.L.P., special New
Jersey tax counsel to the issuer and ACE, 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.
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ERISA CONSIDERATIONS
The following is a general summary based upon provisions of the Employee
Retirement Security Act of 1974, as amended ("ERISA"), and Section 4975 of the
Internal Revenue Code, and related regulations and administrative and judicial
interpretations as of the date hereof. This summary does not purport to be
complete, and no assurance can be given that future legislation, court
decisions, administrative regulations, rules or administrative pronouncements
will not significantly modify the requirements summarized herein, possibly with
retroactive effect, which could affect the accuracy of the statements and
conclusions set forth herein regarding an investment in transition bonds.
IT IS RECOMMENDED THAT ALL PROSPECTIVE PURCHASERS THAT MAY BE SUBJECT TO
ERISA OR TO SECTION 4975 OF THE INTERNAL REVENUE CODE CONSULT WITH ITS OWN
COUNSEL ABOUT THE POTENTIAL CONSEQUENCES UNDER SUCH LAWS OF AN INVESTMENT IN THE
TRANSITION BONDS IN LIGHT OF THEIR PARTICULAR CIRCUMSTANCES.
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."
Investments by Plans are subject to ERISA's general fiduciary requirements,
including the requirement of investment products and diversification and the
requirement that a Plan's investments be made in accordance with the documents
governing the Plan. The prudence of particular investment must be determined by
the responsible fiduciary of a Plan by taking into account the Plan's particular
circumstances and all of the facts and circumstances of an investment in a
transition bond including without limitation the fact that in the future there
may be no market in which the Plan will be able to sell or otherwise dispose of
any transition bond it may purchase.
Section 406 of ERISA and Section 4975 of the Internal Revenue Code
prohibit certain transactions involving the assets of a Plan and Parties in
Interest, unless a statutory or administrative exemption is applicable to the
transaction. A Party in Interest that engages in the prohibited transaction may
be subject to excise taxes and other penalties and liabilities under ERISA and
the Internal Revenue Code.
PLAN ASSET ISSUES FOR AN INVESTMENT IN THE TRANSITION BONDS
Under U.S. Department of Labor regulations at 29 C.F.R. Section 2510.3-101
(the "Plan Asset Regulation"), if a Plan makes an "equity" investment in a
corporation, partnership, trust or other specified
115
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 is anticipated 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, ERISA and
the Internal Revenue Code, 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. Furthermore, there can be no assurance that any of the PTCEs or
any other exemptions will be available with respect to any particular
transaction involving the transition bonds.
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
A PLAN TO PURCHASE AND HOLD THE
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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
Any insurance company proposing to invest assets of its general account in
the transition bonds should consider the implications of the United States
Supreme Court's decision in John Hancock Mutual Life Insurance Co. v. Harris
Trust and Savings Bank, 510 U.S. 86, 114 S. Ct. 517 (1993), in which the United
States Supreme Court held that in certain circumstances assets in a life
insurance company's general account are treated as assets of a Plan that owns
that policy or other contract with such insurance company, as well as the effect
of Section 401(c) of ERISA, as interpreted by regulations issued by the
Department of Labor in January, 2000 (the "General Account Regulations").
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;
117
3. the composition of the Plan's portfolio with respect to
diversification by type of asset;
4. the Plan's funding objectives;
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 (as defined in Section 3(32) of ERISA) and some church
plans (as defined in Section 3(33) of ERISA) 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. Fiduciaries of any such Plans should consult with their counsel
before purchasing any transition bonds.
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, or that this investment is appropriate for 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.
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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 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., New York, New York, a limited liability partnership including
professional corporations, and for the underwriters by Latham & Watkins, New
York, New York. Some legal matters relating to federal tax consequences of the
issuance of the transition bonds and to State of New Jersey tax consequences of
the issuance of the transition bonds will be passed upon for the issuer by
LeBoeuf, Lamb, Greene & MacRae, L.L.P., New York, New York. LeBoeuf, Lamb,
Greene & MacRae, L.L.P. acts from time to time as counsel for ACE and its
affiliates in certain matters.
EXPERTS
The balance sheet as of December 31, 2001 included in this prospectus has
been so included in reliance on the report of PricewaterhouseCoopers LLP,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.
