The information in this prospectus supplement and the accompanying prospectus is
not complete and may be changed. We may not sell these securities until we
deliver a final prospectus supplement and accompanying prospectus. The issuer is
not offering to sell these securities and is not soliciting an offer to buy
these securities in any state where the offer or sale is not permitted.
SUBJECT TO COMPLETION DATED FEBRUARY 8, 2001
P R O S P E C T U S S U P P L E M E N T
(To Prospectus dated , 2001)
PECO Energy Transition Trust
Issuer
PECO Energy Company
Seller and Servicer
Series 2001-A
$ Transition Bonds
Issued to refinance Series 1999-A Bonds
Class A-3 and Class A-5 in Part
The Issuer will issue:
Class A-1
-----------------
Principal Amount $
Price $
( %)
Underwriter's Discounts and Commissions $
( %)
Proceeds to the Issuer $
Bond Rate %
Interest Paid Semi-Annual
Optional Redemption* No
First Payment Date September 1, 2001
Special Payment Date December 31, 2010
Expected Final Payment Date
Class Termination Date
* All Series 2001-A Bonds are subject to optional redemption in whole once the
outstanding principal balance has been reduced to less than or equal to 5%
of the initial principal balance.
- --------------------------------------------------------------------------------
Before you purchase these securities, you should carefully consider the Risk
Factors beginning on Page 19 in the accompanying prospectus.
- --------------------------------------------------------------------------------
o These securities are obligations of PECO Energy Transition Trust only and are
secured only by the assets of PECO Energy Transition Trust.
o PECO Energy Transition Trust is a special purpose entity.
- --------------------------------------------------------------------------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined that
this prospectus supplement or the accompanying prospectus is accurate or
complete. Any representation to the contrary is a criminal offense.
- --------------------------------------------------------------------------------
There currently is no secondary market for the Series 2001-A Bonds, and there
is no assurance that one will develop.
Salomon Smith Barney
Banc One Capital Markets, Inc. Credit Suisse First Boston First Union Securities Inc.
ABN AMRO Incorporated Barclays Capital
JP Morgan Janney Montgomery Scott LLC Lehman Brothers
Mellon Financial Markets, LLC Merrill Lynch & Co. TD Securities
Commerce Capital Investments, Inc. Loop Capital Markets, LLC Pryor, Counts & Co., Inc.
The date of this prospectus supplement is , 2001.
TABLE OF CONTENTS
WHERE TO FIND INFORMATION IN THESE DOCUMENTS ....................................... S-1
SUMMARY OF TERMS ................................................................... S-2
Securities Offered ................................................................ S-3
Introduction ...................................................................... S-4
The Collateral .................................................................... S-5
Interest .......................................................................... S-5
Principal ......................................................................... S-5
Collection Account and Subaccounts ................................................ S-5
Credit Enhancement ................................................................ S-6
Optional Redemption ............................................................... S-6
Mandatory Redemption .............................................................. S-6
Intangible Transition Charge Adjustment Process ................................... S-6
Adjustment Date ................................................................... S-7
Tax Status ........................................................................ S-7
ERISA Considerations .............................................................. S-7
Issuer's and Servicer's Address and Telephone Number of Principal Executive Office S-7
RISK FACTORS ....................................................................... S-8
THE SERIES 2001-A BONDS ............................................................ S-8
General ........................................................................... S-8
Distributions to the Series 2001-A Subaccount ..................................... S-8
Distributions from the Series 2001-A Subaccount ................................... S-8
Interest .......................................................................... S-9
Principal ......................................................................... S-12
Optional Redemption ............................................................... S-17
Mandatory Redemption .............................................................. S-17
Overcollateralization ............................................................. S-17
Other Credit Enhancement .......................................................... S-21
Reports to Holders of Series 2001-A Bonds ......................................... S-21
DESCRIPTION OF INTANGIBLE TRANSITION PROPERTY ...................................... S-22
The Intangible Transition Charges ................................................. S-22
Rate Class Descriptions ........................................................... S-23
Adjustments to the Intangible Transition Charges .................................. S-24
DESCRIPTION OF PECO ENERGY'S BUSINESS .............................................. S-26
SERVICING .......................................................................... S-26
Monthly Servicing Fee ............................................................. S-26
Servicer Advances ................................................................. S-26
REFINANCING OF THE SERIES 1999-A BONDS CLASS A-3 AND
CLASS A-5 ........................................................................ S-26
UNDERWRITING THE SERIES 2001-A BONDS ............................................... S-27
RATINGS ............................................................................ S-29
GLOSSARY OF DEFINED TERMS .......................................................... S-30
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.
This supplement begins with several sections describing these securities:
o Summary of Terms provides important amounts, dates and other terms of
your series of transition bonds,
o The Series 2001-A Bonds describes the key structural features of your
series of transition bonds, and
o Description of Intangible Transition Property describes the intangible
transition charges that provide the source for payment for all series
of transition bonds and refers you to the sections in the accompanying
prospectus where you can find further information about the intangible
transition 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-1
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.
S-2
Securities Offered
Series 2001-A Transition Bonds
$
Issued to Refinance Series 1999-A Bonds Class A-3 and Class A-5 in Part
- --------------------------------------------------------------------------------
Issuer: PECO Energy Transition Trust
Seller and Servicer: PECO Energy Company
Bond Trustee: The Bank of New York
Pricing Date: , 2001
Series Issuance Date: , 2001
Clearance and Settlement: DTC/Clearstream/Euroclear
- --------------------------------------------------------------------------------
Initial Class Principal Balance Bond Rate % of Total Series Principal
--------------------------------- ----------- ----------------------------
Class A-1 $ % %
Monthly Servicing Fee: Either 1/12 of 0.25% of the outstanding principal balance of the Series 2001-A
Bonds as long as intangible transition charges are included in electric bills sent to
customers by the servicer or 1/12 of 1.50% of the outstanding principal balance of
the Series 2001-A Bonds if intangible transition charges are not included in such
electric bills.
Anticipated Ratings: S&P/Fitch, Inc. AAA
Moody's Aaa
Credit Enhancement: o Intangible transition charge adjustments,
o Overcollateralization for all series of transition bonds, funded over the life of
the Series 2001-A Bonds and all other transition bonds issued by the issuer and
expected to reach 2% of the initial principal balance of the Series 1999-A
Bonds and the Series 2000-A Bonds by the expected final payment date of the
Class A-1 Bonds, and
o Capital of the issuer of approximately $25 million available to all series of
transition bonds.
Payment Dates: March 1 and September 1 of each year and the special payment date (December 31,
2010) or, if not a business day, the next business day.
First Payment Date: September 1, 2001
Special Payment Date: December 31, 2010
Expected Final
Payment Date:*
Termination Date:
Optional Redemption: All Series 2001-A Bonds are subject to optional redemption in whole once the
outstanding principal balance of the Series 2001-A Bonds has been reduced to less
than or equal to 5% of the initial principal balance.
Mandatory Redemption: All Series 2001-A Bonds are subject to mandatory redemption in whole if the
seller is obligated to pay liquidated damages for the breach of specified
representations and warranties under the sale agreement.
Record Date: Close of business on the day prior to any payment date.
CUSIP Number:
* The expected final payment date is the date upon which the issuer expects to
make the final payment on your Series 2001-A Bond. However, the final payment
on your Series 2001-A Bond may be made after that date. Your Series 2001-A Bond
will not be in default unless it is not paid in full by its termination date
set forth above.
S-3
Introduction
The Pennsylvania Electricity Generation Customer Choice and Competition
Act was enacted in 1996 and provides for the restructuring of the electric
industry in Pennsylvania, including retail competition for generation services.
Prior to enactment of the Pennsylvania Competition Act, electric utilities,
such as PECO Energy Company (referred to as PECO Energy throughout this
prospectus supplement and the accompanying prospectus), invested in various
generation-related assets, such as electric generating facilities--including
nuclear power plants--and power purchase contracts with third-party generators
of electricity, to help meet their duties to serve the public as regulated
utilities. The electric utilities recovered these investments by charging their
customers the regulated rates approved by the Pennsylvania Public Utility
Commission.
One of the effects of the deregulation of electricity generation is that
rates are determined by market forces. These market rates may not be high
enough to allow the utilities to recover their investments in
generation-related assets. Accordingly, the utilities may incur a loss in value
of their generation-related assets as a result of the transition from a
regulated environment to competition for electric generation services.
The Pennsylvania Competition Act provides for utilities to recover the
anticipated loss in value of their generation-related assets, known as stranded
costs, by including a new type of charge in their customers' bills. These new
charges are known as competitive transition charges. Utilities are authorized
to securitize the right to recover all or a portion of these charges through
the issuance of transition bonds, such as the securities described in this
prospectus supplement. This right is known as intangible transition property.
Once intangible transition property is securitized, the utility's right to
recover its stranded costs through the competitive transition charges is
replaced by the intangible transition property holder's right to recover the
costs associated with the issuance, credit enhancing and servicing of the
transition bonds through intangible transition charges included in customers'
electric bills. Intangible transition charges reduce the amount of competitive
transition charges and, if necessary, PECO Energy's variable distribution
rates, in order that all charges to customers do not exceed rate caps agreed to
by PECO Energy, which extend to December 31, 2006.
Intangible transition property was created by the Pennsylvania Competition
Act and qualified rate orders issued by the Pennsylvania Public Utility
Commission on May 14, 1998 and March 16, 2000. The first order, referred to in
this prospectus supplement and the accompanying prospectus as the First QRO,
authorized $4 billion of intangible transition property which PECO Energy sold
to PECO Energy Transition Trust in connection with the issuance of the Series
1999-A Bonds on March 25, 1999. The First QRO authorized the refinancing of
transition bonds issued in accordance with that order. The second order,
referred to in this prospectus supplement and the accompanying prospectus as the
2000 QRO, authorized an additional $1 billion of intangible transition property,
which PECO Energy sold to PECO Energy Transition Trust in connection with the
issuance of the Series 2000-A Bonds on May 2, 2000. There will be no sale of
intangible transition property in connection with the issuance of Series 2001-A
Bonds. All of the intangible transition property held by PECO Energy Transition
Trust, together with other assets, will serve as collateral for all transition
bonds issued under the indenture, including the Series 2001-A Bonds, the Series
2000-A Bonds and the Series 1999-A Bonds.
The proceeds of the issuance of the Series 2001-A Bonds are being used to
redeem $_____ of the Series 1999-A Bonds Class A-3 and $________ of the
Series 1999-A Bonds Class A-5 that were issued on March 25, 1999.
Intangible transition property represents the irrevocable right to collect
intangible transition charges from customers to recover:
o a portion of PECO Energy's stranded costs, and
o an amount sufficient to provide for any credit enhancement, to fund any
reserves, and to pay interest, premiums, if any, costs of defeasance,
servicing fees and other fees, costs and charges relating to transition
bonds.
Intangible transition charges are nonbypassable. Customers cannot avoid paying
them even if they purchase electricity generation services from a supplier
other than PECO Energy. PECO Energy Transition Trust's other property included
in the collateral for these securities is described under the subcaption "The
Collateral."
S-4
For more information on the Pennsylvania Competition Act, intangible
transition property and intangible transition charges, you should review the
material under the captions entitled "Risk Factors," "The Pennsylvania
Competition Act," "PECO Energy's Electric Restructuring Plan" and "The
Qualified Rate Orders and the Intangible Transition Charges" in the
accompanying prospectus.
The following is a summary of other specific matters related to these
securities:
The Collateral
The Series 2001-A Bonds as well as all other transition bonds issued under the
indenture will be secured by the collateral, primarily consisting of:
o all the issuer's right, title and interest in and to the intangible
transition property authorized by the qualified rate orders and sold by PECO
Energy to the issuer under the intangible transition property sale
agreement,
o collections of intangible transition charges arising from the intangible
transition property authorized by the qualified rate orders that are
remitted to the issuer under the master servicing agreement among the
issuer, the servicer and any other issuers of transition bonds that meet
specified criteria,
o the issuer's rights under the intangible transition property sale agreement,
except for specified provisions for indemnification of the issuer,
o the issuer's rights under the master servicing agreement, except for
specified provisions for indemnification of the issuer, and
o specified bank accounts of the issuer and all amounts or investment property
in these accounts, other than cash amounts payable to the issuer or the
servicer described in the accompanying prospectus.
The intangible transition charges collected by the servicer will be allocated
among all series of transition bonds issued by PECO Energy Transition Trust
(which includes the Series 2001-A Bonds, the Series 2000-A Bonds and the Series
1999-A Bonds) and any other issuer on a Pro Rata basis, as described under the
caption "The Series 2001-A Bonds--General."
For a more detailed description of the collateral securing the transition
bonds, you should review the material under the captions "The Qualified Rate
Orders and the Intangible Transition Charges" and "The Indenture--Security" in
the accompanying prospectus. For a summary of the terms of the intangible
transition property sale agreement, see "The Sale Agreement" in the
accompanying prospectus. For a summary of the terms of the master servicing
agreement, see "The Master Servicing Agreement" in the accompanying prospectus.
For a more detailed description of the allocation of intangible transition
charges among series of transition bonds, see "The Series 2001-A Bonds--
General" in this prospectus supplement.
Interest
Holders of this series are expected to receive interest at the bond rate as set
forth on the cover of this prospectus supplement.
Interest on the Series 2001-A Bonds will be calculated on the basis of a
360-day year of twelve 30-day months. For the first payment date, interest will
accrue from the issuance date.
You should also review the material under the caption "The Series 2001-A
Bonds--Interest" in this prospectus supplement.
Principal
On each payment date, to the extent of available funds, the bond trustee will
make principal payments in accordance with the expected amortization schedule
set forth under the caption "The Series 2001-A Bonds--Principal" in this
prospectus supplement. The actual amount of principal paid on any payment date
on your Series 2001-A Bonds may be less than the amount set forth in the
expected amortization schedule for that payment date.
Other than in the event 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.
Collection Account and Subaccounts
PECO Energy Transition Trust has established a collection account in the bond
trustee's name to hold amounts remitted by the servicer of the collateral
securing all series of transition bonds, including the
S-5
Series 2001-A Bonds, the Series 2000-A Bonds and the Series 1999-A Bonds. The
collection account is comprised of the following subaccounts:
o a general subaccount,
o an overcollateralization subaccount,
o a reserve subaccount,
o a capital subaccount, and
o a series subaccount for each series of transition bonds.
In addition, there will be one or more defeasance subaccounts if required by
the indenture, and subaccounts for the deposit of certain loss amounts and
interest may also be established, if necessary. Amounts in any defeasance
account will be held for the benefit of the related transition bonds.
Withdrawals from and deposits to these subaccounts will be made as described
under "The Indenture--Allocations and Payments" in the accompanying prospectus.
Credit Enhancement
Overcollateralization. Overcollateralization is the pledge by the issuer of
collateral, in this case intangible transition property, in excess of what is
expected to be needed to cover the repayment of all series of transition bonds.
The overcollateralization for all series of transition bonds will be funded
over the life of the Series 2001-A Bonds and all other transition bonds issued
by the issuer and is expected to reach 2% of the initial principle balance of
the Series 1999-A Bonds and the Series 2000-A Bonds by the expected final
payment date of the Class A-1 Bonds.
Additional Credit Enhancement. In addition the capital of the issuer deposited
in the capital subaccount is available to make payments on any series of
transition bonds as described in the accompanying prospectus. As of December 31,
2000, the balance in the capital subaccount was $25,177,339.
Furthermore, intangible transition charges will be subject to periodic review
and adjustment, as described below under "Adjustments to the Intangible
Transition Charges."
You should also review the material under the captions "The Transition
Bonds--Credit Enhancement" and "The Indenture--Allocations and Payments" in the
accompanying prospectus.
Optional Redemption
The Series 2001-A Bonds may be redeemed in whole once the outstanding principal
balance of the Series 2001-A Bonds has been reduced to less than or equal to 5%
of the initial principal balance.
You should also review the material under the caption "The Series 2001-A
Bonds--Optional Redemption" in this prospectus supplement.
Mandatory Redemption
Except as provided below, if the seller is obligated to pay liquidated damages
under the sale agreement, the Series 2001-A Bonds will be subject to mandatory
redemption in whole at a redemption price equal to the principal balance of the
Series 2001-A Bonds plus interest at the applicable bond rate accrued to the
redemption date.
If the seller is obligated to pay liquidated damages for a breach of a
representation and warranty which relates to one or more of the qualified rate
orders, but not all of the qualified rate orders, then:
o the amount of liquidated damages will include the then outstanding principal
amount of only the series of transition bonds issued in connection with the
affected qualified rate order or orders as of the redemption date, plus
accrued interest to the redemption date, and
o only the series of transition bonds issued in connection with the affected
qualified rate order or orders will be subject to mandatory redemption.
For more information about mandatory redemption, liquidated damages and
indemnification payments by the seller, you should refer to the material under
the caption "The Sale Agreement--Representations and Warranties of the Seller"
in the accompanying prospectus.
Intangible Transition Charge Adjustment Process
PECO Energy, as servicer of the intangible transition property on behalf of the
issuer, will make adjustments to the intangible transition charges it bills to
customers, upon approval by the Pennsylvania Public Utility Commission, if PECO
Energy:
(1) collects insufficient intangible transition charges, or
(2) collects excess amounts of intangible transition charges,
in order:
S-6
(1) to make timely payments on all series of transition bonds,
(2) to pay fees, costs and charges associated with the transition bonds, and
(3) to fund the overcollateralization subaccount to its required level.
The following table summarizes the adjustment frequency of the intangible
transition charges:
Adjustment Date
Annual Adjustments.............................................5/14/01 - 5/14/10
Monthly Adjustments of
Series 2001-A Bonds....................................1/1/10 - Termination Date
The annual adjustments through May 14, 2010 are expected to be implemented on
or prior to August 12 of the same year. The monthly adjustments are expected to
be implemented 30 days after a request for the adjustments is filed with the
Pennsylvania Public Utility Commission. See Table 7 in this prospectus
supplement for information regarding the adjustments to intangible transition
charges that have been implemented since the first adjustment date for the
Series 1999-A Bonds on May 14, 1999.
For a more detailed description of the intangible transition charge adjustment
process, you should review the material under the caption "Description of
Intangible Transition Property--Adjustments to the Intangible Transition
Charges" in this prospectus supplement and the material under the caption "The
Qualified Rate Orders and the Intangible Transition Charges--The Intangible
Transition Charges--The Intangible Transition Charge Adjustment Process" in the
accompanying prospectus.
Tax Status
In the opinion of Ballard Spahr Andrews & Ingersoll, LLP, special tax counsel
to PECO Energy and the issuer:
o Interest received by a holder of these transition bonds who is a United
States taxpayer will be subject to federal income tax.
o A holder of the Series 2001-A Bonds will realize a gain from the sale of the
Series 2001-A Bonds to the extent that the proceeds of the sale exceed the
holder's tax basis in these transition bonds. If the holder is a United
States taxpayer, then:
(1) the gain will be fully taxable, and
(2) the gain may qualify as long-term capital gain if such holder held
the securities for more than one year.
o If the holder of the Series 2001-A Bonds is not a United States taxpayer,
interest income and any gain realized by such holder, generally, will be
exempt from United States federal income and withholding tax.
The issuer recommends that all prospective investors consult their tax advisors
regarding the federal income tax consequences of the ownership and disposition
of the Series 2001-A Bonds in light of their particular circumstances, as well
as the effect of any foreign, state, local or other laws.
For further information regarding the application of U.S. federal and state
income tax laws, you should see the sections captioned "United States Taxation"
and "Material Commonwealth of Pennsylvania Tax Matters" in the accompanying
prospectus.
ERISA Considerations
Employee benefit plans are permitted to purchase transition bonds.
You should also review the material under the caption "ERISA Considerations" in
the accompanying prospectus.
Issuer's and Servicer's Mailing Address and Telephone Number of Principal
Executive Office
The mailing address of the issuer is c/o First Union Trust Company, National
Association, One Rodney Square, 920 King Street, Wilmington, Delaware 19801,
and its telephone number is (302) 888-7532. The mailing address of PECO Energy
is P.O. Box 8699, Philadelphia, Pennsylvania 19101, and its telephone number is
(215) 841-4000.
S-7
RISK FACTORS
For a discussion of the material risks associated with an investment in
the Series 2001-A Bonds, you should review the discussion under "Risk Factors,"
which begins on page 19 of the accompanying prospectus.
THE SERIES 2001-A BONDS
General
The Series 2001-A Bonds are being issued to refinance part of the Series
1999-A Bonds Class A-3 and Class A-5, and will be issued and secured under a
base indenture dated as of March 1, 1999 between the issuer and The Bank of New
York, as bond trustee, as supplemented by the Series 1999-A supplemental
indenture, the Series 2000-A supplemental indenture and the Series 2001-A
supplemental indenture to that base indenture.
Some terms used in this prospectus supplement are defined in the glossary
of defined terms located on page S-30 of this prospectus supplement or in the
glossary of defined terms located on page 115 of the accompanying prospectus.
The Series 2001-A Bonds will be issued on the series issuance date in
denominations of $1,000 and integral multiples of $1,000 and will be comprised
of the classes listed above under "Summary of Terms -- Securities Offered."
Interest and principal relating to the Series 2001-A Bonds will be paid
through The Depository Trust Company or, if the Series 2001-A Bonds are no
longer in book-entry form, will be payable at the offices of The Bank of New
York at 101 Barclay Street, New York, New York 10286. For Series 2001-A Bonds
registered on a record date in the name of the nominee of Cede & Co., payments
will be made by wire transfer in immediately available funds to the account
designated by that nominee. Generally, payment will be made by check mailed
first-class, postage prepaid to a holder's address as it appears on the
transition bond register on each record date if the Series 2001-A Bonds are no
longer in book-entry form. The final installment of principal and premium, if
any, payable with respect to any Series 2001-A Bond will be payable, after
prior notice to the holder, only upon presentation and surrender of the Series
2001-A Bond at a place specified in that notice.
Distributions to the Series 2001-A Subaccount
The issuer has already issued two series of transition bonds, the Series
1999-A Bonds and the Series 2000-A Bonds, and may issue additional series in
the future, as discussed under "The Transition Bonds" in the accompanying
prospectus.
On each date the servicer is required to remit collections of intangible
transition charges, it will allocate those collections between the issuer and
any other issuer that issues transition bonds secured by intangible transition
property sold by the seller in accordance with their respective Percentages. On
each monthly allocation date for each series of transition bonds issued under
the indenture, after the payment of specified fees and expenses, the bond
trustee will allocate amounts on deposit in the general subaccount of the
collection account Pro Rata based on each series' proportion of the total
allocated principal and interest of all series to each series subaccount for
the payment of interest on and principal of each series of transition bonds
issued under the indenture. Monthly allocation dates fall on the first day of
each calendar month, or if that day is not a business day, the following
business day.
For a more detailed description of the allocation of intangible transition
charges among series of transition bonds issued under the indenture, see "The
Indenture--Allocations and Payments" in the accompanying prospectus.
Distributions From the Series 2001-A Subaccount
Amounts distributed from the series subaccount as described in "The
Indenture--Allocations and Payments" in the accompanying prospectus will be
applied among the classes of the Series 2001-A Bonds on each payment date as
follows:
S-8
(1) interest, based on the amount of interest payable as described under
"--Interest" in this section, and
(2) principal, as described under "--Principal" in this section.
Interest
Interest on the Series 2001-A Bonds will accrue from the series issuance
date at the respective bond rates indicated in the section at the beginning of
this prospectus supplement entitled "Summary of Terms--Securities Offered." The
interest will be payable on each payment date, commencing September 1, 2001, to
the persons in whose names the Series 2001-A Bonds are registered at the close
of business on the applicable record date.
Interest on the Series 2001-A Bonds will be calculated on the basis of a
360-day year of twelve 30-day months.
The interest accrual period for any payment date shall be the period from
and including the preceding payment date--or, in the case of the first payment
date, from and including the series issuance date--to and excluding that
payment date.
The record date for any payment date shall be the close of business on the
business day prior to that payment date.
The allocated interest balance on the series issuance date and on each
monthly allocation date for the Series 1999-A Bonds, the Series 2000-A Bonds
and the Series 2001-A Bonds is shown below. These balances are used for the
allocation of funds from the general subaccount to the series subaccounts on
each monthly allocation date. There are no consequences if the full amount of
these allocations is not made on any monthly allocation date. In addition,
these balances may change from time to time with the issuance of each new
series, the redemption or refunding of a class or series and each periodic
adjustment to the intangible transition charges.
TABLE 1
Monthly Allocated Interest Balance
Series 1999-A Series 2000-A Series 2001-A
Monthly Allocated Monthly Allocated Monthly Allocated
Monthly Allocation Date Interest Balance(1) Interest Balance Interest Balance
- --------------------------- --------------------- ------------------- ------------------
April 1, 2001 .............
May 1, 2001 ...............
June 1, 2001 ..............
July 1, 2001 ..............
August 1, 2001 ............
September 1, 2001 .........
October 1, 2001 ...........
November 1, 2001 ..........
December 1, 2001 ..........
January 1, 2002 ...........
February 1, 2002 ..........
March 1, 2002 .............
April 1, 2002 .............
May 1, 2002 ...............
June 1, 2002 ..............
July 1, 2002 ..............
August 1, 2002 ............
September 1, 2002 .........
October 1, 2002 ...........
November 1, 2002 ..........
S-9
Series 1999-A Series 2000-A Series 2001-A
Monthly Allocated Monthly Allocated Monthly Allocated
Monthly Allocation Date Interest Balance(1) Interest Balance Interest Balance
- --------------------------- --------------------- ------------------- ------------------
December 1, 2002 ..........
January 1, 2003 ...........
February 1, 2003 ..........
March 1, 2003 .............
April 1, 2003 .............
May 1, 2003 ...............
June 1, 2003 ..............
July 1, 2003 ..............
August 1, 2003 ............
September 1, 2003 .........
October 1, 2003 ...........
November 1, 2003 ..........
December 1, 2003 ..........
January 1, 2004 ...........
February 1, 2004 ..........
March 1, 2004 .............
April 1, 2004 .............
May 1, 2004 ...............
June 1, 2004 ..............
July 1, 2004 ..............
August 1, 2004 ............
September 1, 2004 .........
October 1, 2004 ...........
November 1, 2004 ..........
December 1, 2004 ..........
January 1, 2005 ...........
February 1, 2005 ..........
March 1, 2005 .............
April 1, 2005 .............
May 1, 2005 ...............
June 1, 2005 ..............