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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.
"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 and the certificate of formation filed with the Secretary of
State of the State of Delaware to establish the issuer.
"basic generation service" means electric generation service provided
pursuant to the Competition Act to customers who have not chosen a third-party
supplier.
"basic generation service transition costs" means the amount by which a
utility's payments to procure power for basic generation service and related
ancillary and administrative costs from August 1, 1999 to July 31, 2003 exceeds
net revenues from the charge for that service established by the BPU.
"bondable stranded costs rate order" means an order issued by the BPU
pursuant to the Competition Act which creates bondable transition property.
"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, collectively, the bondable stranded costs
rate order issued by the BPU to ACE on September 20, 2002, any subsequent
bondable stranded costs rate orders issued from time to time by the BPU to ACE,
and any orders supplemental to any of the foregoing.
"business day" means any day other than a Saturday or Sunday or a day on
which banking institutions in New York, New York or, with respect to any
transition bonds listed on the Luxembourg Stock Exchange, in Luxembourg, are
required or authorized by law or executive order to remain closed.
"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.
120
"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.
"Competition Act" means the New Jersey Electric Discount and Energy
Competition Act, enacted in February 1999 and amended in September 2002.
"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" for a series or class of transition bonds
means 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, dated March
30, 2001, 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 of transition bonds 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 proposed action, that
each of Moody's Investors Service, Inc., Standard & Poor's Ratings Group, and
Fitch Ratings has been notified of the proposed action and each of Standard &
Poor's Ratings Group and Fitch Ratings confirms in writing that
121
the proposed action will not result in the reduction or withdrawal of its then
current rating of any series or class of transition bonds, provided that Moody's
Investors Service, Inc. must also confirm this in writing where the proposed
action is the issuance of an additional series of transition bonds.
"reconciliation date" means the 15th 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.
"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 of transition bonds means a subaccount
of the collection account into which will be deposited the excess, if any, of
collections of transition bond charges allocated to that series as described
under clause 11 in "THE INDENTURE -- ALLOCATIONS AND PAYMENTS; PRIORITY OF
DISTRIBUTIONS."
"revenue requirement" for a series of transition bonds means, on any
determination date, the amount the servicer estimates in good faith to be
payable as to that series during the period that begins on the last date on
which the transition bond charge was adjusted and ends on the day before the
next such date.
"series subaccount" for a series of transition bonds means a subaccount of
the collection account, established upon the issuance of that series.
"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 a utility's 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 an electric public utility's electric customers within its service
territory who use its transmission and distribution system.
122
INDEX TO FINANCIAL STATEMENTS OF ATLANTIC CITY ELECTRIC TRANSITION FUNDING LLC
Page
Report of Independent Accountants..........................................F-2
Balance Sheet of Issuer....................................................F-3
Notes to Financial Statements..............................................F-4
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Member
of Atlantic City Electric Transition Funding LLC
In our opinion, the accompanying balance sheet presents fairly, in all
material respects, the financial position of Atlantic City Electric Transition
Funding LLC (a Delaware limited liability company and wholly owned subsidiary of
Atlantic City Electric Company) at December 31, 2001, in conformity with
accounting principles generally accepted in the United States of America. This
financial statement is the responsibility of the Company's management; our
responsibility is to express an opinion on this financial statement based on our
audit. We conducted our audit of this statement in accordance with auditing
standards generally accepted in the United States of America, which require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statement is free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statement, 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 our opinion.
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
November 4, 2002
F-2
ATLANTIC CITY ELECTRIC TRANSITION FUNDING LLC
BALANCE SHEETS
September December 31,
30, 2002 2001
(Unaudited)
ASSETS
OTHER ASSETS:
Deferred financing costs $ 3,305 $ 2,146
-------- ---------
Total assets $ 3,305 $ 2,146
======== ========
LIABILITIES
OTHER LIABILITIES:
Payable to ACE $ 3,305 $ 2,146
-------- --------
Total liabilities $ 3,305 $ 2,146
======== ========
The accompanying Notes to Financial Statements are an integral part of these
statements.
F-3
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 Atlantic City Electric Company ("ACE") under
the laws of the State of Delaware, was formed on March 28, 2001 pursuant to a
limited liability company agreement of ACE, as sole member of the Company. ACE
is a wholly owned subsidiary of Conectiv, which is a wholly owned subsidiary of
Pepco Holdings, Inc. Each of Conectiv and Pepco Holdings, Inc. is a registered
holding company under the Public Utility Holding Company Act of 1935. ACE is a
public utility which supplies and delivers electricity to its customers under
the trade name Conectiv Power Delivery.
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 September 20, 2002 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 $440 million 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.
The Company did not have results of operations, cash flows or member's equity in
the period from its formation to December 31, 2001, as the Company had not
issued Bonds and purchased B.P. As a result, the accompanying financial
statements do not include Statements of Operations, Statements of Cash Flows and
Statements of Member's Equity.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities, and
disclosure of contingent assets and liabilities at the date of the financial
statements, and revenues and expenses during the reporting period. Actual
results could differ from those estimates.
1
ATLANTIC CITY ELECTRIC TRANSITION FUNDING LLC
NOTES TO FINANCIAL STATEMENTS
(Continued)
Deferred Financing Costs
Costs associated with the anticipated issuance of Bonds are capitalized and will
be amortized over the life of the Bonds utilizing the effective interest method.
The deferred financing costs have been paid by ACE and will be reimbursed by the
Company upon the issuance of Bonds.
Income Taxes
The Company is a single member limited liability company which is treated as a
disregarded entity for federal and state income tax purposes. Accordingly, the
Company's results will be included in the taxable income of ACE.
(3) 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 $440,000, which will be determined when the Bonds are issued. This
servicing fee will be recovered by the Company through the TBC. The Company will
also enter into an administration agreement with PHI Service Company, an
affiliated company, pursuant to which PHI Service Company will provide
administrative services to the Company.
All deferred financing costs incurred prior to the issuance of Bonds have been
or will be paid by ACE and will be reimbursed by the Company upon the issuance
of Bonds. These costs are classified as payable to ACE in the accompanying
balance sheets.
F-2
ATLANTIC CITY ELECTRIC TRANSITION FUNDING LLC
NOTES TO FINANCIAL STATEMENTS
(Continued)
(5) SUBSEQUENT EVENTS
Subsequent to December 31, 2001, the Company has incurred certain additional
obligations in connection with the anticipated issuance of Bonds and purchase of
BTP. To the extent such obligations are not paid with a portion of the proceeds
from the issuance of Bonds, such costs would be funded by ACE.
(6) INTERIM FINANCIAL INFORMATION (UNAUDITED)
The unaudited, interim financial statement contained herein includes the
accounts of the Company and reflects all adjustments, consisting of only normal
recurring adjustments, necessary in the opinion of management for a fair
presentation of interim results.
F-3
The Requirement to Deliver a Copy of the Prospectus. Until 90 days after the
date of this Prospectus Supplement, all dealers that effect transactions in the
related Series of Transition Bonds, whether or not participating in the
distribution of the related Series of Transition Bonds, may be required to
deliver a Prospectus and a Prospectus Supplement. This delivery requirement is
in addition to the dealers' obligation to deliver a Prospectus and a Prospectus
Supplement when acting as underwriters and with respect to their unsold
allotments or subscriptions.
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 $ 184,000
-------------
Printing and Engraving Expenses $ 120,000
-------------
Trustee's Fees and Expenses $ 5,000
-------------
Legal Fees and Expenses $ 4,000,000
-------------
Blue Sky Fees and Expenses $ 3,000
-------------
Accountants' Fees and Expenses $ 130,000
-------------
Rating Agency Fees $ 506,000
-------------
Miscellaneous Fees and Expenses $ 1,126,000
-------------
Total $ 6,074,000
=============
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 as it exists or may be amended to provide greater or broader
indemnification rights, 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, or by reason of the fact that the member or
manager was serving in such capacity at the request of Atlantic City Electric
Transition Funding LLC, except that indemnification, unless ordered by a court,
may not be made to or on behalf of the member or any manager if a final
adjudication established that its acts or omissions involved intentional
misconduct, fraud or a knowing violation of the law and was material to the
cause of action.