July 1, 2005 ..............
August 1, 2005 ............
September 1, 2005 .........
October 1, 2005 ...........
November 1, 2005 ..........
December 1, 2005 ..........
January 1, 2006 ...........
February 1, 2006 ..........
March 1, 2006 .............
April 1, 2006 .............
May 1, 2006 ...............
June 1, 2006 ..............
July 1, 2006 ..............
August 1, 2006 ............
September 1, 2006 .........
October 1, 2006 ...........
November 1, 2006 ..........
December 1, 2006 ..........
January 1, 2007 ...........
February 1, 2007 ..........
S-10
Series 1999-A Series 2000-A Series 2001-A
Monthly Allocated Monthly Allocated Monthly Allocated
Monthly Allocation Date Interest Balance(1) Interest Balance Interest Balance
- ---------------------------- --------------------- ------------------- ------------------
March 1, 2007 ..............
April 1, 2007 ..............
May 1, 2007 ................
June 1, 2007 ...............
July 1, 2007 ...............
August 1, 2007 .............
September 1, 2007 ..........
October 1, 2007 ............
November 1, 2007 ...........
December 1, 2007 ...........
January 1, 2008 ............
February 1, 2008 ...........
March 1, 2008 ..............
April 1, 2008 ..............
May 1, 2008 ................
June 1, 2008 ...............
July 1, 2008 ...............
August 1, 2008 .............
September 1, 2008 ..........
October 1, 2008 ............
November 1, 2008 ...........
December 1, 2008 ...........
January 1, 2009 ............
February 1, 2009 ...........
March 1, 2009 ..............
April 1, 2009 ..............
May 1, 2009 ................
June 1, 2009 ...............
July 1, 2009 ...............
August 1, 2009 .............
September 1, 2009 ..........
October 1, 2009 ............
November 1. 2009 ...........
December 1, 2009 ...........
January 1, 2010 ............
February 1, 2010 ...........
March 1, 2010 ..............
April 1, 2010 ..............
May 1, 2010. ...............
June 1, 2010 ...............
July 1, 2010 ...............
August 1, 2010. ............
September 1, 2010. .........
- ------------------
(1) Assumes redemption of $ ____________ of the Series 1999-A Bonds Class A-3
and $ __________ of the Series 1999-A Bonds Class A-5 with proceeds of
the issuance of the Series 2001-A Bonds.
S-11
Principal
On each payment date, the bond trustee shall, as of the related record date
and subject to the availability of funds in the Series 2001-A subaccount, make
principal payments on the Series 2001-A Bonds in accordance with the expected
amortization schedule.
Available funds in the Series 2001-A subaccount will be allocated, to the
extent funds are available to the holders of the Series 2001-A Bonds Class A-1,
until this class is retired in full.
The principal payment on any class on a payment date will not be greater
than the amount necessary to reduce the class principal balance of that class
to the amount specified in the expected amortization schedule for that class
and payment date unless an acceleration of payments following an event of
default or a redemption occurs.
Class principal balance means the initial principal balance of a class,
reduced by principal previously distributed to that class in accordance with
the terms of the indenture.
The entire unpaid principal amount for the Series 2001-A Bonds Class A-1
will be due and payable on the applicable class termination date.
Upon acceleration of payments following a default under the indenture,
principal payments on each class of each series of transition bonds will be
made on a pro rata basis based on the respective outstanding principal balance
for each class and each series of transition bonds as of the prior payment
date.
S-12
TABLE 2
Expected Amortization Schedule
Outstanding Class Principal Balance
Issuance or Payment Date Series 2001-A Class A-1
- ------------------------------ -----------------------
Series Issuance Date ...............................
September 1, 2001 ..................................
March 1, 2002 ......................................
September 1, 2002 ..................................
March 1, 2003 ......................................
September 1, 2003 ..................................
March 1, 2004 ......................................
September 1, 2004 ..................................
March 1, 2005 ......................................
September 1, 2005 ..................................
March 1, 2006 ......................................
September 1, 2006 ..................................
March 1, 2007 ......................................
September 1, 2007 ..................................
March 1, 2008 ......................................
September 1, 2008 ..................................
March 1, 2009 ......................................
September 1, 2009 ..................................
March 1, 2010 ......................................
September 1, 2010 ..................................
For various reasons, the actual class principal balance of the Series
2001-A Bonds Class A-1 may not be reduced to the amounts indicated in the
foregoing table on any payment date. Accordingly, the actual reductions in class
principal balances may be delayed from those indicated in the table. See "Risk
Factors" in the accompanying prospectus for various factors which may,
individually or in the aggregate, affect the rates of reduction of the class
principal balances of the Series 2001-A Bonds Class A-1.
S-13
The allocated principal balance as of the series issuance date and on each
monthly allocation date for the Series 1999-A Bonds, the Series 2000-A Bonds
and the Series 2001-A Bonds is shown below. These balances are used for the
allocation of funds from the general subaccount to the series subaccounts on
each monthly allocation date. There are no consequences if the full amount of
the allocations is not made on any monthly allocation date. In addition, these
balances may change from time to time with the issuance of each new series, the
redemption or refunding of a class or series and each adjustment to the
intangible transition charges.
TABLE 3
Monthly Allocated Principal Balance
Series 1999-A Series 2000-A Series 2001-A
Monthly Allocated Monthly Allocated Monthly Allocated
Monthly Allocation Date Principal Balance(1) Principal Balance Principal Balance
- --------------------------- ---------------------- ------------------- ------------------
April 1, 2001 .............
May 1, 2001 ...............
June 1, 2001 ..............
July 1, 2001 ..............
August 1, 2001 ............
September 1, 2001 .........
October 1, 2001 ...........
November 1, 2001 ..........
December 1, 2001 ..........
January 1, 2002 ...........
February 1, 2002 ..........
March 1, 2002 .............
April 1, 2002 .............
May 1, 2002 ...............
June 1, 2002 ..............
July 1, 2002 ..............
August 1, 2002 ............
September 1, 2002 .........
October 1, 2002 ...........
November 1, 2002 ..........
December 1, 2002 ..........
January 1, 2003 ...........
February 1, 2003 ..........
March 1, 2003 .............
April 1, 2003 .............
May 1, 2003 ...............
June 1, 2003 ..............
July 1, 2003 ..............
August 1, 2003 ............
September 1, 2003 .........
October 1, 2003 ...........
November 1, 2003 ..........
December 1, 2003 ..........
January 1, 2004 ...........
February 1, 2004 ..........
March 1, 2004 .............
April 1, 2004 .............
May 1, 2004 ...............
June 1, 2004 ..............
July 1, 2004 ..............
S-14
Series 1999-A Series 2000-A Series 2001-A
Monthly Allocated Monthly Allocated Monthly Allocated
Monthly Allocation Date Principal Balance(1) Principal Balance Principal Balance
- --------------------------- ---------------------- ------------------- ------------------
August 1, 2004 ............
September 1, 2004 .........
October 1, 2004 ...........
November 1, 2004 ..........
December 1, 2004 ..........
January 1, 2005 ...........
February 1, 2005 ..........
March 1, 2005 .............
April 1, 2005 .............
May 1, 2005 ...............
June 1, 2005 ..............
July 1, 2005 ..............
August 1, 2005 ............
September 1, 2005 .........
October 1, 2005 ...........
November 1, 2005 ..........
December 1, 2005 ..........
January 1, 2006 ...........
February 1, 2006 ..........
March 1, 2006 .............
April 1, 2006 .............
May 1, 2006 ...............
June 1, 2006 ..............
July 1, 2006 ..............
August 1, 2006 ............
September 1, 2006 .........
October 1, 2006 ...........
November 1, 2006 ..........
December 1, 2006 ..........
January 1, 2007 ...........
February 1, 2007 ..........
March 1, 2007 .............
April 1, 2007 .............
May 1, 2007 ...............
June 1, 2007 ..............
July 1, 2007 ..............
August 1, 2007 ............
September 1, 2007 .........
October 1, 2007 ...........
November 1, 2007 ..........
December 1, 2007 ..........
January 1, 2008 ...........
February 1, 2008 ..........
March 1, 2008 .............
April 1, 2008 .............
May 1, 2008 ...............
June 1, 2008 ..............
July 1, 2008 ..............
August 1, 2008 ............
September 1, 2008 .........
October 1, 2008 ...........
S-15
Series 1999-A Series 2000-A Series 2001-A
Monthly Allocated Monthly Allocated Monthly Allocated
Monthly Allocation Date Principal Balance(1) Principal Balance Principal Balance
- --------------------------- ---------------------- ------------------- ------------------
November 1, 2008 ..........
December 1, 2008 ..........
January 1, 2009 ...........
February 1, 2009 ..........
March 1, 2009 .............
April 1, 2009 .............
May 1, 2009 ...............
June 1, 2009 ..............
July 1, 2009 ..............
August 1, 2009 ............
September 1, 2009 .........
October 1, 2009 ...........
November 1, 2009 ..........
December 1, 2009 ..........
January 1, 2010 ...........
February 1, 2010 ..........
March 1, 2010 .............
April 1, 2010 .............
May 1, 2010 ...............
June 1, 2010 ..............
July 1, 2010 ..............
August 1, 2010 ............
September 1, 2010 .........
- ------------------
(1) Assumes redemption of $ ____________ of the Series 1999-A Bonds Class A-3
and $ __________ of the Series 1999-A Bonds Class A-5 with proceeds of
the issuance of the Series 2001-A Bonds.
S-16
Optional Redemption
The Series 2001-A Bonds may be redeemed in whole on any payment date
commencing with the payment date on which the outstanding principal balance of
the Series 2001-A Bonds, after giving effect to payments that would otherwise be
made on that date, has been reduced to less than or equal to 5% of the initial
principal balance of the Series 2001-A Bonds. Notice of redemption will be given
by the issuer to the bond trustee and Standard & Poor's Rating Services,
Moody's Investors Service, Inc. and Fitch, Inc. On or prior to the date notice
of redemption is given, the issuer will deposit with the bond trustee the
redemption price, plus accrued interest to the redemption date, for the Series
2001-A Bonds.
Mandatory Redemption
Except as provided below, if the seller, PECO Energy, is obligated to pay
liquidated damages under the sale agreement, the Series 2001-A Bonds will be
subject to mandatory redemption in whole. The redemption price will equal the
principal balance thereof plus interest at the applicable bond rate, accrued to
the redemption date.
If the seller is obligated to pay liquidated damages for a breach of a
representation and warranty which relates to one or more of the qualified rate
orders, but not all of the qualified rate orders, then:
o the amount of liquidated damages will include the then outstanding
principal amount of only the series of transition bonds issued in
connection with the affected qualified rate order or orders as of the
redemption date, plus accrued interest to the redemption date, and
o only the series of transition bonds issued in connection with the
affected qualified rate order or orders will be subject to mandatory
redemption.
o The seller will be obligated to pay liquidated damages as described in
"The Sale Agreement-- Representations and Warranties of the Seller" in
the accompanying prospectus.
Overcollateralization
The amount of overcollateralization for all series of transition bonds
will be funded over the life of the Series 2001-A Bonds and all other transition
bonds issued by the issuer and is expected to reach 2% of the initial principal
balance of the Series 1999-A Bonds and the Series 2000-A Bonds by the expected
final payment date of the Class A-1 Bonds. The intangible transition charges
will be calculated at, and periodically adjusted to, a level that is designed
to collect the overcollateralization amount ratably over the expected life of
each series of transition bonds. Amounts of intangible transition charges
collected in any period in order to fund overcollateralization amounts will be
available for all series of transition bonds on a pro rata basis without any
preference.
The calculated overcollateralization level for each payment date related
to the Series 1999-A Bonds, the Series 2000-A Bonds and the Series 2001-A Bonds
and the monthly allocated overcollateralization balance for each monthly
allocation date, in each case after giving effect to the issuance of the Series
2001-A Bonds and redemption of $______ of the Series 1999-A Bonds Class A-3 and
$______ of the Series 1999-A Bonds Class A-5, are set forth below. The
balances in Table 4A below are for the allocation of funds from the general
subaccount on each monthly allocation date. There are no consequences if the
full amount of these allocations is not made on any monthly allocation date. In
addition, these balances may change from time to time with the issuance of each
new series, the redemption or refunding of a class or series and each periodic
adjustment to the intangible transition charges. If amounts on deposit in the
general subaccount, the interest deposit subaccount (for the payment of
Interest), the loss subaccount and the reserve subaccount are insufficient to
make scheduled distributions to the series subaccounts and to pay expenses of
the issuer, the bond trustee and the servicer and other related fees and
expenses, the bond trustee will draw on amounts in the overcollateralization
subaccount on each monthly allocation date.
For a more detailed description of overcollateralization, see the material
under the captions "The Transition Bonds--Credit Enhancement" and "The
Indenture--Allocations and Payments" in the accompanying prospectus.
S-17
TABLE 4
Calculated Overcollateralization Level
Series 1999-A,
Series 2000-A and
Series 2001-A Calculated
Issuance Or Payment Date Overcollateralization Level
- ------------------------------ ----------------------------
Series Issuance Date .........
September 1, 2001 ............
March 1, 2002 ................
September 1, 2002 ............
March 1, 2003 ................
September 1, 2003 ............
March 1, 2004 ................
September 1, 2004 ............
March 1, 2005 ................
September 1, 2005 ............
March 1, 2006 ................
September 1, 2006 ............
March 1, 2007 ................
September 1, 2007 ............
March 1, 2008 ................
September 1, 2008 ............
March 1, 2009 ................
September 1, 2009 ............
March 1, 2010 ................
September 1, 2010 ............
TABLE 4A
Monthly Allocated Overcollateralization Balance
Series 1999-A,
Series 2000-A
and Series 2001-A
Monthly Allocated
Monthly Allocation Date Overcollateralization Balance
- --------------------------- ------------------------------
April 1, 2001 .............
May 1, 2001 ...............
June 1, 2001 ..............
July 1, 2001 ..............
August 1, 2001 ............
September 1, 2001 .........
October 1, 2001 ...........
November 1, 2001 ..........
December 1, 2001 ..........
January 1, 2002 ...........
February 1, 2002 ..........
March 1, 2002 .............
April 1, 2002 .............
May 1, 2002 ...............
June 1, 2002 ..............
July 1, 2002 ..............
August 1, 2002 ............
September 1, 2002 .........
S-18
Series 1999-A,
Series 2000-A
and Series 2001-A
Monthly Allocated
Monthly Allocation Date Overcollateralization Balance
- --------------------------- ------------------------------
October 1, 2002 ...........
November 1, 2002 ..........
December 1, 2002 ..........
January 1, 2003 ...........
February 1, 2003 ..........
March 1, 2003 .............
April 1, 2003 .............
May 1, 2003 ...............
June 1, 2003 ..............
July 1, 2003 ..............
August 1, 2003 ............
September 1, 2003 .........
October 1, 2003 ...........
November 1, 2003 ..........
December 1, 2003 ..........
January 1, 2004 ...........
February 1, 2004 ..........
March 1, 2004 .............
April 1, 2004 .............
May 1, 2004 ...............
June 1, 2004 ..............
July 1, 2004 ..............
August 1, 2004 ............
September 1, 2004 .........
October 1, 2004 ...........
November 1, 2004 ..........
December 1, 2004 ..........
January 1, 2005 ...........
February 1, 2005 ..........
March 1, 2005 .............
April 1, 2005 .............
May 1, 2005 ...............
June 1, 2005 ..............
July 1, 2005 ..............
August 1, 2005 ............
September 1, 2005 .........
October 1, 2005 ...........
November 1, 2005 ..........
December 1, 2005 ..........
January 1, 2006 ...........
February 1, 2006 ..........
March 1, 2006 .............
April 1, 2006 .............
May 1, 2006 ...............
June 1, 2006 ..............
July 1, 2006 ..............
August 1, 2006 ............
September 1, 2006 .........
October 1, 2006 ...........
S-19
Series 1999-A,
Series 2000-A
and Series 2001-A
Monthly Allocated
Monthly Allocation Date Overcollateralization Balance
- --------------------------- ------------------------------
November 1, 2006 ..........
December 1, 2006 ..........
January 1, 2007 ...........
February 1, 2007 ..........
March 1, 2007 .............
April 1, 2007 .............
May 1, 2007 ...............
June 1, 2007 ..............
July 1, 2007 ..............
August 1, 2007 ............
September 1, 2007 .........
October 1, 2007 ...........
November 1, 2007 ..........
December 1, 2007 ..........
January 1, 2008 ...........
February 1, 2008 ..........
March 1, 2008 .............
April 1, 2008 .............
May 1, 2008 ...............
June 1, 2008 ..............
July 1, 2008 ..............
August 1, 2008 ............
September 1, 2008 .........
October 1, 2008 ...........
November 1, 2008 ..........
December 1, 2008 ..........
January 1, 2009 ...........
February 1, 2009 ..........
March 1, 2009 .............
April 1, 2009 .............
May 1, 2009 ...............
June 1, 2009 ..............
July 1, 2009 ..............
August 1, 2009 ............
September 1, 2009 .........
October 1, 2009 ...........
November 1, 2009 ..........
December 1, 2009 ..........
January 1, 2010 ...........
February 1, 2010 ..........
March 1, 2010 .............
April 1, 2010 .............
May 1, 2010 ...............
June 1, 2010 ..............
July 1, 2010 ..............
August 1, 2010 ............
September 1, 2010 .........
S-20
Other Credit Enhancement
Reserve Subaccount. Collections of intangible transition charges available
on any payment date above that amount necessary to pay the:
(1) amounts payable for expenses of the bond trustee, the issuer trustee
and the servicer and other fees and expenses,
(2) amounts distributable to the transition bondholders of all series
for principal and interest on the next payment date, and
(3) amounts allocable to the overcollateralization subaccount
will be allocated to the reserve subaccount. As of December 31, 2000, the
balance in the reserve subaccount was $26,554,464.
On each monthly allocation date, the bond trustee is required to draw on
amounts in the reserve subaccount, if any, to the extent amounts available in
the general subaccount, the interest deposit account (for the payment of
Interest) and the loss subaccount are insufficient to make scheduled payments to
the transition bondholders of all series, meet credit enhancement funding
requirements and pay expenses of the issuer, the bond trustee, the issuer
trustee, the servicer and other specified fees and expenses. See "The
Indenture--Allocations and Payments" in the accompanying prospectus.
Capital Subaccount. As of December 31, 2000, the balance in the capital
subaccount was $25,177,339. On each monthly allocation date, the bond trustee
is required to draw on amounts in the capital subaccount, if any, to the extent
amounts available in the general subaccount, the interest deposit subaccount
(for the payment of Interest), the loss subaccount, the reserve subaccount and
the overcollateralization subaccount are insufficient to make scheduled
payments to the transition bondholders of all series of transition bonds, meet
credit enhancement funding requirements and pay expenses of the issuer, the
bond trustee, the issuer trustee and the servicer and other specified fees and
expenses.
Reports to Holders of Series 2001-A Bonds
On or prior to each payment date, the bond trustee is required to prepare
and provide statements to the holders of record of the Series 2001-A Bonds.
These statements will be available to the beneficial owners of the Series 2001-A
Bonds upon request to the bond trustee or the servicer. The financial
information provided will not be examined or reported upon by any independent
public accountant and no independent public accountant will give an opinion on
this financial information.
For a more detailed description of the statements provided to the holders
of record of the Series 2001-A Bonds, you should review the material under the
caption "The Indenture--Reports to Transition Bondholders" in the accompanying
prospectus.
S-21
DESCRIPTION OF INTANGIBLE TRANSITION PROPERTY
The Intangible Transition Charges
PECO Energy's customers currently belong to one of two customer categories
for purposes of adjusting intangible transition charges. These categories are
(a) residential and (b) commercial and industrial. Each customer category is
further divided into rate classes. The qualified transition expenses authorized
in PECO Energy's two qualified rate orders issued by the Pennsylvania Public
Utility Commission are to be recovered from customers in each of PECO Energy's
separate rate classes. The intangible transition charges are calculated by
determining the total amount of intangible transition charges required to be
billed to each customer rate class, based on current estimates of usage and
payment patterns, in order to generate collections of intangible transition
charges sufficient to ensure timely recovery of qualified transition expenses
in accordance with the expected amortization schedules. This amount is then
expressed as a percentage of total projected revenue per rate class. This
percentage is applied to each customer's total bill within the applicable rate
class. The resulting dollar amount on a customer's bill after the application
of such percentage is the intangible transition charge payable by that
customer.
The intangible transition charges, as periodically adjusted, first reduce
competitive transition charges, then to the extent intangible transition
charges exceed those amounts, reduce variable distribution charges. To the
extent that total revenues are affected by changes in usage, number of
customers, the rate of delinquencies and write-offs or other factors,
collections of intangible transition charges vary. Variations in collections of
intangible transition charges are addressed by recalculating the percentages
applied to customers' bills on each calculation date. See Tables 5 and 6 and
"--Adjustments to Intangible Transition Charges" in this section and "The
Qualified Rate Orders and the Intangible Transition Charges--The Intangible
Transition Charges--The Intangible Transition Charge Adjustment Process" in the
accompanying prospectus.
The unbundled customer bills that were sent out with billing cycles
beginning January 1, 1999 separately identified charges for generation,
transmission and distribution and other services. When intangible transition
charges are billed to customers, those charges are applied to total projected
revenue per rate class, exclusive of transmission, energy, capacity and fixed
distribution charges. This is reflected in the calculation of intangible
transition charges. The cash flow from intangible transition charges are
allocated among the transferred intangible transition property held by the
issuer and intangible transition property held by other issuers of transition
bonds to which intangible transition property is sold, based on their
respective Percentages at the time these intangible transition charges are
billed.
See "The Qualified Rate Orders and the Intangible Transition Charges--The
Intangible Transition Charges--The Intangible Transition Charge Adjustment
Process" in the accompanying prospectus.
The following table sets forth the average monthly bill, including gross
receipts tax, and the average monthly intangible transition charges, including
gross receipts tax, billed for the twelve month period ended December 31, 2000
and upon issuance of the Series 2001-A Bonds and redemption of
$_______________ of Series 1999-A Class A-3 Bonds and $ ___________ of Series
1999-A Class A-5 Bonds for each rate category.
TABLE 5
Average Intangible Transition Charges
Projected Monthly Intangible
Transition Charges Billed
After Initial Issuance of
Calendar Year 2000 Series 2001-A Bonds
Calendar Year 2000 Average Monthly And Redemption of
Customer Category Average Monthly Bill Intangible Transition Charges $ __ of Series 1999-A Bonds
- ----------------------------------- ---------------------- ------------------------------- ------------------------------
Residential .......................
Commercial and Industrial .........
The following are estimates of projected average intangible transition
charges--expressed as a percentage of variable distribution charges and
competitive transition charges applicable to each rate class--that will be
S-22
imposed on customers in each customer category beginning with the bill rendered
approximately ten days after the redemption of $ ___________ of Series 1999-A
Class A-3 Bonds and $__________ of Series 1999-A Class A-5 Bonds and the
issuance date of the Series 2001-A Bonds. These percentages, as well as the
dollar amounts in the prior sentences, include the intangible transition charges
imposed in connection with the Series 1999-A Bonds remaining outstanding and the
Series 2000-A Bonds.
TABLE 6
Projected Average Intangible Transition Charges
for the Period March __, 2001 to August 14, 2001
Residential Customers
ITC
Rate Class Percentage
- ------------------------- -----------
Rate R ................ _____%
Rate R-H .............. _____%
Rate OP ............... _____%
Commercial and Industrial Customers
ITC
Rate Class Percentage
- ---------------------------- -----------
Rate GS .................. _____%
Rate POL ................. _____%
Rate SL-P ................ _____%
Rate SL-S ................ _____%
Rate SL-E ................ _____%
Rate TL .................. _____%
Rate BLI(1) .............. _____%
Rate PD .................. _____%
Rate HT .................. _____%
Rate EP .................. _____%
- ------------
(1) No intangible transition charges are or will be imposed on Rate BLI
customers.
Rate Class Descriptions
PECO Energy's customer base is currently divided into two categories for
purposes of adjusting intangible transition charges (a) residential and (b)
commercial and industrial. Rate categories and classes within those categories
are approved by the Pennsylvania Public Utility Commission and are subject to
change. These changes will be reflected in any adjustment request filed with
the Pennsylvania Public Utility Commission by the servicer. Although in the
settlement of merger between PECO Energy and Unicom Corporation, PECO Energy
agreed to reduce its customer categories from three to two (see "PECO Energy's
Electric Restructuring Plan--Subsequent Events" in the accompanying
prospectus), the current rate classes (indicated above) have remained unchanged
since April 20, 1990. These rate classes are:
Residential Rate Classes:
Rate R--Residential Service: Residential service is available in the
entire territory of PECO Energy to single private family dwellings for the
domestic requirements of family members, which service is supplied through one
meter. This rate class (and Rate R-H) also includes payment-troubled low income
customers receiving discounted rates under the Customer Assistance Program,
Rate CAP.
Rate R-H--Residential Heating Service: Residential heating service is
available to single private family dwellings (or to a multiple dwelling unit
building consisting of two to five dwelling units, whether occupied or not) for
domestic requirements when such service is supplied through one meter and where
the dwelling is heated by specified types of electric space heating systems.
S-23
Rate OP--Off-Peak Service: Available in conjunction with other residential
service rates, Rates R and R-H and, in specified cases, Rate GS, for a customer
receiving delivery at certain voltage levels during off-peak periods.
Commercial and Industrial Rate Classes:
Rate GS--General Service: Electric delivery service available through a
single metering installation for offices, professional, commercial or
industrial establishments, governmental agencies, and other applications
outside the scope of the residential service rate schedules.
Rate POL--Private Outdoor Lighting: Available in conjunction with Rate GS
for the outdoor lighting of sidewalks, driveways, yards, lots and similar
places, outside the scope of service under Rate SL-P, SL-S and SL-E.
Rate SL-P--Street Lighting in the City of Philadelphia: Available only to
a governmental agency, municipal, state or federal, for outside lighting of
streets, highways, bridges, parks or similar places, including directional
highway signs at locations where other outdoor lighting service is established
hereunder, for the safety and convenience of the public within the City of
Philadelphia. Accounts in this rate class will be transferred to Rate SL-E on
July 1, 2001, under the terms of the settlement order concerning the merger of
PECO Energy and Unicom Corporation and PECO Energy's proposed corporate
restructuring. See "The Seller and Servicer PECO Energy Company--PECO Energy's
Corporate Restructuring Plan" in the accompanying prospectus.
Rate SL-S--Street Lighting--Suburban Divisions: Available for the outdoor
lighting of streets, highways, bridges, parks and similar places for the safety
and convenience of the public in Suburban Divisions.
Rate SL-E--Street Lighting Customer-Owned Facilities: Available to any
governmental agency outside of the City of Philadelphia for outdoor lighting of
streets, highways, bridges, parks or similar places, including directional
highway signs at locations where outdoor lighting service is established for
the safety and convenience of the public where all of the utilization
facilities are installed, owned and maintained by a governmental agency.
Rate TL--Traffic Lighting: Available to any municipality using PECO
Energy's standard delivery service for electric traffic signal lights
installed, owned and maintained by the municipality.
Rate BLI--Borderline Interchange: Available under reciprocal agreements to
neighboring electric utilities for resale in their adjacent territory. No
intangible transition charges will be imposed on Rate BLI customers.
Rate PD--Primary-Distribution Power: Untransformed electric delivery
service available from the primary supply lines of PECO Energy's distribution
system where the customer installs, owns and maintains any transforming,
switching and other receiving equipment required.
Rate HT--High-Tension Power: Untransformed electric delivery service from
PECO Energy's standard high-tension lines where the customer installs, owns
and maintains any transforming, switching and other receiving equipment
required. Excludes certain special contracts.
Rate EP--Electric Propulsion: This rate is available only to the National
Rail Passenger Corporation and to the Southeastern Pennsylvania Transportation
Authority for untransformed electric delivery service from PECO Energy's
standard high-tension lines, where the customer installs, owns and maintains
any transforming, switching and other receiving equipment required and where
the service is supplied for the operation of electrified transit and railroad
systems and appurtenances.
Adjustments To The Intangible Transition Charges
The actual collections of intangible transition charges are intended to be
neither more nor less than the amount necessary to pay the principal of the
transition bonds of each series in accordance with the expected amortization
schedule, 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
intangible transition charges will be collected, the master servicing agreement
requires the servicer to seek, and the Pennsylvania Competition Act and PECO
S-24
Energy's two qualified rate orders require the Pennsylvania Public Utility
Commission to approve, annual adjustments to the intangible transition charges
within 90 days of the request and does not set forth any procedure for approval
in a shorter time period. There can be no assurance that the Pennsylvania
Public Utility Commission will approve adjustments any more frequently.
These adjustments will be based on actual collections of intangible
transition charges and updated assumptions by the servicer as to projected
future usage of electricity by customers, expected delinquencies and write-offs
and future expenses relating to all series of transition bonds. In addition,
PECO Energy's qualified rate orders provide that, commencing in the final
calendar year of collections of intangible transition charges for any series of
transition bonds, adjustments may be made quarterly or, if necessary, monthly.
See "The Master Servicing Agreement--Servicing Procedures--Intangible
Transition Charge Adjustment Process" in the accompanying prospectus.
The following table reflects information regarding the adjustments to the
intangible transition charges assessed on each rate class within the customer
categories that have been implemented since the first adjustment date for the
Series 1999-A Bonds on May 14, 1999:
TABLE 7
ADJUSTMENTS TO INTANGIBLE TRANSITION CHARGES
Intangible Transition Charges
Series 1999-A May 14, 1999 Series 2000-A May 15, 2000 Series 2001-A
Issuance Date (First Adjustment Date) Issuance Date (Second Adjustment Date) Issuance Date
--------------- ------------------------- --------------- -------------------------- --------------
Residential Customers
Rate Class
- ---------------------
Rate R .............. 26.52% 19.06% 19.81%
Rate R-H ............ 27.94% 20.03% 25.24%
Rate OP ............. 0.00% 0.00% 0.00%
Commercial and Industrial Customers
Rate Class
- ----------------------
Rate GS ............. 51.93% 36.30% 45.31%
Rate POL ............ 0.00% 0.00% 0.00%
Rate SL-P ........... 0.00% 0.00% 0.00%
Rate SL-S ........... 0.00% 0.00% 0.00%
Rate SL-E ........... 0.00% 0.00% 0.00%
Rate TL ............. 46.37% 33.08% 43.29%
Rate BLI(1) ......... 0.00% 0.00% 0.00%
Rate PD ............. 53.68% 37.94% 48.61%
Rate HT ............. 61.95% 43.38% 59.22%
Rate EP ............. 51.17% 36.88% 47.90%
- ------------
(1) No intangible transition charges are or will be imposed on Rate BLI
customers.
S-25
DESCRIPTION OF PECO ENERGY'S BUSINESS
For a discussion of PECO Energy, you should review the material under the
caption "The Seller and Servicer PECO Energy Company" in the accompanying
prospectus.
SERVICING
Monthly Servicing Fee
On each monthly allocation date, the servicer is entitled to receive the
monthly servicing fee in an amount equal to:
o one-twelfth of 0.25% of the outstanding principal balance of all series
of transition bonds for so long as intangible transition charges are
included in electric bills sent to customers by the servicer, and
o one-twelfth of 1.50% of the outstanding principal balance of all series
of transition bonds if intangible transition charges are not included in
such electric bills.
The monthly servicing fee, together with any portion of the monthly
servicing fee that remains unpaid from prior monthly allocation dates, is paid
solely to the extent funds are available for this purpose as described under
"The Indenture--Allocations and Payments" in the accompanying prospectus. The
monthly servicing fee is paid prior to the distribution of any amounts of
interest on and principal of any series of transition bonds. The servicer is
entitled to retain as additional compensation net investment income on
intangible transition charges received by the servicer prior to remittance of
the intangible transition charges to the collection account and the portion of
late fees, if any, paid by customers relating to the intangible transition
charges.
Servicer Advances
The servicer will not make any advances of interest or principal on the
Series 2001-A Bonds.
REFINANCING OF THE SERIES 1999-A BONDS
CLASS A-3 AND CLASS A-5
The issuer will refinance $______ principal amount of the Series 1999-A
Class A-3 Bonds and $______ principal amount of the Series 1999-A Class A-5
Bonds in accordance with their terms by issuing $ _______ of Series 2001-A
Bonds. The remaining $______ principal amount of the Series 1999-A Class A-3
Bonds and $______ principal amount of the Series 1999-A Class A-5 Bonds will
remain outstanding. The collateral, described above under "Summary of
Terms--The Collateral," secures all transition bonds issued under the
indenture, including the Series 1999-A Bonds remaining outstanding, the Series
2000-A Bonds and the Series 2001-A Bonds. No additional intangible transition
property will be purchased in connection with the issuance of the Series 2001-A
Bonds, rather the proceeds of the issuance of the Series 2001-A Bonds will be
deposited with the trustee in accordance with the terms of the indenture and
used to effect the redemptions described above. Amounts on deposit with the
trustee for this purpose will not be pledged as collateral for the Series 2001-A
Bonds and will not be available for the purpose of paying principal or interest
on the Series 2001-A Bonds.
S-26
UNDERWRITING THE SERIES 2001-A BONDS
Subject to the terms and conditions set forth in the underwriting
agreement among PECO Energy, the issuer and the underwriters named below, for
whom Salomon Smith Barney Inc., is acting as the representative, the issuer has
agreed to sell to the underwriters, and the underwriters have severally agreed
to purchase, the principal amounts of the Series 2001-A Bonds set forth
opposite each underwriter's name below:
Name Class A-1
- ---- ---------
Salomon Smith Barney Inc...............................
Banc One Capital Markets, Inc..........................
Credit Suisse First Boston Corporation.................
First Union Securities, Inc............................
ABN AMRO Incorporated..................................
Barclays Capital Inc...................................
Chase Securities Inc...................................
Janney Montgomery Scott LLC............................
Lehman Brothers Inc....................................
Mellon Financial Markets, LLC..........................
Merrill Lynch, Pierce, Fenner & Smith Incorporated.....
TD Securities (USA) Inc................................
Commerce Capital Investments, Inc......................
Loop Capital Markets, LLC..............................
Pryor, Counts & Co., Inc...............................
Total .................................................
Under the terms and conditions of the underwriting agreement, the
underwriters are committed to take and to pay for all of the Series 2001-A
Bonds offered hereby, if any are taken.
The Underwriters' Sales Price for the Series 2001-A Bonds. The underwriters
propose to offer the Series 2001-A Bonds in part directly to retail purchasers
at the initial public offering prices set forth on the cover page of this
prospectus supplement, and in part to some securities dealers at a price less a
concession not in excess of ______ percent of the principal amount of the Series
2001-A Bonds.
The underwriters may allow and the dealers may reallow a concession to some
brokers and dealers not in excess of ______ percent of the principal amount of
the Series 2001-A Bonds.
After the Series 2001-A Bonds are released for sale to the public, the
offering price and other selling terms may from time to time be varied by the
underwriters.
No Assurance as to Resale Price or Resale Liquidity for the Series 2001-A
Bonds. The Series 2001-A Bonds are a new issue of securities with no
established trading market. No series of transition bonds is currently listed
on a securities exchange, and the Series 2001-A Bonds also will not be listed
on any securities exchange. The issuer has been advised by the underwriters
that they intend to make a market in the Series 2001-A Bonds but are not
obligated to do so and may discontinue market making at any time without
notice. No assurance can be given as to the liquidity of the trading market for
the Series 2001-A Bonds.
Various Types of Underwriter Transactions Which May Affect the Price of
the Series 2001-A Bonds. The underwriters may engage in overallotment
transactions, stabilizing transactions, syndicate covering transactions and
penalty bids with respect to the Series 2001-A Bonds in accordance with
Regulation M under the Securities Exchange Act of 1934, as amended.
Overallotment transactions involve syndicate sales in excess of the offering
size, which creates a syndicate short position. Stabilizing transactions permit
bids to purchase the Series 2001-A Bonds so long as the stabilizing bids do not
exceed a specified maximum. Syndicate covering transactions involve purchases
of the Series 2001-A Bonds in the open market after the distribution has been
completed in order to cover syndicate short positions. Penalty bids permit the
underwriters to reclaim a selling concession from a syndicate member when the
Series 2001-A Bonds originally sold by the syndicate member
S-27
are purchased in a syndicate covering transaction. These overallotment
transactions, stabilizing transactions, syndicate covering transactions and
penalty bids may cause the prices of the Series 2001-A Bonds to be higher than
they would otherwise be in the absence of these transactions. None of PECO
Energy, the issuer, the issuer trustee or the bond trustee or any of the
underwriters represent 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 investment banking and commercial banking
transactions with the issuer and its affiliates, including PECO Energy. In
addition, each underwriter may from time to time take positions in the Series
2001-A Bonds.
The issuer and PECO Energy have agreed to indemnify the several
underwriters against some liabilities, including liabilities under the
Securities Act of 1933, as amended.
S-28
RATINGS
It is a condition of any underwriter's obligation to purchase that the
Series 2001-A Bonds be rated "AAA" by Standard & Poor's, "AAA" by Fitch, Inc.
and "Aaa" by Moody's, which, in each case, is in one of the four highest rating
categories of that rating agency.
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 ratings on any of the Series
2001-A Bonds, and, accordingly, there can be no assurance that the ratings
assigned to any class of the Series 2001-A 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 the Series 2001-A Bonds is revised or withdrawn, the liquidity
of that class of the Series 2001-A 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 Series 2001-A Bonds other than
payment in full of each class of the Series 2001-A Bonds by the applicable class
termination date and the ability to make timely interest payments.
S-29
GLOSSARY OF DEFINED TERMS
Set forth below is a glossary of defined terms used in this prospectus
supplement.
"2000 QRO" means the qualified rate order issued by the Pennsylvania
Public Utility Commission to PECO Energy on March 16, 2000.
"First QRO" means the qualified rate order issued by the Pennsylvania
Public Utility Commission to PECO Energy on May 14, 1998.
"Interest" means, for any monthly allocation date for any series of
transition bonds, the sum of, without duplication:
o in the case of any series or class not described in the next
subparagraph, an amount that would cause the amount on deposit for
interest in the series subaccount, without regard to investment income,
for that series to equal the monthly allocated interest balance for that
series and that monthly allocation date,
o in the case of any series or class subject to a swap agreement pursuant
to which the issuer is receiving payments due thereunder from the
applicable counterparty, the regular fixed payment to a related
counterparty without netting, but not payment in respect of breakage or
termination of the related swap agreement,
o if the transition bonds have been declared due and payable, all accrued
and unpaid interest,
o for a series to be redeemed prior to the next monthly allocation date,
the amount of interest that will be payable as interest on that series on
the redemption date, and
o any interest due on that series on a payment date or other date for the
payment of interest and not paid and, to the extent permitted by law,
interest on that amount.
"Percentage" means, for the issuer or any other issuer of transition
bonds, the percentage equivalent of a fraction:
o the numerator of which is the aggregate intangible transition charges (as
adjusted from time to time) applicable to all series of transition bonds
issued by the issuer or any other issuer, as applicable, and
o the denominator of which is the aggregate intangible transition charges
(as adjusted from time to time) applicable to all series of transition
bonds issued by the issuer and all other issuers.
"Principal" means, for any monthly allocation date and any series of
transition bonds, an amount that:
o would cause the amount on deposit for principal in the series subaccount,
without regard to investment income, for that series to equal the monthly
allocated principal balance for that series and that monthly allocation
date,
o if the transition bonds have been declared due and payable, the principal
amount of that series,
o for a series to be redeemed prior to the next monthly allocation date,
the amount that will be payable as principal of that series on the
redemption date, or
o any principal due on that series on a payment date or other date for the
payment of principal and not paid.
"Pro Rata" means, for any series of transition bonds, a ratio,
o in the case of the amount of Interest allocated to the series
subaccounts, the numerator of which is the monthly allocated interest
balance for that series for that monthly allocation date and the
denominator of which is the sum of monthly interest balances for all
series for that monthly allocation date,
S-30
o in the case of the amount of Principal allocated to the series
subaccounts as a result of an acceleration or redemption, the numerator
of which is the amount allocable for that series as a result of that
event and the denominator of which is the amount allocable to all series
as a result of acceleration or redemption, and
o in the case of the amount of Principal otherwise allocated to the series
subaccounts, the numerator of which is the monthly allocated principal
balance for that series for that monthly allocation date and the
denominator of which is the sum of monthly allocated principal balances
for all series for that monthly allocation date.
"qualified rate orders" means the qualified rate order issued by the
Pennsylvania Public Utility Commission to PECO Energy on May 14, 1998, the
qualified rate order issued by the Pennsylvania Public Utility Commission to
PECO Energy on March 16, 2000 and any subsequent order of the Pennsylvania
Public Utility Commission, adopted in accordance with the Pennsylvania
Competition Act, which creates intangible transition property and authorizes
the imposition and collection of intangible transition charges by PECO Energy
or its assignee. This term also includes any order that is supplemental to any
of the foregoing.
"qualified transition expenses," as set forth in PECO Energy's qualified
rate orders, means, collectively, the aggregate principal amount of the
transition bonds and an amount sufficient to provide for any credit
enhancement, to fund any reserves, and to pay interest, premiums, if any, costs
of defeasance, servicing fees and other fees, costs and charges relating to all
series of transition bonds.
"series of transition bonds" means any of the Series 2001-A Bonds, the
Series 2000-A Bonds, the Series 1999-A Bonds and any other series of transition
bonds which are issued under and are subject to the terms of the indenture.
S-31
Subject to Completion dated February 8, 2001
PROSPECTUS
PECO Energy Transition Trust
Issuer
PECO Energy Company
Seller And Servicer
Up to $850,000,000 of Transition Bonds Issuable in Series
The Issuer o has issued transition bonds--the Series 1999-A Bonds and
the Series 2000-A Bonds--and may periodically issue
additional transition bonds in one or more series with one
or more classes,
o owns:
o intangible transition property, which is the right, created
by Pennsylvania's Competition Act and the qualified rate
orders issued by the Pennsylvania Public Utility Commission
to collect intangible transition charges in amounts
designed to be sufficient to repay the related series of
transition bonds, to pay other expenses specified in the
indenture and to fund the trust accounts,
o collections of intangible transition charges,
o its rights under the sale agreement and master servicing
agreement,
o trust accounts held by the bond trustee, and
o if so stated in the applicable prospectus supplement,
other credit enhancement.
The Transition
Bonds Offered by
This Prospectus o will be issued to refinance Series 1999-A Bonds Class A-3
and Class A-5, in whole or in part,
o will be payable only from assets of the issuer,
o will be supported by trust accounts held by the trustee as
security for the transition bonds, and, if so stated in the
applicable prospectus supplement, other credit enhancement,
o will be secured equally with all other transition bonds
issued under the indenture, and
o will be issued in series, each of which the issuer may
issue without the consent of existing transition
bondholders.
This prospectus applies only to transition bonds offered by this
prospectus.
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 , 2001.
TABLE OF CONTENTS
PAGE
----
PROSPECTUS SUMMARY ...................................................... 2
RISK FACTORS ............................................................ 19
Unusual Nature of Intangible Transition Property ....................... 19
Servicing .............................................................. 26
Bankruptcy; Creditors' Rights .......................................... 29
The Transition Bonds ................................................... 33
GLOSSARY OF DEFINED TERMS ............................................... 37
AVAILABLE INFORMATION ................................................... 37
INCORPORATION OF DOCUMENTS BY REFERENCE ................................. 37
THE PENNSYLVANIA COMPETITION ACT ........................................ 38
The Pennsylvania Competition Act's General Effect on the Electric
Utility Industry in Pennsylvania....................................... 38
Recovery of Stranded Costs ............................................. 38
Securitization of Stranded Costs ....................................... 38
Jurisdiction Over Disputes; Standing ................................... 40
Possible Federal Preemption of the Pennsylvania Competition Act ........ 40
Possible Commonwealth Amendment or Repeal of the Pennsylvania
Competition Act ....................................................... 41
PECO ENERGY'S ELECTRIC RESTRUCTURING PLAN ............................... 42
General ................................................................ 42
Subsequent Events ...................................................... 46
Prior Litigation ....................................................... 48
THE QUALIFIED RATE ORDERS AND THE INTANGIBLE TRANSITION CHARGES ......... 49
The Intangible Transition Charges ...................................... 51
Competitive Billing .................................................... 53
THE SELLER AND SERVICER ................................................. 55
Retail Electric Service Territory ...................................... 55
Customers and Operating Revenues ....................................... 55
Forecasting Customers and Usage ........................................ 60
Billing Process ........................................................ 62
Limited Information on Customers' Creditworthiness ..................... 62
Electric Generation Suppliers and Other Third Party Billers ............ 65
THE ISSUER .............................................................. 66
USE OF PROCEEDS ......................................................... 68
THE TRANSITION BONDS .................................................... 68
General ................................................................ 68
Interest and Principal ................................................. 69
Floating Rate Transition Bonds ......................................... 69
Redemption ............................................................. 70
Credit Enhancement ..................................................... 71
Book-Entry Registration ................................................ 71
Definitive Transition Bonds ............................................ 74
WEIGHTED AVERAGE LIFE AND YIELD CONSIDERATIONS .......................... 75
THE SALE AGREEMENT ...................................................... 76
Sale and Assignment of Intangible Transition Property .................. 76
i
PAGE
----
Representations and Warranties of the Seller ........................... 77
Matters Regarding the Seller ........................................... 83
Governing Law .......................................................... 83
THE MASTER SERVICING AGREEMENT ......................................... 84
Servicing Procedures .................................................. 84
Servicer Advances ..................................................... 86
Servicing Compensation; Releases ...................................... 86
Servicer Duties ....................................................... 86
Servicer Representations and Warranties ............................... 87
Servicer Indemnification .............................................. 87
Statements to Issuer and Bond Trustee ................................. 88
Evidence as to Compliance ............................................. 88
Matters Regarding the Servicer ........................................ 89
Servicer Defaults ..................................................... 89
Rights Upon Servicer Default .......................................... 90
Successor Servicer .................................................... 90
Addition of Other Issuers ............................................. 91
Governing Law ......................................................... 91
THE INDENTURE .......................................................... 92
Security .............................................................. 92
Issuance in Series or Classes ......................................... 92
Collection Account .................................................... 93
Allocations and Payments .............................................. 96
Liquidated Damages .................................................... 98
Reports to Transition Bondholders ..................................... 99
Modification of Indenture ............................................. 99
Enforcement of the Sale Agreement and the Master Servicing Agreement .. 101
Modifications to the Sale Agreement and the Master Servicing Agreement 102
Events of Default; Rights Upon Event of Default ....................... 102
Covenants ............................................................. 104
List of Transition Bondholders ........................................ 106
Annual Compliance Statement ........................................... 106
Bond Trustee's Annual Report .......................................... 106
Satisfaction and Discharge of Indenture ............................... 106
Legal Defeasance and Covenant Defeasance .............................. 106
The Bond Trustee ...................................................... 108
Governing Law ......................................................... 108
UNITED STATES TAXATION ................................................. 109
General ............................................................... 109
Taxation of the Issuer and of the Transition Bonds .................... 109
Tax Consequences to US Holders ........................................ 110
Tax Consequences to Non-US Holders .................................... 111
ii
PAGE
----
MATERIAL COMMONWEALTH OF PENNSYLVANIA TAX MATTERS ...................... 112
ERISA CONSIDERATIONS ................................................... 113
PLAN OF DISTRIBUTION ................................................... 113
RATINGS ................................................................ 114
LEGAL MATTERS .......................................................... 114
EXPERTS ................................................................ 114
GLOSSARY OF DEFINED TERMS .............................................. 115
INDEX TO FINANCIAL STATEMENTS ......................................... F-1
ANNEX A ............................................................... A-1
iii
IMPORTANT NOTICE
ABOUT INFORMATION IN THIS PROSPECTUS
You should rely only on information about the transition bonds provided in
this prospectus and in the related prospectus supplement. The issuer has not
authorized anyone to provide you with different information.
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 where it is not lawful to do so.
References to the "issuer" refer to PECO Energy Transition Trust unless
the context indicates otherwise.
References to the "seller" refer to PECO Energy Company and any successor
seller under the sale agreement described in this prospectus.
References to the "servicer" refer to PECO Energy Company and any
successor servicer under the master servicing agreement described in this
prospectus.
We include cross-references to sections where you can find additional
information. Check the table of contents to locate these sections.
1
PROSPECTUS SUMMARY
This summary contains a brief description of the transition bonds which
applies to all series of transition bonds offered by this prospectus.
Information that relates to a specific series of transition bonds can be found
in the prospectus supplement related to that series. Consider carefully the
risk factors beginning on page 19 of this prospectus.
Transaction Overview: The Pennsylvania Electricity Generation Customer
Choice and Competition Act was enacted in 1996 and
provides for the restructuring of the electric
industry in Pennsylvania, including retail
competition for generation services. Prior to
enactment of the Pennsylvania Competition Act,
electric utilities, such as PECO Energy Company,
invested in various generation-related assets, such
as electric generating facilities--including
nuclear power plants--and power purchase contracts
with third-party generators of electricity, to help
meet their duties to serve the public as regulated
utilities. The electric utilities recovered these
investments by charging their customers the
regulated rates approved by the Pennsylvania Public
Utility Commission.
One of the effects of the deregulation of
electricity generation is that prices are
determined by market forces, not through rate
regulation by the Pennsylvania Public Utility
Commission. These market prices may not be high
enough to allow the utilities to recover their
investments in generation-related assets.
Accordingly, the utilities may incur a loss in
value of these generation-related assets as a
result of the transition from a regulated
environment to competition for electric generation
services.
The Pennsylvania Competition Act provides for
utilities to recover the anticipated loss in value
of their generation-related assets, known as
stranded costs, by including a charge in their
customers' bills known as competitive transition
charges. Utilities are authorized to securitize the
right to recover all or a portion of these charges
through the issuance of transition bonds, such as
the securities described in this prospectus and any
related prospectus supplement. This right is known
as intangible transition property. Once intangible
transition property is securitized, the utility's
right to recover its stranded costs through the
competitive transition charges is replaced by the
intangible transition property holder's right to
recover the costs associated with the issuance,
credit enhancing and servicing of the transition
bonds through intangible transition charges
included in customers' electric bills. Intangible
transition charges reduce the amount of competitive
transition charges and, if necessary, will reduce
PECO Energy's variable distribution rates in order
that all charges to customers fit within the rate
caps of the Pennsylvania Competition Act.
Intangible transition property was created by the
Pennsylvania Competition Act and two qualified rate
orders issued by the Pennsylvania Public Utility
Commission to PECO Energy Company on May 14, 1998
and on March 16, 2000. Intangible transition
property represents the irrevocable right to
collect intangible transition charges from
customers to recover:
2
o a portion of PECO Energy Company's stranded
costs, and
o an amount sufficient to provide for any credit
enhancement, to fund any reserves, and to pay
interest, premiums, if any, costs of defeasance,
servicing fees and other fees, costs and charges
relating to transition bonds. Intangible
transition charges are nonbypassable. Customers
cannot avoid paying them even if they purchase
electricity from a supplier other than PECO
Energy Company.
On March 25, 1999, PECO Energy Company sold
intangible transition property created by its first
qualified rate order, which is referred to in this
prospectus as the First QRO, to the issuer and the
issuer issued $4 billion of Series 1999-A Bonds in
accordance with that order. On March 16, 2000, the
Pennsylvania Public Utility Commission issued a
second qualified rate order, which is referred to in
this prospectus as the 2000 QRO. On May 2, 2000,
PECO Energy Company sold intangible transition
property created by the 2000 QRO to the issuer and
the issuer issued $1 billion of Series 2000-A Bonds
in accordance with the 2000 QRO. The First QRO
authorized the refinancing of the Series 1999-A
Bonds. The bonds described in this prospectus and
the related prospectus supplement will be used to
refinance the Series 1999-A Bonds Class A-3 and
Class A-5 in whole or in part.
The issuer has pledged substantially all of its
property to the bond trustee as collateral for all
the transition bonds issued under the indenture,
including the Series 1999-A Bonds, the Series
2000-A Bonds and the bonds described in this
prospectus and the related prospectus supplement.
This property includes:
o intangible transition property created by the
qualified rate orders,
o its rights under the sale agreement and the
master servicing agreement, and
o the collection account and the amounts contained
in that account
and will serve as collateral for all series of
transition bonds issued under the indenture.
The portion of the collection account related to
principal of and interest on your series of
transition bonds will be segregated in a separate
series subaccount as discussed under the caption
"The Indenture--Collection Account" and
"--Allocations and Payments" in this prospectus.
For a diagram depicting the parties to this
transaction, refer to page 18 of this prospectus.