II-1
ITEM 16. Exhibits
Exhibit No. Description
1.1 Form of Underwriting Agreement.
3.1 Limited Liability Company Agreement of Atlantic City Electric
Transition Funding LLC.**
3.2 Certificate of Formation of Atlantic City Electric Transition
Funding LLC.**
3.3 Form of Amended and Restated Limited Liability Company Agreement of
Atlantic City Electric Transition Funding LLC.**
4.1 Form of Indenture.**
4.2 Form of Series Supplement including 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 LeBoeuf, Lamb, Greene & MacRae, L.L.P. with respect to
material State of New Jersey tax matters.
10.1 Form of Sale Agreement.**
10.2 Form of Servicing Agreement.**
10.3 Form of Administration Agreement.**
10.4 Petition of ACE to the New Jersey Board of Public Utilities, dated
June 25, 2001.**
10.5 Financing Order of the BPU issued September 20, 2002.
23.1 Consent of LeBoeuf, Lamb, Greene & MacRae, L.L.P. (included in its
opinions filed as Exhibits 5.1, 8.1 and 8.2).
23.2 Consent of LeBoeuf, Lamb, Greene & MacRae, L.L.P.
23.3 Consent of PricewaterhouseCoopers LLP.
25.1 Statement of Eligibility under the Trust Indenture Act of 1939, as
amended, of The Bank of New York, as Trustee under the Indenture.
99.1 Final Restructuring Order of the BPU, dated March 30, 2001.**
99.2 Internal Revenue Service Private Letter Ruling pertaining to
Transition Bonds.
- ----------
** Previously filed
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
II-3
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 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.
II-3
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
the Registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form S-3 and that the security rating
requirement of Form S-3 will be met by the time of sale, and has duly caused
this amendment to its registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Wilmington, State of
Delaware, on November 15, 2002.
Atlantic City Electric Transition Funding LLC
By: /s/ Joseph M. Rigby*
-------------------------------------------
Name: Joseph M. Rigby
Title: President and COO
Pursuant to the requirements of the Securities Act of 1933, this amendment
to the Registrant's registration statement has been signed by the following
persons on November 15, 2002 in the capacities indicated.
/s/ Joseph M. Rigby
-------------------------------------------
Name: Joseph M. Rigby
Title: President and COO
(Principal Executive Officer)
/s/ James P. Lavin
-------------------------------------------
Name: James P. Lavin
Title: Chief Financial Officer and Manager
(Principal Financial Officer)
/s/ Jeffery E. Snyder
-------------------------------------------
Name: Jeffery E. Snyder
Title: Assistant Treasurer
(Principal Accounting Officer)
/s/ Kirk J. Emge
-------------------------------------------
Name: Kirk J. Emge
Title: General Counsel
II-4
INDEX TO EXHIBITS
Exhibit No. Description
1.1 Form of Underwriting Agreement.
3.1 Limited Liability Company Agreement of Atlantic City Electric
Transition Funding LLC.**
3.2 Certificate of Formation of Atlantic City Electric Transition
Funding LLC.**
3.3 Form of Amended and Restated Limited Liability Company Agreement of
Atlantic City Electric Transition Funding LLC.**
4.1 Form of Indenture.**
4.2 Form of Series Supplement including 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 LeBoeuf, Lamb, Greene & MacRae, L.L.P. with respect to
material State of New Jersey tax matters.
10.1 Form of Sale Agreement.**
10.2 Form of Servicing Agreement.**
10.3 Form of Administration Agreement.**
10.4 Petition of ACE to the New Jersey Board of Public Utilities, dated
June 25, 2001.**
10.5 Financing Order of the BPU issued September 20, 2002.
23.1 Consent of LeBoeuf, Lamb, Greene & MacRae, L.L.P. (included in its
opinions filed as Exhibits 5.1, 8.1 and 8.2).
23.2 Consent of LeBoeuf, Lamb, Greene & MacRae, L.L.P.
23.3 Consent of PricewaterhouseCoopers LLP.
25.1 Statement of Eligibility under the Trust Indenture Act of 1939, as
amended, of The Bank of New York, as Trustee under the Indenture.
99.1 Final Restructuring Order of the BPU, dated March 30, 2001.**
99.2 Internal Revenue Service Private Letter Ruling pertaining to
Transition Bonds.
- ----------
** Previously filed