For more information on the Pennsylvania
Competition Act, intangible transition property and
intangible transition charges, you should review
the material under the captions entitled "Risk
Factors," "The Pennsylvania Competition Act," "PECO
Energy's Electric Restructuring Plan" and "The
Qualified Rate Orders and the Intangible Transition
Charges" in this prospectus.
3
Issuer: PECO Energy Transition Trust, a Delaware statutory
business trust and a wholly owned subsidiary of
PECO Energy Company.
The issuer was formed on June 23, 1998 for the
purpose of purchasing and owning transferred
intangible transition property, issuing transition
bonds from time to time and pledging its interest
in the collateral to the bond trustee under the
indenture to secure the transition bonds. The
issuer is a special purpose entity whose only
assets are the collateral for all series of
transition bonds issued by it and whose only
revenues are collections of the intangible
transition charges. The collateral is the sole
source of payment for all series of transition
bonds. On March 25, 1999, the issuer issued $4
billion of Series 1999-A Bonds, and on May 2, 2000,
the issuer issued $1 billion of Series 2000-A
Bonds. The bonds described in this prospectus and
the related prospectus supplement are being issued
to refinance all or part of the Series 1999-A Bonds
Class A-3 and Class A-5. See "The Issuer" in this
prospectus.
Issuer's Address: c/o First Union Trust Company, National
Association, One Rodney Square, 920 King Street,
Wilmington, Delaware 19801.
Issuer's Telephone Number: (302) 888-7532
Issuer Trustee: First Union Trust Company, National Association.
Two additional trustees were appointed by PECO
Energy Company. See "The Issuer" in this
prospectus.
Issuer Trustee's Address: One Rodney Square, 920 King Street, Wilmington,
Delaware 19801.
Issuer Trustee's Telephone
Number: (302) 888-7532
Bond Trustee: The Bank of New York.
Bond Trustee's Address: 101 Barclay Street, Floor 12 East, New York, New
York 10286.
Bond Trustee's Telephone
Number: (800) 524-4458
Seller and Servicer of the
Transferred Intangible
Transition Property: PECO Energy Company.
PECO Energy Company is referred to as PECO Energy
throughout this prospectus.
The intangible transition property was authorized
by the qualified rate orders issued by the
Pennsylvania Public Utility Commission to PECO
Energy on May 14, 1998 and March 16, 2000. The
first order, the First QRO, authorized intangible
transition property of $4 billion, which was sold
to the issuer concurrently with the issuance of the
Series 1999-A Bonds. A summary of the terms of the
Series 1999-A Bonds can be found in Annex A to this
prospectus. The second order, the 2000 QRO,
authorized intangible transition property of $1
billion which was sold to the issuer concurrently
with the issuance of the Series 2000-A Bonds.
4
A summary of the terms of the Series 2000-A Bonds
can be found in Annex A to this prospectus. There
will be no sale of intangible transition property
in connection with the issuance of the transition
bonds described in this prospectus and the related
prospectus supplement.
PECO Energy services the transferred intangible
transition property under the master servicing
agreement between PECO Energy, as servicer, and the
issuer.
Incorporated in Pennsylvania in 1929, PECO Energy, a
wholly owned subsidiary of Exelon Corporation, is
engaged principally in the purchase, transmission,
distribution and sale of electricity to residential,
commercial, industrial and wholesale customers in
its franchised service territory in southeastern
Pennsylvania. Since 1999, the Commonwealth of
Pennsylvania has required the unbundling of retail
electric services in Pennsylvania into separate
generation, transmission and distribution services
with open retail competition for generation
services. With the commencement of deregulation,
PECO Energy serves as the local distribution company
providing electric distribution services in
southeastern Pennsylvania and bundled electric
service to customers who cannot or do not choose an
alternate electric generation supplier.
PECO Energy, as servicer of the transferred
intangible transition property, collects the
intangible transition charges from customers within
its service territory on behalf of the issuer for a
fee specified in any related prospectus supplement.
Due to provisions of the Pennsylvania Competition
Act and the settlement of restructuring issues, as
of September 1, 2000 PECO Energy customers have the
opportunity to choose from several billing source
options.
One of these options is consolidated billing from
third parties providing billing or metering
services, including electric generation suppliers.
Any third party that provides consolidated billing
is required to pay the servicer amounts billed by
the third party on behalf of the servicer, including
the intangible transition charges, regardless of the
third party's ability to collect those amounts from
its customers. The third party biller effectively
replaces the customer as the obligor on those
intangible transition charges. The servicer will
have no right to collect those intangible transition
charges from the customers, except following payment
defaults by a third party biller and the expiration
of the applicable grace period. As of the date of
this prospectus, only one electric generation
supplier is providing billing for its own services.
See "The Qualified Rate Orders and the Intangible
5
Transition Charges--Competitive Billing" and "Risk
Factors--Servicing--It May Be More Difficult to
Collect Intangible Transition Charges Due to
Billing by Third Parties" in this prospectus.
Customers: PECO Energy's customers are divided into two
customer categories for purposes of adjusting
intangible transition charges. These categories are
(a) residential and (b) commercial and industrial.
Each customer category is further divided into rate
classes. The customer categories and rate classes
are described in greater detail in "The Seller and
Servicer PECO Energy Company--Customers and
Operating Revenues" in this prospectus.
The Assets of the Issuer: The issuer owns:
o the intangible transition property transferred by
PECO Energy to the issuer, which secures all the
transition bonds outstanding under the indenture,
o related collections of intangible transition
charges,
o its rights under the sale agreement and the
master servicing agreement,
o trust accounts held by the bond trustee, and
o other credit enhancement acquired or held to
ensure payment of a particular series of
transition bonds as specified in the related
prospectus supplement.
The intangible transition property is described in
more detail under "The Sale Agreement--Sale and
Assignment of Intangible Transition Property" in
this prospectus. The trust accounts are described
in more detail under "The Indenture--Collection
Account" in this prospectus.
Payment Sources: On each payment date as specified in the related
prospectus supplement, the bond trustee is required
to pay amounts owed on all outstanding series of
transition bonds from:
o amounts collected by the servicer--or any third
party electric generation suppliers or other
third parties providing billing or metering
services--for the issuer with respect to
intangible transition charges and remitted to the
bond trustee after the payment of specific fees
and expenses, and
o any other amounts available for withdrawal from
trust accounts held by the bond trustee,
including specified investment earnings on
amounts in the trust accounts, or paid under
contracts, such as the sale agreement, the bills
of sale or the master servicing agreement,
pledged to secure one or more series of
transition bonds. All accounts referred to in
this prospectus are held by the bond trustee in
trust, and are described in greater detail under
"The Indenture--Collection Account" in this
prospectus.
State Pledge: The Commonwealth of Pennsylvania has pledged in the
Pennsylvania Competition Act that it will not
limit, alter, impair or
6
reduce the value of intangible transition property
or the intangible transition charges which are
approved by an order of the Pennsylvania Public
Utility Commission until the transition bonds are
fully repaid or discharged. The Commonwealth of
Pennsylvania may, however, limit or alter the value
of intangible transition charges or intangible
transition property if adequate compensation is
made for the full protection of the beneficial
owners of the transition bonds. The Pennsylvania
Competition Act does not define adequate
compensation. Thus, the amount of this compensation
may not be sufficient to pay the full amount of
outstanding principal of and interest on the
transition bonds or compensate transition
bondholders for any reinvestment risk.
Priority of Distributions: On each monthly allocation date (which is the first
day of each calendar month or if such day is not a
business day, the next business day), the bond
trustee applies all amounts on deposit in the
general subaccount of the collection account and
any investment earnings on these amounts in the
following priority:
(1) payment of the bond trustee's fee, expenses
and indemnities, if any,
(2) payment of the issuer trustee's fee, expenses
and indemnities, if any,
(3) payment of the monthly servicing fee and all
unpaid monthly servicing fees from prior
monthly allocation dates,
(4) so long as no event of default under the
indenture has occurred and is continuing or
would be caused by that payment, payment of
all operating expenses other than those
referred to in the first, second and third
items above--up to an aggregate for all series
of transition bonds of $12,500 on any monthly
allocation date,
(5) Interest on each series of transition bonds
for that monthly allocation date will be
transferred to the series subaccounts for each
series Pro Rata, which is defined in the
glossary to this prospectus,
(6) any Principal then payable on the transition
bonds:
(a) as a result of acceleration triggered by an
event of default,
(b) on a series termination date or class
termination date, as applicable, or
(c) on a redemption date,
that will occur prior to the next monthly
allocation date will be transferred Pro Rata to
the series subaccount for that series,
(7) the Principal not accounted for in (6) will be
transferred Pro Rata to the series
subaccounts,
(8) payment of any remaining unpaid operating
expenses, indemnity amounts and loss amounts
then owed by the issuer,
7
(9) allocation of any required amount to the
overcollateralization subaccount, which
account is described in detail under
"--Accounts" in this prospectus summary and
"The Indenture--Collection Account" in this
prospectus,
(10) payment of any termination or breakage amounts
owed to any counterparty to a hedge or swap
transaction,
(11) so long as no event of default has occurred
and is continuing, payment of net investment
earnings on amounts in the general subaccount
of the collection account since the previous
monthly allocation date to the issuer, free
from the lien of the indenture,
(12) allocation of the remainder, if any, to the
reserve subaccount, which account is described
in detail under "--Accounts" in this
prospectus summary and "The
Indenture--Collection Account" in this
prospectus, and
(13) following repayment of all outstanding series
of transition bonds, the balance will be
released to the issuer, free from the lien of
the indenture.
The payment of the bond trustee's and issuer
trustee's indemnities specified in items (1) and
(2) above will be made only if:
o those indemnity payments would not result in an
event of default under the indenture and
o the issuer provides notice to the rating agencies
of the indemnity amount and, if reasonably
required by the rating agencies, an officer's
certificate and other documentation that
certifies that those payments are not reasonably
expected to result in an event of default.
The following diagram generally depicts the basic
flow of the collection of intangible transition
charges from customers or electric generation
suppliers or other third parties to the servicer
and, subsequently, to the various accounts listed
above.
8
BASIC ALLOCATIONS AND DISTRIBUTIONS
CUSTOMERS
AND
EGSs*
Monthly payment of
intangible transition
charges to servicer
PECO ENERGY
(SERVICER)
Monthly remittance of
collections of intangible
transition charges
allocated to the issuer
COLLECTION
ACCOUNT
Application of amounts
in collection account
(including net earnings),
as follows
Bond
Trustee/
Issuer
Trustee:
Fees and
expenses
(including
indemnity
amounts
and loss
amounts
owed to
the
trustees)
Servicer:
Monthly
servicing
fee
Issuer:
Operating
expenses
(up to an
aggregate
$12,500
for all
series for
each
monthly
allocation
date)
Series Subaccounts:
o Interest for
applicable monthly
allocation date
o Principal payable
as a result of
acceleration or
payable on a series
or class
termination date or
payable on a
redemption date
o Principal for that
monthly allocation
date not provided
for above
Issuer:
All unpaid
operating
expenses,
indemnity
amounts
and loss
amounts
owed to
the issuer
Overcollateralization
Subaccount:
Overcollateralization
Issuer:
Net earnings
on amounts
in general
subaccount
of the
collection
account
Reserve
Subaccount:
All
remaining
amounts
* electric generation suppliers or other third parties providing billing and
metering services.
9
If on any monthly allocation date, available
collections of intangible transition charges,
together with amounts available in the subaccounts,
are insufficient to make the allocations
contemplated by the first through the ninth items
above, the bond trustee will draw from amounts on
deposit in the following subaccounts up to the
amount of such shortfall, in order to make those
payments and transfers:
(1) from the interest deposit subaccount, for the
payments or transfers contemplated by the fifth
item above only,
(2) then from the loss subaccount, for the payments
or transfers contemplated by the first through
the eighth items above only, and
(3) thereafter, from the reserve subaccount, then
from the overcollateralization subaccount and
finally from the capital subaccount.
See "The Indenture--Allocations and Payments" in
this prospectus.
On each payment date for any series, the amounts on
deposit in the applicable series subaccount (other
than net income or other gain, which, so long as no
event of default has occurred and is continuing,
are released to the issuer free of the lien of the
indenture) are applied to pay the following (in the
priority indicated):
(1) interest due and payable on the transition
bonds of that series, together with any overdue
interest and, to the extent permitted by law,
interest on that amount, are paid to the
transition bondholders of that series (in the
case of classes with swap or hedge
transactions, that interest is payable to the
applicable counterparty to those transactions),
(2) the balance, if any, up to the principal amount
of the transition bonds of that series that is
scheduled to be paid by that payment date in
accordance with the expected amortization
schedule for that series or, for any series of
transition bonds payable as a result of
acceleration under the indenture or to be
redeemed under the indenture, the outstanding
principal amount of that series and premium, if
any, is paid to the transition bondholders of
that series for principal and premium, if any,
on the transition bonds of that series, and
(3) the balance, if any, is transferred to the
general subaccount for allocation on the next
monthly allocation date. See "The
Indenture--Allocations and Payments" in this
prospectus.
Credit Enhancement: Credit enhancement for the transition bonds is as
follows:
o The servicer of the intangible transition
property on behalf of the issuer makes periodic
adjustments to the intangible transition charges
it bills to customers, once the Pennsylvania
Public Utility Commission approves these
adjustments. PECO Energy will make these
adjustments if it determines that collections of
10
intangible transition charges are either greater
or lesser than the amount necessary to make
timely payments on all series of transition
bonds, to fund subaccounts to required levels and
to pay applicable fees and expenses. The servicer
can make these changes, with the approval of the
Pennsylvania Public Utility Commission, once a
year. In addition, during the final calendar year
of collections of intangible transition charges
for any series of transition bonds, the servicer
can make these adjustments as frequently as
monthly. See "The Qualified Rate Orders and the
Intangible Transition Charges--The Intangible
Transition Charges--The Intangible Transition
Charge Adjustment Process."
o The amounts in the reserve subaccount, the
overcollateralization subaccount and the capital
subaccount also provide credit enhancement for
all series of transition bonds.
o Additional credit enhancement for any series may
include surety bonds, letters of credit, maturity
guarantees, a financial guaranty insurance
policy, a credit or liquidity facility, a
repurchase obligation, a third party payment or
cash deposit, each as specified in the related
prospectus supplement.
The credit enhancement for the transition bonds is
intended to protect you against losses or delays in
scheduled payments on your transition bonds.
Accounts: The bond trustee holds the following trust
accounts:
o Collection Account--Under the indenture, the
issuer established a single collection account
for all series of transition bonds which is held
by the bond trustee. The collection account has
been divided into subaccounts which allocate the
funds deposited in the collection account to
specific uses.
o General Subaccount--Funds received from
collections of the intangible transition charges
are initially allocated to the general subaccount
of the collection account.
o Series Subaccount--Under the indenture, the
issuer has established series subaccounts for the
Series 1999-A Bonds and the Series 2000-A Bonds
and will establish a series subaccount for each
series of transition bonds offered by this
prospectus. On each monthly allocation date, the
bond trustee is required to transfer to this
account amounts accruing for principal and
interest for each series on a Pro Rata basis. On
each payment date, the bond trustee withdraws
funds from these subaccounts to make payments on
the related series.
o Class Subaccounts--These subaccounts have been
and will be established for any class of
transition bonds that bears a floating rate of
interest.
o Overcollateralization Subaccount--Each prospectus
supplement will set a funding level for the
overcollateralization subaccount that takes into
account the issuance of any previous series of
transition bonds. The overcollateralization
amount required to be
11
funded for all series of transition bonds is
expected to reach 2% of the initial principal
balance of the Series 1999-A Bonds and the Series
2000-A Bonds by the expected final payment date
specified in the applicable prospectus supplement.
The overcollateralization amount will be funded
over the expected term of all series of transition
bonds through the imposition of intangible
transition charges.
o Capital Subaccount--Capital of the issuer of
approximately $25 million available to all series
of transition bonds will be held in the capital
subaccount.
o Reserve Subaccount--If the issuer collects
intangible transition charges in excess of:
(1) amounts payable for expenses of the bond
trustee, the issuer trustee and the servicer
and other fees and expenses,
(2) amounts allocable to the applicable series
and class subaccounts for Principal and
Interest on the next payment date, and
(3) amounts allocable to the
overcollateralization subaccount,
the excess is held in the reserve subaccount.
As of December 31, 2000, the balance in the reserve
subaccount was $26,544,464.
o Other Accounts--If funds are remitted to the bond
trustee in connection with a legal defeasance or
covenant defeasance under the indenture, a
defeasance subaccount will be established and
such funds will be held for the benefit of the
related transition bondholders. If the seller is
required to remit loss amounts under the terms of
the sale agreement, a loss subaccount will be
established. Additionally, if the seller is
required to remit interest payments under the
sale agreement, an interest deposit subaccount
will be established.
Each of the overcollateralization subaccount, the
capital subaccount, the reserve subaccount and, if
established, one or more defeasance subaccounts,
the loss subaccount and interest deposit subaccount
will be available to make payments on the
transition bonds on each payment date as described
in "The Indenture--Allocations and Payments" in
this prospectus.
Interest and Principal: Interest will accrue on the outstanding principal
balance of transition bonds of a series or class
offered by this prospectus at the applicable rate
of interest specified in or determined in the
manner specified in the applicable prospectus
supplement.
On any payment date for any series offered by this
prospectus, unless principal is payable:
o as a result of acceleration triggered by an event
of default,
o on a series termination date or class termination
date, as applicable, or
o on a redemption date,
12
the issuer will make principal payments on that
series in the amount necessary to reduce the
outstanding principal balance of that series to the
amount specified for that payment date in the
expected amortization schedule set forth in the
prospectus supplement for that series, and only to
the extent funds are available for that payment as
described in this prospectus. Principal of that
series or class of transition bonds may be paid
later than reflected in the expected amortization
schedule for that series or class.
See "Risk Factors--The Transition Bonds--Transition
Bondholders May Receive Principal Payments Later
than Expected" and "--Transition Bondholders May
Have to Reinvest the Principal of Their Investments
at a Lower Rate of Return Because of Optional and
Mandatory Redemption of Transition Bonds" and
"Weighted Average Life and Yield Considerations" in
this prospectus.
The entire unpaid principal amount of all of the
transition bonds outstanding under the indenture
will be due and payable if an event of default
under the indenture occurs and is continuing and
the bond trustee or the holders of a majority in
principal amount of the transition bonds of all
series then outstanding have declared the
transition bonds to be immediately due and payable.
See "The Indenture--Events of Default; Rights Upon
Event of Default" in this prospectus.
Optional Redemption: Provisions for redemption of a series of transition
bonds offered by this prospectus at the option of
the issuer will be specified in the related
prospectus supplement.
Mandatory Redemption: Except as described in the third paragraph of this
section, each series of transition bonds offered by
this prospectus will be subject to mandatory
redemption in whole at a redemption price equal to
the principal amount of the bonds, plus interest
accrued to the redemption date, if the seller is
obligated to pay liquidated damages under the sale
agreement. PECO Energy will be required to pay
liquidated damages and certain amounts due to the
bond trustee, the issuer trustee and the issuer as
a result of a breach by PECO Energy of specified
representations relating to intangible transition
property under the sale agreement if that breach
continues beyond a 90-day grace period, assuming
the seller meets specified rating criteria or makes
an escrow deposit, and has a material adverse
effect on the transition bondholders. If the
specified rating criteria are not met or the
requisite escrow deposit is not made, the seller
must pay liquidated damages within 2 days of the
breach. The bond trustee, which may consult with
the servicer and other third parties, will have
sole responsibility to determine whether a breach
by PECO Energy of any of these specified
representations has a material adverse effect on
the transition bondholders.
If the full amount of indemnification payments
resulting from PECO Energy's breach of its
representations relating to:
13
o the Commonwealth's and the Pennsylvania Public
Utility Commission's ability to adversely affect
intangible transition property or transition
bondholders,
o governmental approvals,
o pending or threatened litigation,
o PECO Energy's due incorporation and corporate
authority to fulfill its obligations under the
sale agreement,
o the enforceability of the sale agreement against
PECO Energy and the absence of any breach of its
charter documents, or
o creation of a lien or violation of applicable law
in connection with the sale agreement
is reasonably expected to be incurred beyond a
90-day period immediately following the breach of
the representation giving rise to the damages, the
seller will, except as provided below, pay
liquidated damages to the bond trustee, as assignee
of the issuer, on the first monthly allocation date
following the expiration of such 90-day period.
If PECO Energy is obligated to pay liquidated
damages for a breach of a representation and
warranty which relates to one or more of the
qualified rate orders, but not all of the qualified
rate orders, then:
o the amount of liquidated damages will include the
then outstanding principal amount of only the
series of transition bonds issued in connection
with the affected qualified rate order or orders
as of the redemption date, plus accrued interest
to the redemption date, and
o only the series of transition bonds issued in
connection with the affected qualified rate order
or orders will be subject to mandatory
redemption.
If the losses incurred as a result of a breach of
one of the foregoing representations is reasonably
expected not to exceed a de minimis loss amount, on
the monthly allocation date immediately following
the initial loss allocation date, the seller may
deposit in the loss subaccount the aggregate
expected amount of losses, in lieu of paying
indemnification or liquidated damages. In this
case, the seller may be required to make additional
deposits to the loss subaccount from time to time
if actual losses exceed the amount already
deposited.
Additional redemption provisions, if any, for each
series of transition bonds offered by this
prospectus will be specified in the related
prospectus supplement. See "The Transition Bonds--
Redemption" and "The Sale
Agreement--Representations and Warranties of the
Seller" in this prospectus.
Payment and Record Dates: The payment dates and record dates for each series
of transition bonds will be specified in the
related prospectus supplement.
14
Expected Final Payment Dates,
Series Termination Dates and
Class Termination Dates: The expected final payment date for each series
or class of transition bonds offered by this
prospectus will be the date when all interest
on and principal of that series or class is
expected to be paid in full. The series
termination date for a series or, if applicable,
the class termination date for a class of
transition bonds will be a date after the expected
final payment date. Failure to pay the entire
outstanding amount of any class or series by the
expected final payment date will not result in an
event of default under the indenture. Failure to
pay the entire outstanding amount of any class or
series on the series termination date or class
termination date for the class or series will
result in an event of default under the indenture.
The expected final payment date and the series
termination date or class termination date of each
series and class of transition bonds will be
specified in the corresponding prospectus
supplement.
Risk Factors: Prospective investors should consider the risks
associated with an investment in the transition
bonds offered by this prospectus. These risks may
cause transition bondholders to suffer a loss of
their investment in transition bonds or may
adversely affect the timing of payments to
transition bondholders. For a detailed discussion
of the material risks associated with an investment
in transition bonds, prospective investors should
review the discussion under "Risk Factors" which
begins on page 19 of this prospectus.
The Transition Bonds;
Issuance of New Series: The issuer may issue transition bonds offered
by this prospectus in one or more series,
each comprised of one or more classes. Each
series of transition bonds will be issued
under the indenture. As mentioned previously
under "--Issuer" in this prospectus summary,
the issuer issued the Series 1999-A Bonds on
March 25, 1999. The Series 1999-A Bonds,
totaling $4 billion in principal amount, were
issued in seven classes as described in the
related prospectus supplement dated March 18,
1999 and summarized in Annex A to this
prospectus. Two of the classes of the Series
1999-A Bonds have floating interest rates.
Also mentioned previously under "--Issuer" in
this prospectus summary, on May 2, 2000 the
issuer issued the Series 2000-A Bonds,
totaling $1 billion in principal amount, in
five classes as described in the related
prospectus supplement dated April 27, 2000
and summarized in Annex A to this Prospectus.
See also "The Indenture" in this prospectus.
Any series of transition bonds may include one or
more classes which differ as to the bond rate and
amortization of principal. The terms of all
transition bonds of the same series will be
identical, unless that series is comprised of 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 and, if applicable, classes of
that series, will be described in the related
prospectus supplement.
15
The terms of any series and any classes of that
series will not be subject to prior review by, or
consent of, the transition bondholders of any
previously issued series. A new series may be
issued under the indenture only upon satisfaction
of the conditions described in this prospectus
under "The Indenture--Issuance in Series or
Classes." See "Risk Factors--The Transition Bonds--
Issuance of Additional Series May Adversely Affect
Outstanding Transition Bonds" and "The Transition
Bonds" in this prospectus. For instance, one of the
conditions to the issuance of additional transition
bonds under the indenture is that each rating
agency must confirm to the seller, the servicer,
the bond trustee and the issuer that the issuance
of those additional transition bonds will not
result in a reduction or a withdrawal of the
current rating by that rating agency of any
outstanding series or class of transition bonds.
Denominations: Each class of transition bonds offered by this
prospectus will initially be issued in the minimum
denominations set forth in the related prospectus
supplement.
Form of the Transition
Bonds: Each series and class of transition bonds offered
by this prospectus will initially be issued either
only in book-entry form through The Depository
Trust Company or in another form as specified in
the applicable prospectus supplement. See "The
Transition Bonds--Book-Entry Registration" in this
prospectus.
Tax Status: In connection with the sale of intangible
transition property for the Series 1999-A Bonds,
PECO Energy received a ruling from the Internal
Revenue Service that the transition bonds will be
classified as obligations of PECO Energy. In
connection with the issuance of the transition
bonds offered by this prospectus, PECO Energy has
filed a request for a new ruling from the Internal
Revenue Service that the transition bonds offered
by this prospectus will be obligations of PECO
Energy. In the opinion of Ballard Spahr Andrews &
Ingersoll, LLP, special tax counsel to the issuer
and PECO Energy, for U.S. federal income tax
purposes:
o the transition bonds offered by this prospectus
will be treated as debt of PECO Energy secured by
a pledge of the collateral, and
o the issuer will be treated as a division of PECO
Energy and will not be treated as a separate
taxable entity.
Transition bondholders who are not United States
taxpayers generally will not be subject to United
States federal income or withholding taxes on
interest received on the transition bonds.
See "United States Taxation" in this prospectus.
In addition, in the opinion of Ballard Spahr
Andrews & Ingersoll, LLP, interest from the
transition bonds offered by this prospectus
received by a person who is not otherwise subject
to corporate or personal income tax in Pennsylvania
will not be subject to these taxes. Transition
bonds held by deceased Pennsylvania residents may
be subject to inheritance and estate taxes. Neither
residents
16
nor nonresidents of Pennsylvania will be subject at
the present time to an intangible personal property
tax with respect to the transition bonds. See
"Material Commonwealth of Pennsylvania Tax Matters"
in this prospectus.
ERISA Considerations: Employee benefit plans are permitted to purchase
transition bonds. A fiduciary of any employee
benefit plan or other plan or arrangement that is
subject to the Employee Retirement Income Security
Act of 1974, as amended, or Section 4975 of the
Internal Revenue Code of 1986, as amended, should
carefully review with its legal advisers whether
the purchase or holding of the transition bonds of
any class or series could give rise to a
transaction prohibited or not otherwise permissible
under ERISA or the Internal Revenue Code. See
"ERISA Considerations" in this prospectus.
Ratings: It is a condition of any underwriter's obligation
to purchase each series or class of transition
bonds offered by this prospectus that, at the time
of issuance, that series or class receive the
rating indicated in the related prospectus
supplement, which will be in one of the four
highest categories, from one or more rating
agencies which have rated the transition bonds
specified in that prospectus supplement.
A security rating is not a recommendation to buy,
sell or hold securities and may be subject to
revision or withdrawal at any time. No person is
obligated to maintain any rating on any transition
bond and, accordingly, there can be no assurance
that the ratings assigned to any series or class of
transition bonds upon initial issuance of that
series or class will not be revised or withdrawn by
a rating agency at any time thereafter without
prior notification.
If a rating of any series or class of transition
bonds is revised downward or withdrawn, the
liquidity and the price of that series or class of
transition bonds may be adversely affected. In
general, the ratings address credit risk, the
ability of the issuer to make timely interest
payments, 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 series termination date or class
termination date.
See "Risk Factors--The Transition Bonds--Transition
Bondholders May Receive Principal Payments Later
than Expected" and "Ratings" in this prospectus.
17
PARTIES TO THE TRANSACTION
PECO ENERGY
(seller, servicer,
grantor and owner)
Applies, as servicer, for
intangible transition charge
adjustments
Pennsylvania Public
Utility Commission*
(State agency; not
affiliated with issuer
or PECO Energy)
Issued the two qualified rate
orders and approves
adjustments to intangible
transition charges
Sold intangible transition property
for cash pursuant to sale agreement
in connection with the issuance of
the Series 1999-A Bonds and
the Series 2000-A Bonds
Services intangible transition
property of the issuer and
receives monthly servicing
fee pursuant to master
servicing agreement
ISSUER TRUSTEE
(with beneficiary trustees
manages issuer pursuant
to trust agreement)
ISSUER
(PECO Energy
Transition Trust)
PROVIDER OF
CREDIT
ENHANCEMENT
OR HEDGE
TRANSACTION
(to be named, if any)
Sale of refinancing transition bonds
for cash, pursuant to underwriting
agreement
UNDERWRITERS
BOND TRUSTEE
(acts for and on behalf of
transition bondholders
pursuant to indenture)
Sale of refinancing
transition bonds
Redemption
price
Proceeds of refinancing
transition bond sale
TRANSITION
BONDHOLDERS
Redeemed
Bonds
SERIES 1999-A
TRANSITION
BONDHOLDERS
(subject to redemption)
- -------------
* The Pennsylvania Public Utility Commission also supervises the implementation
of the Pennsylvania Competition Act and is authorized to issue regulations
under the Pennsylvania Competition Act.
18
RISK FACTORS
You should consider the following risk factors in deciding to purchase
transition bonds offered by this prospectus:
Unusual Nature of Intangible Transition Property
Legal Challenges Could Adversely Affect
Transition Bondholders Intangible transition property and its adequacy to pay principal
of and interest on the series of transition bonds offered by this
prospectus depends on the Pennsylvania Competition Act and
the qualified rate orders. If the Pennsylvania Competition Act
or any of the qualified rate orders were challenged in a lawsuit
and a court decided that the Pennsylvania Competition Act or
any of the qualified rate orders, or all of them, were invalid or
unenforceable, PECO Energy will have breached a
representation in the sale agreement. In that case, PECO Energy
may have to pay liquidated damages to the issuer and the bond
trustee for the losses resulting from that breach.
If PECO Energy is obligated to pay liquidated damages for a
breach of a representation and warranty which relates to one or
more of the qualified rate orders, but not all qualified rate
orders, then:
o the amount of liquidated damages will include the then
outstanding principal amount of only the series of transition
bonds authorized by the affected qualified rate order or orders
as of the redemption date, plus accrued interest to the
redemption date, and
o only the series of transition bonds authorized by the affected
qualified rate order or orders will be subject to mandatory
redemption.
See "The Sale Agreement--Representations and Warranties of
the Seller" in this prospectus.
PECO Energy may not be able to meet its obligations to pay
liquidated damages. As a result, if the Pennsylvania
Competition Act or any of the qualified rate orders were
overturned, transition bondholders could suffer a loss of their
investment. Also, the time and expense of enforcing rights
against PECO Energy could result in a loss to transition
bondholders or delay expected payments on the transition
bonds offered by this prospectus.
19
Lack of Continued Operation of Existing
Generation Facilities May Result in
Losses to Transition Bondholders Under the Pennsylvania Competition Act, recovery of stranded
costs associated with existing generating facilities depends on
continued operation of these facilities. There is an exception if
that operation is uneconomic because of the transition to a
competitive market. Since PECO Energy has transferred its
generation assets to a new subsidiary, PECO Energy cannot ensure
the continued operation of all of those generation assets.
Although the parts of the First QRO and the 2000 QRO
providing for the collection of intangible transition charges are
stated in the Pennsylvania Competition Act and in those qualified
rate orders themselves to be irrevocable, the collection of
intangible transition charges could be challenged if some of
the generating facilities transferred by PECO Energy ceased to
operate at reasonable levels. If the challenge were successful,
PECO Energy would not be required to pay liquidated damages and
the issuer may not have funds to make payments on the
transition bonds. As a result, transition bondholders could suffer
a loss of their investment.
Changes in Law May Result in Losses to
Transition Bondholders A change in law by legislative enactment or constitutional
amendment, including an enactment or amendment that
breaches the Commonwealth of Pennsylvania's pledge not to
limit, alter or impair intangible transition property or intangible
transition charges, will not be a breach by PECO Energy of its
representations under the sale agreement and will not require
PECO Energy to pay liquidated damages. Examples of a
change in law are a repeal of the Pennsylvania Competition
Act, an amendment to it voiding the existence of intangible
transition property or the adoption of a federal statute
prohibiting the recovery of stranded costs.
Under the Pennsylvania Competition Act, the Commonwealth
of Pennsylvania may limit or alter the value of intangible
transition property or intangible transition charges if "adequate
compensation is made by law" for the protection of the
intangible transition charges and of transition bondholders. It is
unclear if "adequate compensation . . . by law" would be
sufficient to pay the full amount of the outstanding principal of
and interest on the transition bonds or would compensate
transition bondholders for any reinvestment risk.
Under the United States and Pennsylvania Constitutions, the
Commonwealth of Pennsylvania could not repeal or amend the
Pennsylvania Competition Act--by way of legislative process--
or take any action that violates its pledge and agreement
described in the first paragraph of this subheading without
paying just compensation to the transition bondholders if doing
so would:
o constitute a permanent taking of the property interest of
transition bondholders in the intangible transition property,
and
20
o deprive the transition bondholders of their reasonable
expectations arising from their investments in the transition
bonds.
Just compensation awarded by a court, however, may not be
sufficient to pay the full amount of principal of and interest on
the transition bonds or compensate transition bondholders for
any reinvestment risk.
Also, if there were a change in law, there might be costly and
time-consuming litigation. There is no judicial precedent
directly on point, and the security for the transition bondholders
is a new type of asset. As a result, the outcome of any of this
litigation cannot be predicted with certainty.
Federal Legislation May Result in Losses
to Transition Bondholders In the past, bills have been introduced in Congress prohibiting
the recovery of stranded costs, and such a prohibition could
negate the existence of intangible 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. If the Pennsylvania Competition
Act or the qualified rate orders were preempted by federal law,
a court may decide that it is not a taking for which the
government would have to pay the estimated market value of
the transferred intangible transition property. Even if any
federal preemption were considered a taking, for which the
government had to pay this value, that compensation may not
be sufficient to pay the full amount of principal of and interest
on the transition bonds. In that case, transition bondholders
could suffer a loss of their investment. In that event, PECO
Energy would not be required to pay liquidated damages. See
"--Changes in Law May Result in Losses to Transition
Bondholders" above.
The Pennsylvania Public Utility
Commission May Take Actions that
Adversely Affect Transition Bondholders The Pennsylvania Public Utility Commission continues to
regulate some aspects of the electric industry in Pennsylvania
and may take actions that adversely affect transition
bondholders. For example, the Pennsylvania Public Utility
Commission:
o regulates electric distribution companies such as PECO Energy,
o sets financial and other requirements for electric generation
suppliers and other third parties, and
o sets customer billing guidelines and collection, metering and
disclosure requirements for electric generation suppliers and
other third parties.
21
Furthermore, when PECO Energy entered into a settlement with
certain parties to its restructuring plan submitted in compliance
with the Pennsylvania Competition Act, these parties agreed to
"review and, as appropriate, to recommend changes to
regulations and procedures in order to facilitate the efficient and
full recovery of revenues from customers, while at the same
time protecting customers." The issuer cannot predict what
effect that review and recommendations will have.
Also, subject to the Commonwealth of Pennsylvania's pledge
not to limit or alter the value of intangible transition charges or
intangible transition property unless adequate compensation is
made for the full protection of the transition bondholders, the
Pennsylvania Public Utility Commission could revise or rescind
any of its regulations. PECO Energy cannot predict whether the
Pennsylvania Public Utility Commission will make new
regulations or the timing or content of any new Pennsylvania
Public Utility Commission regulations.
PECO Energy agrees to take legal or administrative actions,
including bringing lawsuits, as may be reasonably necessary to
block or overturn:
o any government attempt to repeal or change the Pennsylvania
Competition Act, the qualified rate orders, or the intangible
transition property in a way that is materially adverse to the
holders of transition bonds, or
o lawsuits by third parties which, if successful, would result in
a breach by PECO Energy of its representations in the sale
agreement concerning the intangible transition property, the
qualified rate orders, or the Pennsylvania Competition Act.
PECO Energy, however, may not be able to take those actions
and any action PECO Energy is able to take may not be
successful.
Future Pennsylvania Public Utility Commission regulations may
affect the ratings of the transition bonds or their price. Those
actions may also affect the rate of collections of intangible
transition charges and, as a result, the amortization of transition
bonds and their weighted average lives. As a result, transition
bondholders could suffer a loss of their investment.
Judicial Decisions or Legal Actions in
Other Jurisdictions Could Adversely
Affect Transition Bondholders A court decision based on the U.S. Constitution or other federal
law overturning a state statute like the Pennsylvania
Competition Act adopted by another state could give rise to a
challenge to the Pennsylvania Competition Act. That decision
would not automatically invalidate the Pennsylvania
Competition Act. It could, however, set a legal precedent for a
successful challenge to the Pennsylvania Competition Act that
could adversely affect transition bondholders. As a result, the
market value of the transition bonds could be reduced.
22
Also, legal actions in other states challenging stranded cost
recovery or securitization of stranded cost recovery could
adversely affect the market for transition bonds. Legal
challenges brought in jurisdictions other than Pennsylvania
based on state laws other than Pennsylvania would not,
however, directly affect the Pennsylvania Competition Act or
the interests of the transition bondholders. These actions,
however, could increase awareness of the political and other
risks associated with these types of securities and limit the
liquidity of the transition bonds and impair their value.
Failure to Make Adequate Adjustments
to the Intangible Transition Charges
May Result in Losses to Transition
Bondholders Due to a number of factors, the actual rate of collections of
intangible transition charges have in the past, and may continue,
to vary from projections used to set the intangible transition
charges. These factors include variations in electricity usage by
customers from projected electricity usage and variations in
delinquencies and write-offs. The servicer must seek an
adjustment to the intangible transition charges from the
Pennsylvania Public Utility Commission on each calculation
date to reflect shortfalls in or excesses of collections of
intangible transition charges for prior periods, including
shortfalls or excesses resulting from inaccurate servicer
forecasts. The adjustments are intended to take into account any
projected trends in customers or usage impacting billed revenue
from which intangible transition charges are allocated to
prevent shortfalls or excesses of collections of intangible
transition charges in future periods.
If the servicer's forecasts or projections are not accurate,
adjustments to the intangible transition charges may result in
the issuer collecting insufficient funds to pay interest on the
transition bonds when due and principal of the transition bonds
in accordance with the expected amortization schedule.
The Pennsylvania Competition Act, the First QRO and the 2000
QRO require the Pennsylvania Public Utility Commission to
approve annual adjustment requests within 90 days of the
applicable date on which the servicer calculates the required
adjustment and files that adjustment request with the
Pennsylvania Public Utility Commission. Also, the First QRO
and the 2000 QRO provide that, during the final calendar year
of collections of intangible transition charges for any series of
transition bonds, monthly or quarterly adjustments may be
made. If the Pennsylvania Public Utility Commission fails to
approve these adjustments on a timely basis or there is any
litigation challenging the approval of these adjustments or
methodology in calculating these adjustments, the price and
liquidity of the transition bonds could be adversely affected.
23
Any of these factors could result in a delay in payment of
principal from the expected amortization schedule of the
transition bonds offered by this prospectus. As a result, the
weighted average lives of the transition bonds could be
adversely affected or transition bondholders could suffer a loss
of their investment.
Limited Time Period for Imposition or
Adjustment of Intangible Transition
Charges May Result in Losses to
Transition Bondholders The intangible transition charges may not be imposed for
service periods after December 31, 2010. Also, after the final
adjustment date specified for each series, the intangible
transition charges may no longer be adjusted for that series.
After that date, any shortfalls in collections of intangible
transition charges available to make payments on the series are
expected to be covered through amounts, if any, on deposit in
the reserve subaccount, the overcollateralization subaccount and
the capital subaccount. If those amounts are not sufficient to
cover the shortfalls, the transition bonds may not be paid in full
by the applicable expected final payment date or class or series
termination date, and transition bondholders would suffer a loss
of their investments.
Lack of Historical Information About,
and Limited Experience Administering,
Intangible Transition Property May
Result in Losses to Transition
Bondholders The servicer has only limited historical information for
intangible transition property, namely for the period beginning
after the issuance of the Series 1999-A Bonds. Further, because
retail electric competition has only recently been introduced in
Pennsylvania, the servicer's customer and energy usage records
may not accurately reflect customers' long-term payment
patterns or energy usage. This historical information also does
not reflect consolidated billing by electric generation suppliers
or other third parties. As a result, these records may not be
useful in predicting payments of intangible transition charges.
The servicer has limited experience administering this type of
asset.
In the event of a foreclosure, there is likely to be a limited
market, if any, for the transferred intangible transition property.
Therefore, foreclosure may not be a realistic or practical
remedy. See "--Bankruptcy; Creditors' Rights" below.
These factors may result in delays or shortfalls in scheduled
payments on the transition bonds.
24
Adjustments to Intangible Transition
Charges by Rate Classes May Result
in Insufficient Collections The customers responsible for paying intangible transition
charges are currently divided into 12 rate classes. In the
settlement concerning PECO Energy's merger with Unicom
Corporation, PECO Energy agreed to reconcile all competitive
transition charges and intangible transition charge revenues on
an annual basis in two customer categories: (a) residential and
(b) commercial and industrial (encompassing all commercial and
industrial accounts). Intangible transition charges are assessed
by rate class within each customer category. Adjustments to the
intangible transition charges will also be made to each rate
class within each customer category. A shortfall in collection in
one rate class must be made up by adjustments to that rate
class as well as the other rate classes within that customer
category. The Pennsylvania Competition Act, the First QRO
and the 2000 QRO provide, however, that shortfalls in a
customer category may not be corrected by making adjustments
to rate classes in any other customer category.
Some rate classes in a particular category have a significantly
smaller number of customers than other rate classes in that
customer category. If customers in a rate class fail to pay
intangible transition charges, the servicer may have to
substantially increase the intangible transition charges for the
remaining customers in that rate class and to a lesser extent the
other rate classes in that customer category. The servicer may
also have to take this action if consumers representing a
significant percentage of a rate class cease to be customers.
Increases in intangible transition charges to certain rate classes
could lead to further failures by the remaining customers in that
customer category to pay intangible transition charges, thereby
increasing the risk of a shortfall in funds to pay the transition
bonds. See also "--The Transition Bonds--Issuance of Additional
Series of Transition Bonds May Increase Delinquencies of Intangible
Transition Charges" below.
Risks Associated with the Use of Credit
Enhancements May Result in Losses to
Transition Bondholders Some forms of credit enhancement, such as
interest rate swaps entered into by the issuer for a series or
class of floating rate transition bonds, entail credit risks--the
risk associated with the credit of the party providing the credit
enhancement. The applicable prospectus supplement will
contain the risk factors, if any, associated with any applicable
credit enhancement.
25
Servicing
PECO Energy Ceasing to Act as Servicer
May Result in Losses to Transition
Bondholders The servicer is responsible for calculating adjustments to the
intangible transition charges, submitting adjustment requests to
the Pennsylvania Public Utility Commission and billing and
collecting the intangible transition charges. PECO Energy may
resign as servicer only in specified limited circumstances. If,
however, PECO Energy ceased servicing intangible transition
property, it may be hard to obtain a successor servicer. Also, a
transfer of servicing functions will require cooperation by the
Pennsylvania Public Utility Commission. A successor servicer
may have difficulties in collecting intangible transition charges
and determining appropriate adjustments to intangible transition
charges. Also, under current law, a successor servicer may not
be able to shut off service to a customer that fails to pay
intangible transition charges.
If PECO Energy were replaced as servicer, any of those factors
and others could delay the timing of payments on the intangible
transition property. As a result, transition bondholders could
incur a loss of their investment. See "The Master Servicing
Agreement" in this prospectus.
Inaccurate Projections by Servicer May
Result in Losses to Transition
Bondholders If the servicer incorrectly forecasts the billed revenue from
which intangible transition charges are allocated and the
delinquency and write-off experience relating to intangible
transition charges proves to be unreliable, the timely receipt of
collections of intangible transition charges could be adversely
affected. A variety of risks and uncertainties could cause actual
results to differ materially from those projected. They include
changes in political, social and economic conditions, weather,
unexpected demographic trends, catastrophes, regulatory
initiatives, compliance with governmental regulations and
litigation. All of these events and circumstances are beyond the
control of the servicer. Adjustments to the intangible transition
charges are required to be made under the Pennsylvania
Competition Act if actual results differ from projections.
However, until the adjustments are made and result in sufficient
collections of intangible transition charges, payments on the
transition bonds could be delayed, and the market value of the
transition bonds could be reduced. There can be no assurance
that, when made, adjustments will be sufficient.
26
Delays in Payments on Transition Bonds
May Be Caused by Changes in Payment
Terms The servicer is permitted to alter the terms of billing and
collection arrangements and modify amounts due from
customers. The servicer cannot change the amount of a
customer's individual intangible transition charges, but it can
take actions that it believes will increase collections from a
customer. These actions might include, for example, agreeing to
an extended payment schedule or agreeing to write-off the
remaining portion of an outstanding bill. The servicer can also
write-off outstanding bills that it deems uncollectible in
accordance with its usual billing and collection practices.
Additionally, PECO Energy or a successor to PECO Energy as
servicer may change its billing and collection practices, or the
Pennsylvania Public Utility Commission may require changes
to these practices.
These changes could delay or reduce collections of intangible
transition charges and, as a result, adversely affect the payment
of interest on the transition bonds on a timely basis or the
payment of principal of the transition bonds in accordance with
the expected amortization schedule. See "The Seller and
Servicer PECO Energy Company--Customers and Operating
Revenues," "--Billing Process" and "--Limited Information on
Customers' Creditworthiness" in this prospectus.
PECO Energy's Limited Information on
Customers' Creditworthiness May Result
in Increased Delinquencies and
Write-Offs The servicer's ability to collect intangible transition charges
depends in part on the creditworthiness of its customers. Under
Pennsylvania law, PECO Energy generally must provide service
to new customers in its service area. Credit investigations of
new customers by PECO Energy have been limited. PECO
Energy's information regarding the creditworthiness of new
customers is limited to information regarding prior service, if
any, by PECO Energy provided by its customer information
system audits. If the servicer incorrectly determines the
creditworthiness of a large number of its customers, there may
be significant increases in delinquencies and write-offs. This
could result in delays in payments to transition bondholders.
See "--It May Be More Difficult to Collect Intangible
Transition Charges Due To Billing by Third Parties" below.
It May Be More Difficult to Collect
Intangible Transition Charges Due to
Billing by Third Parties Under the Pennsylvania Competition Act, intangible transition
charges may be collected by third parties providing billing or
metering services, including electric generation suppliers. Any
third party that provides consolidated billing must pay the
servicer amounts billed by the servicer to the third party,
including the intangible transition charges. Third party billing
parties are required to make these payments even if the third
party fails to collect amounts due from customers.
27
Billing by third parties could adversely affect the timely
payment of interest on the transition bonds or the payment of
principal of the transition bonds in accordance with the
expected amortization schedule because:
o any third party that collects intangible transition charges may
not use the same customer credit standards as the servicer,
o problems may arise from new and untested systems or any
lack of experience on the part of third parties with customer
billing and collections,
o the servicer may not be able to reduce credit risks relating to
third parties in the same manner in, or to the same extent to
which, it reduces those risks relating to its customers,
o the servicer generally will not have the right to pursue
customers of a third party that provides consolidated billing
who defaults in the payment of intangible transition charges,
o to the extent that customers choose consolidated billing by
electric generation suppliers or other third parties, the issuer
may be relying on a small number of electric generation
suppliers and other third parties rather than a large number of
individual customers, to pay collections of intangible
transition charges. As a result, a default in the payment of
intangible transition charges by a single third party that
provides billing service to a large number of customers may
adversely affect the timing of payments on the transition
bonds or could result in a loss of their investment, and
o a new billing system could cause customer confusion.
Neither PECO Energy nor any successor servicer will pay any
shortfalls resulting from the failure of any third party to
forward collections of intangible transition charges to the
servicer. The adjustment mechanism for the intangible transition
charges, as well as the amounts on deposit in the reserve
subaccount, the overcollateralization subaccount and the capital
subaccount are intended to address delays in the timing of
collections and payments. However, delays in payments to
transition bondholders might occur as a result of delays in
obtaining adjustments, limitations on rate adjustments or
insufficient funds in the reserve subaccount, the
overcollateralization subaccount and the capital subaccount after
the final adjustment date.
Customers Within PECO Energy's
Service Area May Stop or Delay Making
Intangible Transition Charge Payments Customers within PECO Energy's service area may stop or
delay paying intangible transition charges because:
o they may misdirect their payments as they may owe amounts
to several different parties which may include both PECO
Energy and an electric generation supplier or other third
party,
28
o if a large number of customers self-generate electricity, move
out of PECO Energy's service territory, significantly reduce
their electricity consumption or cease consuming electricity
altogether, the intangible transition charges, as periodically
adjusted, required to be paid by remaining customers may
become burdensome. Greater delinquencies and write-offs or
petitions to the Pennsylvania Public Utility Commission to
reduce intangible transition charges might result, and
o the servicer may not be able to collect intangible transition
charges from customers who partially self-generate electricity
because the servicer may not know which consumers are
self-generating electricity and will not be able to exercise
full shut-off rights against a self-generator.
Any of these factors could result in delays or shortfalls in
scheduled payments on the transition bonds.
The Commingling of Collections of
Intangible Transition Charges with
Servicer's Other Funds May Result in
Payment Delays Until collections of intangible transition charges are deposited
with the bond trustee, the servicer will not segregate them from
its general funds. If the servicer does not or cannot remit the
full amount of the collections of intangible transition charges,
there may be delays or reductions in payments to transition
bondholders. The adjustments to the intangible transition
charges and amounts, if any, on deposit in the reserve
subaccount, the overcollateralization subaccount and the capital
subaccount are designed to reduce this risk. However, there
may be delays in payments to transition bondholders if there
are delays in implementation of the adjustment mechanism or a
lack of funds in the reserve subaccount, the
overcollateralization subaccount or the capital subaccount after
the final adjustment date.
Bankruptcy; Creditors' Rights
Bankruptcy of PECO Energy May
Result in Losses to Transition
Bondholders General. The bankruptcy of PECO Energy could have several
adverse consequences for transition bondholders, the most
important of which are briefly described below.
Sale of Intangible Transition Property May Be
Recharacterized as a Financing Rather than a True
Sale. The Pennsylvania Competition Act provides that a
transfer of intangible transition property by an electric utility to
an assignee that is expressly stated to be a sale or other
absolute transfer in a transaction approved in a qualified rate
order will be treated as a sale, rather than a pledge or other
financing, of the intangible transition property. PECO Energy
has represented in the sale agreement that the sales of the
intangible transition property in connection with the issuance of
the Series 1999-A Bonds and the Series 2000-A Bonds were
sales.
29
PECO Energy has also represented that it took the appropriate actions
under the Pennsylvania Competition Act, including filing an intangible
transition property notice, to perfect the sale.
However, if PECO Energy became a debtor in a bankruptcy case, the
bankruptcy trustee, PECO Energy or another party could take the
position that the sale of the transferred intangible transition
property to the issuer was a financing transaction and not a sale. If
a court agreed with this position, delays or reductions in payments on
the transition bonds could result. Regardless of a court's final
decision on the character of the transaction, the bankruptcy of PECO
Energy could result in delays in payments on the transition bonds. A
bankruptcy also could have an adverse effect on the secondary market
for the transition bonds, including the liquidity and market value of
the transition bonds.
To reduce the impact of the possible recharacterization of a sale or
other absolute transfer of intangible transition property as a
financing transaction, the Pennsylvania Competition Act and related
regulations provide that if an intangible transition property notice
is filed and the transfer is later held to be a financing transaction,
that notice will be deemed to constitute a filing with respect to a
security interest. The Pennsylvania Competition Act also provides that
any such filing in respect of transition bonds takes precedence over
any other filings.
As a result of these filings, the issuer would be a secured creditor
of PECO Energy, entitled to recover against the collateral. If,
however, intangible transition property notices were not or are not
filed for any reason, the issuer failed or fails to otherwise perfect
its interest in the transferred intangible transition property and the
transfer is thereafter deemed not to constitute a true sale or other
absolute transfer, the issuer would be an unsecured creditor of PECO
Energy.
Court May Order Consolidation of the Issuer and PECO Energy. If PECO
Energy became a debtor in a bankruptcy case, the bankruptcy trustee,
PECO Energy or another party may attempt to substantively consolidate
the assets of the issuer and PECO Energy. PECO Energy and the issuer
have taken steps to attempt to reduce this risk. If, however, a court
ordered that the assets and liabilities of the issuer be consolidated
with those of PECO Energy, delays or reductions in payments on the
transition bonds would result.
30
Court May Make Low Estimation of Contingent Claims; Enforceability of
Remedy Provisions May Be Challenged. If PECO Energy became a debtor in
a bankruptcy case, claims, including claims for liquidated damages, by
the issuer against PECO Energy under the sale agreement and the
related documents would be unsecured claims and could be discharged.
Also, the bankruptcy trustee, PECO Energy or another party may request
that the bankruptcy court estimate any contingent claims, including
for PECO Energy's liquidated damages, of the issuer against PECO
Energy and take the position that the claims should be estimated at
zero or at a low amount because the contingency giving rise to the
claims is unlikely to occur.
If PECO Energy became a debtor in a bankruptcy case and PECO Energy
were obligated under the sale agreement to pay liquidated damages, the
bankruptcy trustee, PECO Energy or another party might challenge the
enforceability of the liquidated damages provisions. If a court
decided that the liquidated damages provisions were unenforceable, the
issuer should have a claim against PECO Energy for actual damages
based on breach of contract principles. The amount of those actual
damages would be subject to estimation or calculation by the court.
As a result of any of the above-described actions or claims,
transition bondholders could suffer delays in payment, reduction in
the investment value of their transition bonds or a loss of their
investment.
Intangible Transition Property May Not Be Held To Be Current Property,
Resulting in Unsecured Debt. The Pennsylvania Competition Act provides
that the transferred intangible transition property constitutes a
current property right on and after the date that a qualified rate
order becomes effective. PECO Energy has also made a representation to
that effect. However, if PECO Energy became a debtor in a bankruptcy
case, the bankruptcy trustee, PECO Energy or another party could argue
that, because the payments based on the transferred intangible
transition property are indirectly usage-based charges, the
transferred intangible transition property comes into existence only
as customers use electricity.
If a court adopted this position, a security interest in favor of the
transition bondholders may not attach to intangible transition charges
in respect of electricity used after the beginning of a bankruptcy
case for PECO Energy. If a court took this position and also
determined that the transferred intangible transition property has not
been sold or transferred absolutely to PECO Energy or the issuer, the
issuer would be an unsecured creditor of PECO Energy and delays or
reductions in payments on the transition bonds could result.
31
Also, a court could rule that any intangible transition charges
relating to electricity consumed after the bankruptcy of PECO Energy
cannot be transferred to the issuer or the bond trustee. This could
result in delays or reductions of payments of the transition bonds.
Payments based on the intangible transition charges are indirectly
usage-based charges. Therefore, if PECO Energy became a debtor in a
bankruptcy case, the bankruptcy trustee, PECO Energy or another party
could argue that the issuer should pay a portion of the costs of PECO
Energy associated with purchasing, transmitting or distributing the
electricity which gave rise to the collections of intangible
transition charges related to the transition bonds. If a court adopted
this position, there could be delays or reductions in payments to the
transition bondholders.
Whether or not PECO Energy is the debtor in a bankruptcy case, if a
court decided that the transferred intangible transition property
comes into existence only as customers use electricity, a tax or
government lien or other nonconsensual lien on property of PECO Energy
arising before the transferred intangible transition property came
into existence could have priority over the issuer's interest in the
transferred intangible transition property. This could result in a
reduction of amounts paid to the transition bondholders. Adjustments
to the intangible transition charges may be available to reduce this
risk, although delays in implementation or challenges to those
adjustments may cause a delay in receipt of payments.
Automatic Stay May Prevent or Delay Enforcement of Rights by Bond
Trustee. If there is an event of default under the indenture, the
Pennsylvania Competition Act permits the Pennsylvania Public Utility
Commission to order the segregation and payment of all intangible
transition charges to transition bondholders. The Pennsylvania
Competition Act provides that the order will be effective
notwithstanding bankruptcy or other insolvency proceedings with
respect to the utility or its assignee. The Pennsylvania Public
Utility Commission, however, may not be able to issue this order
because of the automatic stay provisions of the Bankruptcy Code. Also,
a bankruptcy court may not lift the stay to permit this action by the
Pennsylvania Public Utility Commission. In that event, the bond
trustee may under the indenture seek an order from the bankruptcy
court lifting the automatic stay with respect to the Pennsylvania
Public Utility Commission action and an order requiring segregation of
the revenues arising from the transferred intangible transition
property. However, a court may not grant either order.
32
Bankruptcy of Servicer May Result in
Losses to Transition Bondholders The servicer can commingle collections of intangible transition
charges with its own funds until they are deposited with the
bond trustee. The Pennsylvania Competition Act provides that
the priority of a lien created under the Pennsylvania
Competition Act is not adversely affected by the commingling
of funds arising with respect to intangible transition property
with funds of the electric utility. However, in the event of a
bankruptcy of the servicer, the bankruptcy trustee, the servicer
or another party might argue that collections of intangible
transition charges held by the servicer were property of the
servicer included in its bankruptcy estate. If a court adopted
this position, there may be delays in payments due on the
transition bonds.
If the servicer became a debtor in a bankruptcy case, the
automatic stay may prevent the issuer from effecting a transfer
of servicing, even though the master servicing agreement
provides that the bond trustee appoint, or petition the
Pennsylvania Public Utility Commission or a court to appoint, a
successor servicer.
Even if a successor servicer may be appointed, it may be
difficult to find an entity willing to act as a successor servicer.
The Transition Bonds
Absence of Secondary Market for
Transition Bonds Could Limit Ability to
Resell Transition Bonds The underwriters for the various series of transition bonds may
assist in resales of the transition bonds offered by this
prospectus, but they are not required to do so. Although
secondary markets for the Series 1999-A Bonds and the Series
2000-A Bonds have developed, a secondary market for the
transition bonds offered by this prospectus may not develop. If
a secondary market for the transition bonds offered by this prospectus
does develop, it may not continue or it may not be sufficiently liquid to
allow holders to resell any of the transition bonds. See "Plan of
Distribution" in this prospectus.
Limited Sources of Payments for the
Transition Bonds May Result in Losses
to Transition Bondholders The transition bonds are obligations only of the issuer, a special
purpose entity. The transition bonds will not represent an
interest in or obligation of PECO Energy, the issuer trustee, the
bond trustee or any entity other than the issuer. The issuer has
no property other than the collateral and its organizational
documents restrict its rights to acquire assets not related to the
transactions described in this prospectus. The collateral is the
sole source of payment on the transition bonds. None of the
transition bonds will be guaranteed or insured by PECO
Energy, the issuer trustee, the bond trustee or any affiliates of
those entities, other than the issuer, or any other entity.
33
Issuance of Additional Series May
Adversely Affect Outstanding Transition
Bonds The issuer may from time to time issue additional series of
transition bonds without the prior review by or consent of the
transition bondholders of any previously issued series.
Additional series of transition bonds may not be issued if it
would result in the credit ratings of any outstanding series of
transition bonds being reduced or withdrawn, but the issuance
of any other series of transition bonds might have an impact on
the timing or amount of payments received by transition
bondholders. See "The Transition Bonds" and "The Indenture--
Issuance in Series or Classes" in this prospectus.
In addition, various matters relating to the transition bonds
require a vote of all transition bondholders of all series, even
though there may be differences in the interests or positions
among those series or classes of those series. This could result
in voting outcomes adverse to your interests.
Issuance of Transition Bonds by Another
Issuer May Adversely Affect Outstanding
Transition Bonds The seller may sell intangible transition property to one or
more parties other than the issuer to securitize stranded costs
without the prior review by or consent of the transition
bondholders of any previously issued series. In the event of
such sale, collections of intangible transition property will be
pro rated among the issuer and such other parties based on their
respective Percentages. Intangible transition property may not
be sold to another issuer if it would result in the credit ratings
of any outstanding series of transition bonds being reduced or
withdrawn. The sale of intangible transition property to another
issuer may have an impact on the timing or amount of
payments received by transition bondholders. In addition,
various matters relating to the transition bonds under the master
servicing agreement are subject to a vote of the bond trustee
and any bond trustees of other issuers, based on the directions
of the holders, even though there may be differences in the
interests or positions among the transition bonds issued by
these other issuers and the transition bonds issued by the issuer
which could result in voting outcomes adverse to your interests.
Issuance of Additional Series of
Transition Bonds May Increase
Delinquencies of Intangible Transition
Charges With the issuance of each additional series of transition bonds,
the intangible transition charges will change and may increase.
Although this should not affect the overall rates paid by
customers because of adjustments of other rates at the time of
issuance, future adjustments may cause intangible transition
charges to increase for certain customers. These increases may
lead to increased failures to pay intangible transition charges,
and may reduce collections of intangible transition charges. See
also "Unusual Nature of Intangible Transition Property--
Adjustments to Intangible Transition Charges by Rate Classes
May Result in Insufficient Collections" above.
34
Securities Ratings Are Limited and Do
Not Assess Timing of Principal Payments The transition bonds offered by this prospectus will be rated by
one or more established rating agencies. The ratings merely
analyze the probability that the issuer will repay the total
principal amount of the transition bonds at final maturity--the
series or class termination date, as applicable--and will make
timely interest payments. The ratings do not assess whether the
issuer will repay the principal of the transition bonds in
accordance with the expected amortization schedule. As a
result, any series or class of transition bonds might be paid
later than expected, resulting in a weighted average life of
those transition bonds which is longer than expected.
A security rating is not a recommendation to buy, sell or hold
securities. There can be no assurance that a rating will remain
in effect for any given period of time or that a rating will not
be revised or withdrawn entirely by a rating agency if, in its
judgment, circumstances so warrant.
Transition Bondholders May Receive
Principal Payments Later Than
Expected The actual dates on which principal is paid on each class of
transition bonds might be affected by the amount and timing of
receipt of collections of intangible transition charges. Since the
amount of intangible transition charges collected from each
customer will depend upon the customer's usage of electricity,
the aggregate amount and timing of collections of intangible
transition charges--and the resulting amount and timing of
principal payments on the transition bonds--will depend, in
part, on actual usage of electricity and the rate of delinquencies
and write-offs. See "--Servicing--Inaccurate Projections by
Servicer May Result in Losses to Transition Bondholders"
above.
Although the intangible transition charges will be adjusted from
time to time based in part on the actual rate of collections of
intangible transition charges during prior billing periods, the
servicer may not be able to forecast accurately actual customer
energy usage and the rate of delinquencies and write-offs or
implement adjustments to the intangible transition charges. If
collections of intangible transition charges are received at a
slower rate than expected, payments on the transition bonds
may be made later than expected, resulting in a longer
weighted average life. Because principal will generally be paid
at a rate not to exceed that reflected in the expected
amortization schedule, the transition bonds are not expected to
be retired earlier than scheduled other than in the event of a
redemption or acceleration.
35
Transition Bondholders May Have To
Reinvest the Principal of Their
Investment at a Lower Rate of Return
Because of Optional and Mandatory
Redemption of the Transition Bonds If so provided in a prospectus supplement, there may be
optional redemptions of the transition bonds. There will be
mandatory redemptions if PECO Energy must pay liquidated
damages. Future market conditions may require transition
bondholders to reinvest the proceeds of a redemption at a rate
lower than the rate received on the transition bonds. The issuer
cannot predict whether it will redeem any series of transition
bonds. See "Weighted Average Life and Yield Considerations"
and "The Transition Bonds--Credit Enhancement" in this
prospectus.
PECO Energy's Obligation to Pay
Liquidated Damages for a Breach of a
Representation or Warranty May Not Be
Sufficient to Protect Your Investment The obligations of PECO Energy under the sale agreement have
been assigned to the bond trustee under the indenture as
security for all of the transition bonds issued under the
indenture. If PECO Energy breaches specified representations or
warranties in the sale agreement, PECO Energy may be
obligated to pay the bond trustee, as assignee of the issuer,
liquidated damages if that breach continues beyond a 90-day
grace period and has a material adverse effect on transition
bondholders or if the losses attributable to that breach continue
beyond a 90-day grace period and the full amount of these
losses are expected to exceed the de minimis loss amount. The
amount of any liquidated damages paid by PECO Energy,
however, may not be sufficient for you to recover your
transition bond investment. If PECO Energy becomes obligated
to pay liquidated damages, the ratings on the transition bonds
will likely be downgraded since the bond trustee, on behalf of
the transition bondholders, will be an unsecured creditor of
PECO Energy with respect to any of these amounts. See "The
Sale Agreement--Representations and Warranties of the Seller"
in this prospectus.
36
GLOSSARY OF DEFINED TERMS
You can find a glossary of defined terms used in this prospectus beginning
on page 116 in this prospectus.
AVAILABLE INFORMATION
A registration statement with respect to the offering of the transition
bonds under the Securities Act of 1933, as amended has been filed. This
prospectus, which forms a part of the registration statement, and any prospectus
supplement describe the material terms of some of the 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. For further information, reference is
made to the registration statement and the exhibits to the registration
statement, which are available for inspection without charge at the public
reference facilities maintained by the SEC at 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at its regional offices located as follows: Chicago
Regional Office, Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661-2511; and New York Regional Office, 7 World Trade Center, 13th
Floor, New York, New York 10048. Copies of the registration statement and
exhibits to the registration statement may be obtained at the above locations at
prescribed rates. Information filed with the SEC can also be inspected at the
SEC site on the World Wide Web at http://www.sec.gov.
The issuer has filed and will continue to file with the SEC the periodic
reports as are required by the Exchange Act and the rules, regulations or
orders of the SEC under the Exchange Act. 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 under 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 of this registration statement. 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 which also is or is
deemed to be incorporated by reference in this prospectus modifies or
supersedes that statement. Any of these statements so modified or superseded
will not be deemed, except as so modified or superseded, to constitute part of
this prospectus or any prospectus supplement.
The issuer will provide without charge to each person to whom a copy of
this prospectus is delivered, on the written or oral request of any such
person, a copy of any or all of the documents incorporated in this prospectus
by reference, except the exhibits to those documents--unless those exhibits are
specifically incorporated by reference in those documents. Written requests for
those copies should be directed to the issuer, c/o First Union Trust Company,
National Association, One Rodney Square, 920 King Street, 1st Floor,
Wilmington, Delaware 19801. Telephone requests for those copies should be
directed to the issuer at 302-888-7532.
37
THE PENNSYLVANIA COMPETITION ACT
The Pennsylvania Competition Act's General Effect on the Electric Utility
Industry in Pennsylvania
The Pennsylvania Electricity Generation Customer Choice and Competition
Act was enacted in December 1996 and provides for the restructuring of the
electric utility industry in Pennsylvania. The Pennsylvania Competition Act
requires the unbundling of electric services into separate generation,
transmission and distribution services with open retail competition for
generation services. Generation services may be provided by electric generation
suppliers licensed by the Pennsylvania Public Utility Commission. Under the
Pennsylvania Competition Act, electric generation suppliers are subject to
certain limited financial and disclosure requirements but are otherwise
unregulated by the Pennsylvania Public Utility Commission. Electric
distribution and transmission services remain regulated by the Pennsylvania
Public Utility Commission.
The Pennsylvania Competition Act requires utilities to submit
restructuring plans, including their stranded costs resulting from retail
competition for generation services. Stranded costs include regulatory assets
and long-term purchase power commitments for which full recovery is allowed and
other costs, including investment in generating plants, retirement costs and
reorganization costs, for which an opportunity for recovery is allowed in an
amount determined by the Pennsylvania Public Utility Commission as just and
reasonable. Under the Pennsylvania Competition Act, utilities are subject to a
generation rate cap through the later of December 31, 2005 or until stranded
cost recovery ends. This rate cap provides that total generation charges to
customers cannot exceed rates in place at December 31, 1996, subject to certain
exceptions. The Pennsylvania Competition Act also caps transmission and
distribution rates from December 31, 1996 through June 30, 2001, subject to
specified exceptions. The rate cap period was subsequently extended to December
31, 2006 with respect to PECO Energy's rates. See "PECO Energy's Electric
Restructuring Plan--Subsequent Events."
Recovery of Stranded Costs
As a mechanism for utilities, including PECO Energy, to recover their
allowed stranded costs, the Pennsylvania Competition Act provides for the
imposition and collection of nonbypassable charges on customers' bills called
competitive transition charges. Competitive transition charges are assessed to
and collected from all retail customers who have been assigned stranded cost
responsibility and access the utilities' transmission and distribution systems
and may be collected over a maximum period of ten years, except as that period
may be extended by the Pennsylvania Public Utility Commission for good cause
shown. As the competitive transition charges are based on access to the
utility's transmission and distribution system, they are assessed regardless of
whether that customer purchases electricity from the utility or an independent
electric generation supplier. The Pennsylvania Competition Act provides,
however, that the utility's right to collect competitive transition charges is
contingent on the continued operation at reasonable availability levels of the
assets for which the stranded costs were awarded, except where continued
operation is no longer cost efficient because of the transition to a competitive
market. See "Risk Factors--Unusual Nature of Intangible Transition
Property--Legal Challenges Could Adversely Affect Transition Bondholders" and
"Risk Factors--Unusual Nature of Intangible Transition Property--Lack of
Continued Operation of Existing Generation Facilities May Result in Losses to
Transition Bondholders" in this prospectus.
Securitization of Stranded Costs
The Pennsylvania Competition Act authorizes the Pennsylvania Public
Utility Commission to issue qualified rate orders approving the issuance of
transition bonds to facilitate the recovery or financing of qualified
transition expenses of an electric utility or its assignee. Transition bonds
may be issued by a utility, a finance subsidiary of a utility or a third-party
assignee of a utility. Under the Pennsylvania Competition Act, proceeds of
transition bonds are required to be used principally to reduce qualified
transition expenses, including stranded costs, and the related capitalization
costs of the utility. The transition bonds are secured by intangible transition
property and payable from the intangible transition charges and may have a
maximum maturity of ten years. Intangible transition charges can be imposed
only when and to the extent that transition bonds are issued.
38
The Pennsylvania Competition Act contains a number of provisions designed
to facilitate the securitization of stranded costs.
Irrevocability of Intangible Transition Property. Under the Pennsylvania
Competition Act, intangible transition property is created by the issuance by
the Pennsylvania Public Utility Commission of a qualified rate order and the
declaration by the Pennsylvania Public Utility Commission that the relevant
paragraphs of a qualified rate order are irrevocable. The Pennsylvania Public
Utility Commission is granted the power under the Pennsylvania Competition Act
to specify that all or a portion of that qualified rate order will be
irrevocable. The Pennsylvania Competition Act provides that to the extent that
the Pennsylvania Public Utility Commission declares all or a portion of a
qualified rate order irrevocable, the Pennsylvania Public Utility Commission
may not, by any subsequent action, reduce, postpone, impair or terminate either
the order or the intangible transition charge authorized in that order. In
addition, under the Pennsylvania Competition Act, the Commonwealth of
Pennsylvania pledges and agrees with the holders of the transition bonds, and
with any assignee or finance party, not to limit or alter or in any way impair
or reduce the value of intangible transition property or the intangible
transition charges until the related transition bonds are fully discharged. The
Pennsylvania Competition Act provides, however, that nothing precludes the
Commonwealth of Pennsylvania from limiting or altering intangible transition
property or the qualified rate order, provided that adequate compensation is
made by law for the full protection of the intangible transition charges
collected under the qualified rate order and of the holders of the transition
bonds and any assignee or finance party. See "Risk Factors--Unusual Nature of
Intangible Transition Property" in this prospectus.
Adjustments of the Intangible Transition Charges. The Pennsylvania
Competition Act requires the Pennsylvania Public Utility Commission to provide
in all qualified rate orders a procedure for expeditiously approving periodic
adjustments to the intangible transition charges. The Pennsylvania Competition
Act requires that these adjustments be made on at least an annual basis on each
anniversary of the issuance of the qualified rate order or at additional
intervals as specified in that order. The Pennsylvania Public Utility
Commission must approve these annual adjustments within 90 days of each request
for adjustment.
Nonbypassability. The Pennsylvania Competition Act provides that the
competitive transition charges and the intangible transition charges will be
imposed on customers accessing the utility's transmission and distribution
system even if those customers elect to purchase electricity from another
supplier or if the customer chooses to operate self-generation equipment in
tandem with accessing the utility's transmission and distribution system. The
Pennsylvania Competition Act further provides that to the extent that the
utility, or any assignee of intangible transition property, assigns, sells,
transfers or pledges any interest in intangible transition property, the
Pennsylvania Public Utility Commission authorizes the utility to contract with
that assignee for the utility:
(1) to continue to operate the system to provide electric services to the
utility's customers,
(2) to impose and collect the applicable intangible transition charges
for the benefit and account of the assignee,
(3) to make periodic adjustments of the intangible transition charges,
and
(4) to account for and remit the applicable intangible transition charges
to or for the account of the assignee free of any charge, deduction or
surcharge of any kind.
In addition, to the extent specified in the qualified rate order, the
obligations of the utility under any of these contracts:
(1) will be binding upon the utility, its successors and assigns, and
(2) will be required by the Pennsylvania Public Utility Commission to be
undertaken and performed by the utility and any other entity which
provides electric service to a person that is a customer of the
utility located within the utility's retail electric service
territory, as a condition to providing service to that customer or the
municipal entity providing those services in place of the utility.
39
Creation of a Statutory Lien on Intangible Transition Property. The
Pennsylvania Competition Act provides that a valid and enforceable security
interest in intangible transition property automatically attaches from the time
the related transition bonds are issued and is enforceable against all third
parties, including judicial lien creditors, if:
(1) value is given by purchasers of the transition bonds, and
(2) a filing is made with the Pennsylvania Public Utility Commission to
perfect the security interest.
The Pennsylvania Competition Act also provides that security interests in
the intangible transition property are created and perfected only by means of a
separate filing with the Pennsylvania Public Utility Commission in accordance
with the provisions of the Pennsylvania Competition Act. Upon perfection, the
statutorily created lien attaches both to intangible transition property and to
all revenues and proceeds of intangible transition property, whether or not
accrued. The Pennsylvania Competition Act provides that this filing will take
precedence over any other filing and will be enforceable against the assignee
and all third parties, including judicial lien creditors, subject only to
rights of any third parties holding security interests in intangible transition
property previously perfected in accordance with the Pennsylvania Competition
Act. The Pennsylvania Competition Act provides that priority of security
interests in intangible transition property will not be defeated or adversely
affected by:
(1) commingling of revenues with other funds of the utility, or
(2) changes to the qualified rate order or the intangible transition
charges.
Characterization of Transfer of Transferred Intangible Transition Property
as True Sale. The Pennsylvania Competition Act provides that a transfer by the
utility or an assignee of intangible transition property will be treated as a
true sale of the transferor's right, title and interest and not as a pledge or
other financing, other than for federal and state income and franchise tax
purposes, if:
(1) the parties expressly state in governing documents that a transfer is
to be a sale or other absolute transfer, and
(2) the transaction is approved in a qualified rate order.
See "Risk Factors--Bankruptcy; Creditors' Rights" in this prospectus.
Jurisdiction Over Disputes; Standing
Actions against customers for nonpayment of the intangible transition
charges may only be brought by the utility, its successor or any other entity
providing electric service to the customers. In addition, the Pennsylvania
Competition Act grants to the Pennsylvania Public Utility Commission exclusive
jurisdiction over all disputes arising out of the obligations to impose and
collect the intangible transition charges by a utility, its successor or any
other entity which provides electric service to a customer.
Possible Federal Preemption of the Pennsylvania Competition Act
In the past, bills have been introduced in Congress prohibiting the
recovery of stranded costs, and such a prohibition could negate the existence of
intangible 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 a federal
preemption a taking. Moreover, even if a preemption of the Pennsylvania
Competition Act or any qualified rate order by the federal government were
considered a taking, for which the government had to pay the estimated market
value of the transferred intangible transition property at the time of the
taking, there is no assurance that this compensation would be sufficient to pay
the full amount of principal of and interest on the transition bonds,
40
and transition bondholders could suffer a loss of their investment. See "Risk
Factors--Unusual Nature of Intangible Transition Property--Federal Legislation
May Result in Losses to Transition Bondholders" in this prospectus and
"--Possible Commonwealth Amendment or Repeal of the Pennsylvania Competition
Act" below.
Possible Commonwealth Amendment or Repeal of the Pennsylvania Competition Act
Under the Pennsylvania Competition Act, the Commonwealth of Pennsylvania
has pledged to and agreed with transition bondholders that it will not limit or
alter or in any way impair or reduce the value of intangible transition
property or intangible transition charges approved by a qualified rate order,
until the transition bonds and interest thereon are fully paid and discharged.
The Pennsylvania Competition Act also provides, however, that subject to the
requirements of law, nothing contained in the Pennsylvania Competition Act
precludes this limitation or alteration by the Commonwealth if "adequate
compensation is made by law" for the full protection of the intangible
transition charges collected under a qualified rate order and of transition
bondholders. It is unclear what "adequate compensation . . . by law" would be
afforded to transition bondholders by the Commonwealth of Pennsylvania if it
attempts to limit or alter intangible transition property or intangible
transition charges. Accordingly, no assurance can be given that this provision
would fully compensate transition bondholders for their investment and would
not adversely affect the price of the transition bonds or the timing of
payments with respect to the transition bonds. See "Risk Factors--Unusual
Nature of Intangible Transition Property--Changes in Law May Result in Losses
to Transition Bondholders" in this prospectus.
In the opinion of Ballard Spahr Andrews & Ingersoll, LLP, counsel to PECO
Energy, under the Contract Clause of the United States Constitution, the
Commonwealth of Pennsylvania could not repeal or amend the Pennsylvania
Competition Act--by way of legislative process--or take any other action that
substantially impairs the rights of the transition bondholders, unless that
action is a reasonable exercise of the Commonwealth's sovereign powers and of a
character appropriate to the public purpose justifying that action. To date, no
cases addressing these issues in the context of transition bonds have been
decided. 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 those bonds. Based upon this case law, in the
opinion of Ballard Spahr Andrews & Ingersoll, LLP, it would appear unlikely that
the Commonwealth of Pennsylvania could reduce, modify, alter or take any other
action with respect to intangible transition property which would substantially
impair the rights of transition bondholders, unless the action is reasonable and
appropriate to further a legitimate public purpose.
Moreover, under the Taking Clause of the United States Constitution, the
Commonwealth of Pennsylvania could not repeal or amend the Pennsylvania
Competition Act--by way of legislative process--or take any action that
violates its pledge and agreement described in the first paragraph of this
subheading without paying just compensation to the transition bondholders if
doing so would constitute a permanent appropriation of the property interest of
transition bondholders in the intangible transition property and deprive the
transition bondholders of their reasonable expectations arising from their
investments in the transition bonds. There is 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 on the transition bonds.
In addition, there can be no assurance that a repeal of or amendment to
the Pennsylvania Competition Act will not be sought or adopted or that any
action by the Commonwealth of Pennsylvania may not occur, any of which might
constitute a violation of the Commonwealth's pledge and agreement with the
transition bondholders. If this occurs, costly and time-consuming litigation
might ensue. That litigation might adversely affect the price and liquidity of
the transition bonds and the dates of payments of principal of the transition
bonds 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 bondholders, the outcome of that
litigation cannot be predicted with certainty, and accordingly, transition
bondholders could incur a loss of their investment.
41
PECO ENERGY'S ELECTRIC RESTRUCTURING PLAN
General
In accordance with the provisions of the Pennsylvania Competition Act, in
April 1997, PECO Energy filed with the Pennsylvania Public Utility Commission a
comprehensive electric restructuring plan detailing its proposal to implement
full customer choice of electric generation suppliers. PECO Energy's electric
restructuring plan identified $7.5 billion of retail electric generation-related
stranded costs. In August 1997, PECO Energy and various intervenors in PECO
Energy's electric restructuring proceeding filed with the Pennsylvania Public
Utility Commission a Joint Petition for Partial Settlement. In December 1997,
the Pennsylvania Public Utility Commission rejected the Joint Petition for
Partial Settlement and entered an Opinion and Order, revised in January and
February 1998, referred to as the Restructuring Order, which deregulated PECO
Energy's electric generation operations. The Restructuring Order authorized PECO
Energy to recover stranded costs of $4.9 billion on a discounted basis, or $5.3
billion on a book value basis, over 8 1/2 years beginning in 1999.
On January 21, 1998, PECO Energy filed a complaint in the U.S. District
Court for the Eastern District of Pennsylvania seeking injunctive and monetary
relief on the grounds that the provisions of the Restructuring Order relating
to transmission rates were preempted by the Federal Power Act and that
implementation of the Pennsylvania Competition Act by the Pennsylvania Public
Utility Commission in the Restructuring Order violated several provisions of
the U.S. Constitution. On January 22, 1998, PECO Energy also filed two
Petitions for Review in the Commonwealth Court of Pennsylvania appealing the
Restructuring Order based upon errors of law, an arbitrary and capricious abuse
of administrative discretion and the deprivation of the due process of law. In
addition to PECO Energy's appeals, numerous other parties, including various
intervenors, filed appeals and cross-appeals of the Restructuring Order. See
"--Prior Litigation" in this section of this prospectus.
On April 29, 1998, PECO Energy and all but one of the 25 parties who
challenged PECO Energy's electric restructuring plan filed a settlement with
the Pennsylvania Public Utility Commission. That settlement--referred to as the
electric restructuring plan settlement--was approved by the Pennsylvania Public
Utility Commission in the Final Order. The Final Order was subsequently
appealed by IP&L. Under the terms of the electric restructuring plan settlement
and a stipulation between certain of the parties to the litigation, all of the
appeals and cross-appeals of the Restructuring Order, as well as the IP&L
appeal of the Final Order, were resolved when the U.S. Supreme Court denied
certiorari of a separate suit in which IP&L claimed that the provisions of the
Pennsylvania Competition Act that allow recovery of stranded costs violate the
Commerce Clause of the United States Constitution. See "--Prior Litigation" in
this section of this prospectus.
The electric restructuring plan settlement authorized PECO Energy to
recover $5.26 billion of stranded costs, together with a return of 10.75% on
these stranded costs. For good cause shown, the Pennsylvania Public Utility
Commission authorized the recovery of stranded costs over a 12-year transition
period beginning January 1, 1999 and ending December 31, 2010. Recovery of
stranded costs and the allowed return are through competitive transition
charges and, at PECO Energy's election to issue or cause the issuance of
transition bonds, intangible transition charges, designed to recover the $5.26
billion of stranded costs. The competitive transition charges were established
assuming annual growth in sales of 0.8% and are reconciled annually to actual
sales.
All terms of the electric restructuring plan settlement described in this
prospectus were specifically made to apply to the issuance of the Series 2000-A
Bonds, including the termination of intangible transition charges no later than
December 31, 2010, generation rate caps and rate cap extensions.
The following table shows the estimated average levels of competitive
transition charges and/or intangible transition charges for the years 2001
through 2010, based on estimated 0.8% annual sales growth assumed in the
restructuring settlement. For the calendar year 2000, annual retail electric
revenues were $2,602,624,000, including combined competitive transition charges
and intangible transition charges of approximately $628,000,000.
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The projected amounts included within the Annual Stranded Cost
Amortization and Return disclosure in this "PECO Energy's Electric
Restructuring Plan" section were not prepared with a view toward compliance
with published guidelines of the SEC, the guidelines established by the
American Institute of Certified Public Accountants for preparation and
presentation of financial projections or generally accepted accounting
principles. Additionally, PricewaterhouseCoopers LLP, as described in the
"Experts" section, has neither examined nor compiled these projected amounts.
TABLE 1
Annual Stranded Cost
Amortization And Return
Revenue Excluding
Gross Receipts Tax(3)
-----------------------------------------
Annual CTC Return @
Year Sales And/or ITC(2) Total 10.75% Amortization
- ---- ------------ ------------- ----------- ----------- -------------
MWh(1) $/kWh ($000) ($000) ($000)
2001 ......... 34,108,616 0.0231(4) 753,241(4) 482,561(4) 270,680
2002 ......... 34,381,485 0.0251 825,004 516,869 308,135
2003 ......... 34,656,537 0.0247 818,352 482,401 335,951
2004 ......... 34,933,789 0.0243 811,540 444,798 366,742
2005 ......... 35,213,260 0.0240 807,933 403,555 404,378
2006 ......... 35,494,966 0.0266 902,623 353,070 549,553
2007 ......... 35,778,925 0.0266 909,844 290,627 619,217
2008 ......... 36,065,157 0.0266 917,123 220,312 696,811
2009 ......... 36,353,678 0.0266 924,459 141,228 783,231
2010 ......... 36,644,507 0.0266 931,855 52,381 879,474
- ------------
(1) Subject to reconciliation of actual sales and collections. Under the
electric restructuring plan settlement, sales are estimated to increase
0.8 percent per year.
(2) Figures result in the recovery of $5.26 billion of stranded costs plus the
allowed return from the estimated number of customers and at projected
usage levels in the period during which the competitive transition charges
and/or intangible transition charges will be collected, taking into
account the discounts from the current total bundled bill of customers,
based on the discounts to be provided in accordance with the terms of the
restructuring plan. Both the competitive transition charges and the
intangible transition charges are subject to adjustment.
(3) The utilities gross receipts tax is imposed on public utilities (including
electric utilities) organized under the laws of, or doing business in, the
Commonwealth and is currently reflected in PECO Energy's revenue at the
rate of 4.4% on each dollar of the utility's gross receipts arising from
certain sales of energy.
(4) Reflects the rate reductions required by the 2000 QRO and the merger
settlement described under "Subsequent Events" in this section.
Authorization to Securitize. The intangible transition charges associated
with the issuance of all transition bonds must terminate no later than December
31, 2010. Under the electric restructuring plan settlement, after the issuance
of any transition bonds, competitive transition charges (or PECO Energy's
distribution rates) are reduced by the amount of intangible transition charges
imposed to pay the applicable qualified transition expenses. Also under the
electric restructuring plan settlement, PECO Energy securitized $4 billion of
its $5.26 billion of stranded cost recovery through the issuance of transition
bonds, the Series 1999-A Bonds. As part of its approval of the 2000 QRO, the
Pennsylvania Public Utility Commission authorized the securitization of up to an
additional $1 billion of stranded costs.
The First QRO also authorized PECO Energy and any assignee, namely the
issuer, to refinance, in reliance on that First QRO, one or more series of
transition bonds, each series in one or more classes secured
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by intangible transition property created by that order, provided that the
final maturity of any series not exceed 10 years from the date of issuance and
in no event have a final maturity after December 31, 2010. PECO Energy and the
issuer may only refinance transition bonds in a face amount not to exceed the
unamortized principal of the outstanding transition bonds being refinanced.
Unbundling of Rates and Rate Reductions and Rate Caps. The electric
restructuring plan settlement required PECO Energy to unbundle its retail
electric rates for billing cycles beginning on January 1, 1999 into the
following components:
(1) distribution and transmission charges,
(2) if applicable, intangible transition charges and competitive
transition charges, and
(3) a shopping credit for generation.
The sum of the competitive transition charges and the shopping credit equals
the maximum amount PECO Energy can charge customers who do not or cannot choose
to purchase electricity from alternate electric generation suppliers (referred
to as serving as the "provider of last resort").
The electric restructuring plan settlement required PECO Energy to reduce
rates during 1999 and 2000 by 8% and 6%, respectively, from rates in existence
on December 31, 1996. Further, the electric restructuring plan settlement
provided for one-time additional discounts in 2000 since there was an
overcollection of intangible transition charges and competitive transition
charges in 1999, resulting in the rates for those rate categories being reduced
by 8.3% and 7%, respectively, for 2000.
The electric restructuring plan settlement also extended the rate caps on
generation rates at higher levels than required by the Pennsylvania Competition
Act, until December 1, 2010, and extended rate caps on transmission and
distribution rates until July 1, 2005. The rate cap period was subsequently
extended to December 31, 2006.
The Pennsylvania Competition Act authorizes electric distribution
companies to recover increases in state tax liabilities resulting from the
introduction of competition through adjustments in the rates charged to
customers. In circumstances set forth in the regulations adopted by the
Pennsylvania Public Utility Commission, adjustments to rates for increases in
state taxes may result in rates exceeding the applicable rate cap. PECO Energy
applied to the Pennsylvania Public Utility Commission for, and was granted, the
right to defer state tax liabilities for future recovery if rates increase or
as offsets for future state tax decreases.
Competitive Metering and Billing. On January 1, 1999, PECO Energy
unbundled its retail electric rates for metering, meter reading, and billing
and collection services to provide credits for those customers that have
elected to have alternate suppliers perform these services. Pennsylvania Public
Utility Commission-licensed entities, including electric generation suppliers,
may act as agents to provide a single bill and provide associated billing and
collection services to retail customers located in PECO Energy's retail
electric service territory. The Pennsylvania Public Utility Commission-licensed
entities, including electric generation suppliers, may also finance, install,
own, maintain, calibrate and remotely read advanced meters for service to
retail customers located in PECO Energy's service territory. An electric
generation supplier or other third party that bills on behalf of PECO Energy
must comply with all applicable billing and disclosure requirements absent
waiver by the Pennsylvania Public Utility Commission, including the unbundling
of transmission and distribution rates. Only PECO Energy can physically
disconnect or reconnect a customer's distribution service. Physical termination
of the service may only be permitted for failure to pay for transmission and
distribution service--including transition charges--or provider of last resort
service. See also "The Qualified Rate Orders and the Intangible Transition
Charges--The Intangible Transition Charges" in this prospectus.
Provider of Last Resort. Under PECO Energy's electric restructuring plan,
PECO Energy acts as a provider of last resort for all retail electric customers
in its retail electric service territory who do not choose or cannot choose to
purchase power from alternative suppliers through December 31, 2010, subject to
specified terms, conditions and qualifications.
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Customer Choice, Market Share Thresholds, and Competitive Default
Service. Under the electric restructuring plan settlement, customer choice of
electric generation suppliers was phased in between January 1, 1999 and January
2, 2000. In the electric restructuring plan settlement, PECO Energy agreed to
two market share threshold tests to measure and adjust the amount of customer
migration that occurs under customer choice. On January 1, 2001, if 35% of PECO
Energy's residential and commercial customers were not obtaining generation
service from alternative electric generation suppliers (measured by number of
customers for the residential class, and by percentage of load for the
commercial class), then non-shopping customers were to be assigned to
alternative generation suppliers until that level was reached. PECO Energy
exceeded each of these market thresholds on January 1, 2001 and no additional
assignment occurred. The second market share threshold is on January 1, 2003.
If, on that date, 50% of PECO Energy's residential and commercial customers are
not obtaining generation services from alternative electric generation
suppliers, then non-shopping customers will be assigned to alternative
generation suppliers to reach that level. The procedures for accomplishing this
have not yet been developed, and will be subject to Pennsylvania Public Utility
Commission approval.
In addition to the market thresholds described above, PECO Energy also
agreed in its electric restructuring plan to assign 20% of its non-shopping
residential customers to competitive default service effective January 1, 2001.
To implement that portion of its settlement, on November 29, 2000 the
Pennsylvania Public Utility Commission approved PECO Energy's bilateral
contract with New Power Company to move 22% of PECO Energy's non-shopping
residential customers to New Power for generation service. Under this contract,
New Power has agreed that, for the three-year term of the contract, it will
provide generation services, at specified discounted rates, to nearly 300,000
residential customers of PECO Energy who are currently taking their generation
service from PECO Energy. Throughout the three-year term, those customers will
continue to have the right to switch to an alternative generation supplier
other than New Power, as well as the right to return as customers of PECO
Energy, without penalty or charge. At the end of 2002, if the number of
competitive default service customers then served by New Power has dropped
below 20% of PECO Energy's residential customer base, there will be an
additional allocation of residential customers to New Power to bring its
competitive default service levels back up to 20% of the residential customer
base.
In addition to the New Power contract, PECO Energy has also entered into a
contract with Green Mountain Energy Company to move 50,000 of PECO Energy's
non-shopping residential customers to Green Mountain for generation service, on
the same terms and conditions as the New Power contract. The Green Mountain
contract has been submitted to the Pennsylvania Public Utility Commission, but
approval of the contract is still pending.
By order entered April 30, 1999, the Pennsylvania Public Utility
Commission adopted procedures for qualifying to provide competitive default
service. The procedures require an electric generation supplier to provide:
o proof that it has received the requisite licenses from the state and
federal governments,
o proof that it meets certain creditworthiness standards, and
o assurances that it can acquire additional surety bonds as necessary.
New Power and Green Mountain were required to meet these standards before
they were allowed to contract to provide competitive default service to PECO
Energy's customers. (As indicated above, at this time the Pennsylvania Public
Utility Commission's approval of the Green Mountain contract is still pending).
In addition, New Power and Green Mountain contractually agreed to provide
additional credit assurances that will provide liquidated damages to PECO
Energy in the event that New Power or Green Mountain materially defaults on its
obligations under its respective contract.
The April 30, 1999 order also provided that the supplier of competitive
default service will be required to provide billing, including payment of
intangible transition charges and other revenues, to PECO Energy on the terms
and conditions set forth in PECO Energy's tariff. Under the New Power and Green
Mountain contracts
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with PECO Energy, however, PECO Energy will continue to provide billing
services for the New Power and Green Mountain competitive default service
customers. Billing for those customers will therefore be conducted using PECO
Energy's normal practices and terms.
Other Provisions. The electric restructuring plan settlement also provided
for flexible generation service pricing for residential customers served by
competitive default service, authorization of PECO Energy to transfer its
generation assets to a separate subsidiary, inclusion under the capped
transmission and distribution rates of .01 cent per kilowatt-hour for a
sustainable energy and economic development fund and expansion of PECO Energy's
program for low-income customers.
Subsequent Events
On February 7, 2000, the Mid-Atlantic Power Supply Association filed an
intervention to the Pennsylvania Pubic Utility Commission's proceedings on PECO
Energy's application for the 2000 QRO to ensure that the then-proposed
securitization would not have an adverse effect on competition in the retail
electrical services market in Pennsylvania. Specifically, that association
expressed concern that the 2000 QRO would cause a reduction in the shopping
credit established in the First QRO and would enable PECO Energy to use the
proposed rate reduction in 2001 to promote its provider of last resort service.
The Mid-Atlantic Power Supply Association subsequently agreed to join with
several of the parties who participated in PECO Energy's electric restructuring
proceedings in a settlement, which was filed with the Pennsylvania Public
Utility Commission on March 8, 2000. The settlement stated that, beginning
January 1, 2001, PECO Energy will provide its retail customers with additional
rate reductions in the total amount of $60 million.
PECO Energy also agreed in the settlement of the 2000 QRO that it would
not use the related securitization savings or the 2001 rate reductions to
promote its provider of last resort service. Consequently, unless required by
law, PECO Energy may not refer to savings from securitization or rate
reductions in any public advertising, promotion or communication without
following procedures to review the content with the Mid-Atlantic Power Supply
Association. PECO Energy's unbundled rates, rate reductions (from the electric
restructuring plan settlement and the settlement of the 2000 QRO) and rate caps
are reflected in the schedule of system-wide average rates included in the
electric restructuring plan settlement, the settlement of the 2000 QRO and the
merger settlement (described below) and are shown in Table 2 below. See also
"The Qualified Rate Orders and The Intangible Transition Charges" and "The
Seller and Servicer PECO Energy Company."
On November 22, 1999, PECO Energy filed an application for approval of its
merger with Unicom Corporation (whereby PECO Energy became a wholly owned
subsidiary of Exelon Corporation) with the Pennsylvania Public Utility
Commission. Twenty-five parties filed protests or petitions to intervene in the
application. On March 23, 2000, PECO Energy filed a joint petition for
settlement of the issues raised in the application for the merger. The
Pennsylvania Public Utility Commission approved the settlement on June 22, 2000
without modification. On October 20, 2000, PECO Energy merged with Unicom
Corporation creating a new holding company, Exelon Corporation. PECO Energy and
Commonwealth Edison (formerly a subsidiary of Unicom Corporation and a
regulated utility in Illinois) continue as subsidiaries of Exelon Corporation.
Under the merger settlement, PECO Energy agreed to $200 million in rate
reductions for all customers over the period January 1, 2002 through 2005 and
extended rate caps on PECO Energy's retail electric distribution charges (in
addition to the rate reduction implemented in connection with the settlement of
the 2000 QRO) through December 31, 2006. In the merger settlement, PECO Energy
also agreed not to market, advertise or promote its provider of last resort
service until January 1, 2004. The merger settlement agreement also provided for
electric reliability and customer service standards, mechanisms to enhance
competition and customer choice, expanded assistance to low-income customers,
extensive funding for wind and solar energy and community education, nuclear
safety research funds, customer protection against nuclear costs outside of
Pennsylvania and maintenance of charitable and civic contributions and
employment for PECO Energy's headquarters in Philadelphia. The merger settlement
also requires PECO Energy to provide certain benefits after completion of the
merger with Unicom Corporation including a requirement that, effective January
1, 2002, PECO Energy reduce its retail electric rates by $60 million annually
until January 1, 2004, and then by $40 million through December 31, 2005. The
merger settlement extends the retail distribution and transmission rate cap
provision
46
of the electric restructuring settlement from June 30, 2005 to December 31,
2006. PECO Energy also agreed not to seek recovery, through Pennsylvania
electric distribution rates, of the costs associated with the ownership and
operation of any nuclear generating plants PECO Energy did not own on December
31, 1999.
The merger settlement provides options for AMTRAK, to whom PECO Energy
provides service in rate class EP, to prepay its transition charge
responsibility to PECO Energy in fixed amounts ranging from $46,561,000 to
$41,619,000 on certain dates from October 1, 2000 to July 1, 2002. AMTRAK is
under no obligation to exercise any of the options. AMTRAK did not exercise its
option on October 1, 2000. If and when AMTRAK decides to exercise its option,
the PECO Energy generation rate applicable for AMTRAK service under Rate EP
will be the fixed shopping credit set forth in the restructuring plan
settlement, which will no longer be subject to yearly adjustment through the
adjustments of competitive transition charges and intangible transition
charges.
PECO Energy also agreed in the merger settlement to reconcile all
competitive transition charges and intangible transition charge revenues on an
annual basis in two categories: (a) residential; and (b) commercial and
industrial (encompassing all commercial and industrial accounts), effective for
rate-setting cases for the year 2001. The parties to the merger settlement
anticipate that this modification of the reconciliation process will minimize
changes to the shopping credits on commercial and industrial rate classes by
expanding the customer base on which the charges are reconciled. PECO Energy
will notify customers by bill insert of any changes to the shopping credits
that result from the annual reconciliation process, whenever possible in
advance of any change becoming effective.
The following table shows system wide average rates for the years 2001
through 2010. The information in the table reflects rate reductions required by
the 2000 QRO and the Merger Settlement.
TABLE 2
Schedule of System-Wide Average Rates (per kilowatt-hour ("kWh"))(1)
CTC
T&D and/or Shopping Generation
Effective Date Transmission(2) Distribution Rate Cap(3) ITC(4) Credit Rate Cap
- -------------- --------------- -------------- ------------- ------------ ---------- ------------
(1) (2) (3)=(1)+(2) (4) (5) (6)=(4)+(5)
$/kWh $/kWh $/kWh $/kWh $/kWh $/kWh
January 1, 2001 ......... 0.0045 0.0253 0.0298 0.0231(5) 0.0450 0.0681
January 1, 2002 ......... 0.0045 0.0235 0.0280 0.0251 0.0447 0.0698
January 1, 2003 ......... 0.0045 0.0235 0.0280 0.0247 0.0451 0.0698
January 1, 2004 ......... 0.0045 0.0241 0.0286 0.0243 0.0455 0.0698
January 1, 2005 ......... 0.0045 0.0241 0.0286 0.0240 0.0458 0.0698
January 1, 2006 ......... 0.0045 0.0241 0.0286 0.0266 0.0485 0.0751
January 1, 2007 ......... N/A N/A N/A 0.0266 0.0535 0.0801
January 1, 2008 ......... N/A N/A N/A 0.0266 0.0535 0.0801
January 1, 2009 ......... N/A N/A N/A 0.0266 0.0535 0.0801
January 1, 2010 ......... N/A N/A N/A 0.0266 0.0535 0.0801
- ------------
(1) All prices reflect average retail billing for all rate classes (including
gross receipts tax). The average prices as presented in this table reflect
the profile of service contained in PECO Energy's proof of revenue set
forth in PECO Energy's electric restructuring plan.
(2) The transmission prices listed are for unbundled rates only. The
Pennsylvania Public Utility Commission does not regulate the rates for
transmission service.
(3) The T&D (Transmission & Distribution) Rate Cap under Section 2804(4) of the
Pennsylvania Competition Act extended until June 30, 2005, and was
subsequently extended to December 31, 2006 by the merger settlement.
(4) Figures result in the recovery of $5.26 billion of stranded costs plus the
(footnotes continued on next page)
47
allowed return on these costs from the estimated number of customers and
at projected usage levels in the period during which the competitive
transition charges and/or intangible transition charges will be collected,
taking into account the discounts from the current total bundled bill of
customers, based on the discounts to be provided in accordance with the
terms of PECO Energy's electric restructuring plan and the settlement of
the 2000 QRO. Both the competitive transition charges and the intangible
transition charges are subject to adjustment.
(5) Reflects the rate reductions required by the 2000 QRO and the merger
settlement.
Prior Litigation
In May, 1997, IP&L appealed the First QRO by filing an action in the
Commonwealth Court of Pennsylvania challenging the Pennsylvania Competition
Act, alleging that the Pennsylvania Competition Act's provision allowing PECO
Energy to recover stranded costs discriminates against interstate commerce in
violation of the Commerce Clause of the United States Constitution. In an
opinion dated May 7, 1998, the Commonwealth Court dismissed IP&L's action,
holding, as a matter of law, that the Pennsylvania Competition Act does not
violate the Commerce Clause. Following that dismissal, IP&L petitioned the
Pennsylvania Supreme Court for allowance of appeal. In the petition, IP&L
claimed that the payment of stranded costs to PECO Energy discriminates against
interstate commerce by favoring in-state electricity producers over
out-of-state electricity producers. On September 29, 1998, the Pennsylvania
Supreme Court denied IP&L's petition for allowance of appeal. On December 28,
1998, IP&L filed a petition for a writ of certiorari with the United States
Supreme Court to appeal the Commonwealth Court's decision on the claim
described above. On March 8, 1999, the United States Supreme Court denied the
petition.
During the period from January 1998 through March 1998, appeals and
cross-appeals were filed at the Commonwealth Court against the Restructuring
Order by PECO Energy, IP&L and numerous other parties. On April 29, 1998, PECO
Energy and all of the parties who had filed appeals and cross-appeals, with the
exception of IP&L, filed the restructuring plan settlement with the
Pennsylvania Public Utility Commission. The restructuring plan settlement was
approved by the Pennsylvania Public Utility Commission through the Final Order.
Under the terms of the restructuring plan settlement, PECO Energy and all
signatories to the restructuring plan settlement requested, and were granted, a
general continuance of their appeals and cross-appeals of the Restructuring
Order until the time as the Final Order was no longer subject to administrative
or judicial challenge. In June, 1998, IP&L withdrew its appeal to the
Restructuring Order and filed an appeal at the Commonwealth Court challenging
the Final Order. The IP&L appeal of the Final Order was identical in scope to
its Commerce Clause arguments described above. The IP&L appeal constituted a
judicial challenge to the Final Order and, under the terms of the restructuring
plan settlement, the appeals of PECO Energy and the other signatories to the
restructuring plan settlement remained pending, but inactive, until resolution
of the IP&L appeal. PECO Energy and IP&L entered into a stipulation that the
final outcome of the IP&L Commerce Clause case would be controlling for the
IP&L appeal of the Final Order. With the denial of the IP&L petition for
certiorari by the United States Supreme Court, all appeals and cross-appeals of
the Final Order were withdrawn with prejudice from the Commonwealth Court and
from the United States District Court in accordance with the terms of the
restructuring plan settlement and the stipulation with IP&L.
Two additional actions, one filed by the Utility Workers Union of America
and one filed by a group of plaintiffs including State Senator Vincent J. Fumo
alleged that the adoption of the Pennsylvania Competition Act violated certain
provisions of the Pennsylvania Constitution governing legislative procedure.
The Pennsylvania Public Utility Commission filed preliminary objections seeking
dismissal of these actions at the pleading stage, on the ground that enactment
of the Pennsylvania Competition Act did not violate those Pennsylvania
constitutional provisions as a matter of law. The Commonwealth Court of
Pennsylvania upheld the Pennsylvania Public Utility Commission's preliminary
objections and dismissed both actions with prejudice. The appeal period expired
without appeals being filed and the dismissal of these actions is final and
non-appealable.
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THE QUALIFIED RATE ORDERS AND THE INTANGIBLE TRANSITION CHARGES
As part of its approval of the electric restructuring plan settlement, the
Pennsylvania Public Utility Commission issued the First QRO on May 14, 1998. In
this order, the Pennsylvania Public Utility Commission determined that PECO
Energy's recovery of stranded costs as set forth in the restructuring plan
settlement was just and reasonable and in the public interest and that
securitization of up to $4 billion of its $5.26 billion of stranded costs as
set forth in the restructuring plan settlement was just and reasonable and in
the public interest. On March 16, 2000, the Pennsylvania Public Utility
Commission issued the 2000 QRO, authorizing the securitization of up to $1
billion of the remaining stranded costs.
The qualified rate orders provide that, to the extent that PECO Energy, or
any assignee, assigns, sells, transfers, or pledges any interest in intangible
transition property created by those qualified rate orders, the Pennsylvania
Public Utility Commission authorizes PECO Energy to contract, for a specified
fee, with any assignee for PECO Energy:
o to continue to operate the system to provide electric services to PECO
Energy's customers,
o to impose and collect the applicable intangible transition charges for
the benefit and account of the assignee,
o to make periodic adjustments of intangible transition charges
contemplated under the qualified rate orders, and
o to account for and remit the applicable intangible transition charges to
or for the account of the assignee free of any charge, deduction or
surcharge of any kind (other than the specified contractual fee referred
to above).
The First QRO and the 2000 QRO also authorize PECO Energy to contract with
the issuers of transition bonds and an alternative party, which may be a
trustee, that the alternative party will replace PECO Energy under its contract
with the issuers and perform the obligations of PECO Energy contemplated in
those qualified rate orders. The obligations of PECO Energy:
o are binding upon PECO Energy, its successors and assigns, and
o are required by the Pennsylvania Public Utility Commission to be
undertaken and performed by PECO Energy and any other entity which
provides transmission and distribution services to a person who was a
customer of PECO Energy located within PECO Energy's certificated
territory on January 1, 1997, or who became a customer of electric
services within such territory after January 1, 1997, and is still
located within such territory, as a condition to providing service to
that customer or municipal entity providing these services in place of
PECO Energy by PECO Energy or other entity.
The rate reductions in the total amount of $60 million required by the
2000 QRO were passed on to customers over a one-year period commencing with
billing cycles beginning after December 31, 2000.
Authorization of Issuance and Refinancing of Transition Bonds. In the
First QRO, the Pennsylvania Public Utility Commission authorized the issuance
of transition bonds in an aggregate principal amount not to exceed a combined
total of $4 billion. In the 2000 QRO, the Pennsylvania Public Utility
Commission authorized an additional $1 billion of transition bonds. PECO
Energy, or any assignee of PECO Energy to whom intangible transition property
is sold, may issue and sell, in reliance on the First QRO and the 2000 QRO, one
or more series of transition bonds, each series in one or more classes, secured
by intangible transition property, provided that the final maturity of any
series of transition bonds may not be later than ten years from the date of
issuance and in no event after December 31, 2010. PECO Energy, or its assignee,
is also authorized to refinance transition bonds in a face amount not to exceed
the unamortized principal of the transition bonds being refinanced.
The First QRO and the 2000 QRO provide that PECO Energy retains the sole
discretion whether to issue or cause the issuance of transition bonds. Within
120 days after each issuance of transition bonds, PECO Energy is required to
file with the Pennsylvania Public Utility Commission a description of the
financing structure of the transition bonds, including the principal amount,
the price at which each series or class of
49
transition bonds was sold, payment schedules, interest rate and other financing
costs and the final plans for PECO Energy's use of the proceeds of any
offering. Notwithstanding this filing, the final structure of each issuance of
transition bonds is not subject to change or revision by the Pennsylvania
Public Utility Commission after the date of that issuance.
Authorization to Impose Intangible Transition Charges. In the First QRO
and the 2000 QRO, the Pennsylvania Public Utility Commission determined that it
was just and reasonable and in the public interest for PECO Energy to recover
from its customers, through intangible transition charges, $4 billion and $1
billion, respectively, of its $5.26 billion of stranded costs. The Pennsylvania
Public Utility Commission authorized PECO Energy to impose on and collect from
customers, either directly or through bills rendered by electric generation
suppliers, intangible transition charges in an amount sufficient to recover
qualified transition expenses in connection with the permitted securitization
of PECO Energy's stranded costs. In accordance with the Pennsylvania
Competition Act, the Pennsylvania Public Utility Commission found that good
cause had been shown to extend the payment period for imposing intangible
transition charges beyond the ten-year period specified in the Pennsylvania
Competition Act to December 31, 2010.
In the First QRO and the 2000 QRO, the Pennsylvania Public Utility
Commission approved the allocation and methodology for imposing competitive
transition charges and intangible transition charges on customers. The First
QRO and the 2000 QRO also authorize PECO Energy to make annual adjustments to
intangible transition charges if collections of intangible transition charges
fall below or exceed the amount necessary to ensure the receipt by the
transition bond trustee of revenues sufficient to fully recover the qualified
transition expenses, provided, however, that adjustments during the final
calendar year during which any series of bonds are outstanding may be quarterly
or monthly if necessary to ensure full recovery of intangible transition
charges. The First QRO and the 2000 QRO state that the revenues received by the
transition bond trustee through intangible transition charges shall be
determined to be sufficient only if the collections of intangible transition
charges so received are sufficient to amortize the transition bonds, fund any
reserves and to pay premiums, if any, on the transition bonds (after payment of
accrued interest, redemption premiums, if any, related credit enhancement,
servicing fees and other related costs and expenses) in accordance with the
terms of the transition bonds. For each annual adjustment, the First QRO and
the 2000 QRO direct PECO Energy to file with the Pennsylvania Public Utility
Commission:
o an accounting of intangible transition charges received by the transition
bond trustee for the previous annual period,
o a statement of any over-or-under receipts,
o the charge or credit to be added to intangible transition charges to
ensure that the intangible transition charges received by the transition
bond trustee will be sufficient to amortize the qualified transition
expenses in accordance with the amortization schedule for the transition
bonds, and
o the corresponding reduction or increase in competitive transition charges
or PECO Energy's distribution rates, as the case may be.
The First QRO and the 2000 QRO provide that, in accordance with the
Pennsylvania Competition Act, the Pennsylvania Public Utility Commission shall
approve all annual adjustments within 90 days of PECO Energy's annual
adjustment filing.
Authorization to Sell Intangible Transition Property. Under the First QRO
and the 2000 QRO, the Pennsylvania Public Utility Commission concluded that it
is in the public interest, and authorized PECO Energy and any assignee of PECO
Energy, to assign, sell, transfer or pledge intangible transition property in
an amount sufficient to recover all of PECO Energy's qualified transition
expenses in connection with the securitization of its stranded costs and all
revenues, collections, claims, payments or money or proceeds arising from
intangible transition charges. The Pennsylvania Public Utility Commission
directed PECO Energy to use the proceeds from the sale of intangible transition
property to reduce stranded costs and related capitalization.
To the extent PECO Energy or its assignee assigns, sells, transfers or
pledges an interest in the intangible transition property, the Pennsylvania
Public Utility Commission authorized PECO Energy to contract, for a specified
fee, with that assignee for PECO Energy to:
50
o continue to operate its transmission and distribution system,
o provide electric service to customers,
o impose and collect intangible transition charges for the benefit and
account of the assignee,
o make periodic adjustments of intangible transition charges, and
o account for and remit the intangible transition charges to or for the
account of the assignee free of any charge, deduction or surcharge or any
kind (other than the specified contractual fee referred to above).
The First QRO and the 2000 QRO also authorize the assignee to contract
with an alternate party to replace PECO Energy as servicer of the intangible
transition property. The First QRO and the 2000 QRO provide that the
obligations of PECO Energy in servicing the intangible transition property
shall be required by the Pennsylvania Public Utility Commission to be
undertaken and performed by PECO Energy and any other entity which provides
transmission or distribution services to customers.
Irrevocability of the Qualified Rate Orders. The First QRO and the 2000
QRO declare that the respective paragraphs concerning the recovery of PECO
Energy's stranded costs through the issuance of transition bonds, the
imposition of intangible transition charges on customers in an amount
sufficient to recover qualified transition expenses in connection with the
securitization of stranded costs, the methodology and allocation and timing of
adjustments to the intangible transition charges and the sale of intangible
transition property are irrevocable for purposes of the Pennsylvania
Competition Act, and the Pennsylvania Public Utility Commission accordingly
agrees that it will not, directly or indirectly, by any subsequent action,
reduce, postpone, impair or terminate those qualified rate orders or the
related intangible transition charges. In the First QRO and the 2000 QRO, the
Pennsylvania Public Utility Commission further declared that the right, title
and interest of PECO Energy and any assignee in those qualified rate orders and
the intangible transition charges, the rates and other charges authorized by
those qualified rate orders, and all revenues, collections, claims, payments,
money or proceeds of or arising from the same constitute intangible transition
property.
The Intangible Transition Charges
Calculation of the Intangible Transition Charges. The qualified transition
expenses authorized in the First QRO and the 2000 QRO are recovered from
customers in each of PECO Energy's separate rate classes based on the
allocation of stranded cost recovery borne by each rate class through current
electric rates approved by the Pennsylvania Public Utility Commission. The
intangible transition charges are calculated by determining the total amount of
intangible transition charges required to be billed to each rate class in order
to generate collections of intangible transition charges sufficient to ensure
timely recovery of qualified transition expenses related to each series of
transition bonds among affected rate classes. The intangible transition charge
percentage is applied to total projected revenue per rate class, exclusive of
transmission, energy and capacity and fixed distribution charges. The resulting
dollar amount on a customer's bill after the application of that percentage is
the intangible transition charge payable by that customer. To the extent that
total revenues are affected by changes in usage, number of customers, rate of
delinquencies and write-offs or other factors, collections of intangible
transition charges will vary. Variations in collections of intangible
transition charges will be addressed by recalculating the percentages applied
to customers' bills on each calculation date. See "--The Intangible Transition
Charge Adjustment Process" below.
Initial Billing and Termination of Intangible Transition Charge
Collections. Intangible transition charges for each series of transition bonds
are or will be assessed on all customer bills rendered on or after the
effective date of the rates for intangible transition charges associated with
the relevant series issuance date. Upon each adjustment of intangible
transition charges or issuance of additional series of transition bonds, the
adjusted intangible transition charges will be assessed in the same manner. The
imposition of intangible transition charges as a result of the issuance of
transition bonds will result in a reduction in any competitive transition
charges then in effect in an amount equal to those intangible transition
charges, so that the total amount billed to customers will remain unchanged.
The servicer (or electric generation supplier or other third party biller)
will continue to bill the intangible transition charges, and the servicer will
continue to make collections of intangible transition charges from
51
customers and electric generation suppliers and other third parties with
respect to each outstanding series of transition bonds until the series
termination date or class termination date, if applicable, for each series or
class, as applicable, but in no event later than December 31, 2010. Upon the
series termination date or class termination date, relating to the series or
class of transition bonds having the latest series termination date or class
termination date, the servicer will cease assessing the intangible transition
charges. However, the servicer (or electric generation supplier or other third
party biller) will continue to collect the intangible transition charges
previously billed to customers. To the extent that collections of intangible
transition charges exceed the amount necessary to amortize fully all transition
bonds and pay interest on these bonds and specified fees and expenses, those
amounts will be retained by the issuer.
The Intangible Transition Charge Adjustment Process. The master servicing
agreement, the Pennsylvania Competition Act and the qualified rate orders
require the servicer to seek and the Pennsylvania Competition Act and the
qualified rate orders require the Pennsylvania Public Utility Commission to
approve annual adjustments to the intangible transition charges. The annual
adjustments are intended to enhance the likelihood that the actual collections
of intangible transition charges allocated to the issuer under the master
servicing agreement are neither more nor less than the amount necessary to
amortize the transition bonds of each series in accordance with the expected
amortization schedule for that series and to fund the overcollateralization
subaccount to the calculated overcollateralization level. The annual adjustments
are based on actual collections of intangible transition charges allocated to
the issuer and updated assumptions by the servicer as to projected future usage
of electricity by customers, expected delinquencies and write-offs, and future
expenses relating to intangible transition property and the transition bonds.
Adjustments will be made to the intangible transition charges imposed upon
customers to reflect shortfalls in or excesses of collections of intangible
transition charges for the period since the last adjustment, including
shortfalls or excesses resulting from inaccurate forecasts by the servicer. For
example, if actual electricity consumption is less than the servicer forecasted
because of an unusually mild summer, resulting in a shortfall in collections of
intangible transition charges, the servicer would be required to seek an
adjustment from the Pennsylvania Public Utility Commission to the intangible
transition charges imposed after that to compensate for that shortfall. In
addition, the adjustments will take into account any projected trends in
customers or usage in order to prevent shortfalls or excesses of collections of
intangible transition charges from arising in future periods so that if, for
example, usage is declining at an accelerating pace, this trend will be taken in
account in the calculation of the current adjustment.
The First QRO and the 2000 QRO also provide that adjustments during the
final calendar year of collections of intangible transition charges for any
series of transition bonds may be made quarterly or monthly. If at the time of
issuance of a series, the servicer determines additional adjustments are
required, the dates for these adjustments will be specified in the prospectus
supplement for that series. Adjustments will cease for a series on the final
adjustment date specified in the related prospectus supplement for that series.
In the merger settlement filed with the Pennsylvania Public Utility
Commission on March 23, 2000 settling issues concerning the merger of PECO
Energy with Unicom, PECO Energy agreed to reconcile all competitive transition
charges and intangible transition charge revenues on an annual basis in two
customer categories: (a) residential; and (b) commercial and industrial
(encompassing all commercial and industrial accounts), effective for
rate-setting cases for the year 2001 and thereafter. The parties to the merger
settlement anticipated that any modification of the reconciliation process will
minimize changes to the shopping credits on commercial and industrial rate
classes by expanding the customer base on which the charges are reconciled. PECO
Energy will notify customers by bill insert of any changes to the shopping
credits that result from the annual reconciliation process whenever possible in
advance of any change becoming effective.
The servicer will file an adjustment request on each calculation date,
requesting modifications to the intangible transition charges which are designed
to result in the outstanding principal balance of each series equaling the
amount provided for in its expected amortization schedule. See Table 7
"Adjustments to Intangible Transition Charges" in the applicable prospectus
supplement for information regarding the adjustments to the intangible
transition charges that have been made since the adjustment date for the Series
1999-A Bonds on May 14, 1999. Each adjustment request is also designed to
result in the amount on deposit in the overcollateralization subaccount equaling
the calculated overcollateralization level. The equalizing of these amounts is
designed to be achieved by the payment date closest to the next adjustment date
or the expected final payment date, as applicable, for each series, taking into
account any amounts on deposit in the reserve subaccount other than certain
customer prepayments of
52
intangible transition charges, if any, not allocable to the period covered by
the applicable adjustment request. As provided for in the First QRO and the
2000 QRO, any adjustment request filed with the Pennsylvania Public Utility
Commission will include any proposal by PECO Energy to modify the recalculation
methodology. For a discussion of customer prepayments, see "The Seller and
Servicer PECO Energy Company--Limited Information on Customers'
Creditworthiness--Application of Customer Payments" in this prospectus. The
Pennsylvania Competition Act and the First QRO and the 2000 QRO require the
Pennsylvania Public Utility Commission to approve annual adjustments within 90
days of the calculation date. The adjustments to the intangible transition
charges are expected to be implemented on each adjustment date.
Competitive Billing
PECO Energy's restructuring plan and subsequent orders of the Pennsylvania
Public Utility Commission give customers who purchase electric generation from
electric generation suppliers the opportunity to choose from the following
billing source options:
o consolidated billing from the utility,
o consolidated billing from the electric generation supplier,
o separate billing from the utility and from the electric generation
supplier providing billing services, or
o third party billing services.
Any electric generation supplier or other third party that provides
consolidated billing is required to pay the utility amounts billed by the
utility to the electric generation supplier or other third party, including the
intangible transition charges, regardless of the electric generation supplier's
or other third party's ability to collect these amounts from its customers. In
that case, the electric generation supplier or other third party will replace
the customer as the obligor on these intangible transition charges, and the
servicer, on behalf of the issuer, will generally have no right to collect
these intangible transition charges from the customer. The servicer will have
the right to bill and collect intangible transition charges and other amounts
payable to the servicer directly from all of the electric generation supplier's
or other third party's consolidated billing customers following specified
payment defaults by an electric generation supplier or other third party and
the expiration of the applicable grace period. As of the date of this
prospectus, there are no third parties providing billing of PECO Energy charges
to its customers. See "Risk Factors--Servicing--It May Be More Difficult to
Collect Intangible Transition Charges Due to Billing by Third Parties" in this
prospectus.
PECO Energy's restructuring plan sets forth and future orders of the
Pennsylvania Public Utility Commission will set forth guidelines governing
metering, billing and other activities by electric generation suppliers and
other third parties. The Pennsylvania Public Utility Commission has determined
that if an electric generation supplier or other third party provides
consolidated billing, the electric generation supplier or other third party
must first establish its creditworthiness by either:
o demonstrating that it has an investment grade rating for its own
long-term debt, or
o depositing with the Pennsylvania Public Utility Commission a letter of
credit or other mechanism sufficient to cover 30 days of its expected
collections from intangible transition charges.
While the restructuring plan and Pennsylvania Public Utility Commission
orders provide that an electric generation supplier or other third party that
bills customers must comply with all billing, financial and disclosure
requirements applicable to electric generation suppliers, the Pennsylvania
Public Utility Commission may waive any of those requirements at any time in
the future. Further, the parties to the restructuring plan settlement agreed to
review and, as appropriate, to recommend changes to Pennsylvania Public Utility
Commission regulations and procedures in order to facilitate the efficient and
full recovery of revenues from customers, while at the same time protecting
customers. See also "Risk Factors--Unusual Nature of Intangible Transition
Property--The Pennsylvania Public Utility Commission May Take Actions That
Adversely Affect Transition Bondholders" in this prospectus.
Discounts, Special Charges, Termination Fees. Under its restructuring
plan, PECO Energy provides discounts to specified classes of customers, for
instance commercial and industrial customers who have
53
demonstrated competitive alternatives (such as self-generation) and customers in
specified low-income assistance programs, among others. These discounts in the
competitive transition charges, including the intangible transition charges, are
accounted for in the average rates to be charged to all other customers. For
calendar year 2000, revenue from residential customers participating in the low
income assistance program and commercial special contracts were 1.8% and 10.5%
of retail revenue, respectively. In addition, the restructuring plan requires
PECO Energy to allow specified customers to pay competitive transition charges,
including intangible transition charges, in a lump sum, based on a calculation
that takes into account each of these customer's last 12 months of demand and
PECO Energy's after-tax weighted average cost of capital. As of the date of this
prospectus, one customer, representing 2.7% of total sales revenue for calendar
year 2000, has elected to exercise this option.
The recovery of both competitive transition charges and intangible
transition charges from industrial and commercial customers that significantly
reduce their purchases of electricity generation from PECO Energy through the
installation of on-site generation equipment is governed by special rules set
forth in the restructuring plan. These special arrangements were designed so
that customers who operate generation equipment in parallel with PECO Energy's
transmission and distribution system pay their fully allocated share of
stranded costs through competitive transition charges and intangible transition
charges. For each self-generating customer, the servicer determines annually,
after the end of each calendar year in which competitive transition charges or
intangible transition charges are assessed, whether that customer purchased at
least 10% fewer kilowatt-hours of electricity through the transmission and
distribution system than the customer purchased in the applicable base year.
For customers who began self-generation on or after January 1, 1997, the base
year is the immediately preceding calendar year. For all others, the base year
is 1996.
If the ratio between
o the amount of usage difference caused by the on-site generation and
o the base year usage
is 10% or more, the servicer bills the customer separately an amount equal to
the difference between
o the total competitive transition charges and intangible transition
charges that the customer would have paid using usage and demand data for
the base year (as adjusted for any portion not related to self-
generation) and
o the total competitive transition charges and intangible transition
charges that the customer did pay in the preceding calendar year.
There are other special rules for customers whose peak load during 1996
was at least 4 megawatts and who can prove that they were actively
self-generating or planning to self-generate as of December 31, 1996 or
earlier.
PECO Energy does not expect the number of customers who self-generate or
the kilowatt-hours produced by self-generation to be significant. The
calculation of the intangible transition charges and any adjusted intangible
transition charges will reflect actual self-generation at the time of that
calculation and the servicer's projection with respect to future
self-generation.
As of December 31, 2000, 272,511 customers (approximately 17.92% of PECO
Energy's transmission and distribution business) had chosen alternate suppliers
of generation. See "The Seller and Servicer PECO Energy Company--Customers and
Operating Revenues" below.
54
THE SELLER AND SERVICER
PECO ENERGY COMPANY
Retail Electric Service Territory
Incorporated in Pennsylvania in 1929, PECO Energy Company, a wholly owned
subsidiary of Exelon Corporation, is engaged principally in the purchase,
transmission, distribution and sale of electricity to residential, commercial,
industrial and wholesale customers in its franchised service territory in
southeastern Pennsylvania. Since 1999, the Commonwealth of Pennsylvania has
required the unbundling of retail electric services in Pennsylvania into
separate generation, transmission and distribution services with open retail
competition for generation services. With the commencement of deregulation, PECO
Energy serves as the local distribution company providing electric distribution
services in southeastern Pennsylvania and bundled electric service to customers
who cannot or do not choose an alternate electric generation supplier. In
connection with a planned corporate restructuring, in January 2001, PECO Energy
transferred substantially all its generation properties and assets to a separate
subsidiary of Exelon. In addition, PECO Energy transferred substantially all of
the assets of its other unregulated businesses to another subsidiary of Exelon.
As a result, PECO Energy itself now provides only transmission and distribution
services and purchases generation from affiliates for its provider of last
resort services.
PECO Energy's retail electric service territory covers 1,972 square miles
with a population of approximately 3.6 million, including approximately 1.6
million in the City of Philadelphia. Approximately 94% of the retail service
area and 64% of retail kilowatt-hour electricity sales are in the suburbs
around Philadelphia, and 6% of the retail service area and 36% of those sales
are in the City of Philadelphia. This retail electric service territory
includes all of the City of Philadelphia and Delaware County, substantially all
of Chester and Montgomery Counties and the southern portion of Bucks County.
This territory is primarily urban and suburban, with a service-based economy.
PECO Energy files periodic reports with the SEC as required by the
Exchange Act. Reports filed with the SEC are available for inspection without
charge at the public reference facilities maintained by the SEC at 450 Fifth
Street, N.W., Washington, D.C. 20549, and at its regional offices located as
follows: Chicago Regional Office, Citicorp Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661-2511; and New York Regional Office, 7 World
Trade Center, 13th Floor, New York, New York 10048. Copies of periodic reports
and exhibits to these reports may be obtained at the above locations at
prescribed rates. Information filed with the SEC can also be inspected at the
SEC site on the World Wide Web at http://www.sec.gov.
Customers and Operating Revenues
PECO Energy's customer base is currently divided into two customer
categories for purposes of adjusting intangible transition charges (a)
residential and (b) commercial and industrial. Rate categories and classes
within those categories are approved by the Pennsylvania Public Utility
Commission and are subject to change. Those changes will be reflected in any
adjustment request filed with the Pennsylvania Public Utility Commission by the
servicer. Although in the settlement relating to the merger between PECO Energy
and Unicom Corporation, PECO Energy agreed to reduce its customer categories
from three to two (see "PECO Energy's Electric Restructuring Plan--Subsequent
Events" in this prospectus), the current rate classes have remained unchanged
since April 20, 1990. The current rate classes are:
Residential Rate Classes:
Rate R--Residential Service: Residential Service is available in the entire
territory of PECO Energy to single private family dwellings for the domestic
requirements of family members, which service is supplied through one meter.
This rate class (and Rate R-H) also includes payment-troubled low income
customers receiving discounted rates under PECO Energy's low-income Customer
Assistance Program, Rate CAP.
55
Rate R-H--Residential Heating Service: Residential Heating Service is
available to single private family dwellings (or to a multiple dwelling unit
building consisting of two to five dwelling units, whether occupied or not)
for domestic requirements when such service is supplied through one meter
and where the dwelling is heated by specified types of electric space
heating systems.
Rate OP--Off-Peak Service: Available in conjunction with other residential
service rates, Rates R and R-H and, in specified cases, Rate GS, for a
customer receiving delivery at certain voltage levels during off-peak
periods.
Commercial and Industrial Rate Classes:
Rate GS--General Service: Electric delivery service available through a single
metering installation for offices, professional, commercial or industrial
establishments, governmental agencies, and other applications outside the
scope of the Residential Service rate schedules.
Rate POL--Private Outdoor Lighting: Available in conjunction with Rate GS for
the outdoor lighting of sidewalks, driveways, yards, lots and similar
places, outside the scope of service under Rate SL-P, SL-S and SL-E.
Rate SL-P--Street Lighting in the City of Philadelphia: Available only to a
governmental agency, municipal, state or federal, for outside lighting of
streets, highways, bridges, parks or similar places, including directional
highway signs at locations where other outdoor lighting service is
established for the safety and convenience of the public within the City of
Philadelphia. Accounts in this rate class will be transferred to Rate SL-E
on July 1, 2001, under the terms of the settlement order concerning the
merger of PECO Energy and Unicom Corporation and PECO Energy's proposed
corporate restructuring.
Rate SL-S--Street Lighting--Suburban Divisions: Available for the outdoor
lighting of streets, highways, bridges, parks and similar places for the
safety and convenience of the public in Suburban Divisions.
Rate SL-E--Street Lighting Customer-Owned Facilities: Available to any
governmental agency outside of the City of Philadelphia for outdoor lighting
of streets, highways, bridges, parks or similar places, including
directional highway signs at locations where outdoor lighting service is
established for the safety and convenience of the public where all of the
utilization facilities are installed, owned and maintained by a governmental
agency.
Rate TL--Traffic Lighting: Available to any municipality using PECO Energy's
standard delivery service for electric traffic signal lights installed,
owned and maintained by the municipality.
Rate BLI--Borderline Interchange: Available under reciprocal agreements to
neighboring electric utilities for resale in their adjacent territory. No
intangible transition charges are or will be imposed on Rate BLI customers.
Rate PD--Primary-Distribution Power: Untransformed electric delivery service
available from the primary supply lines of PECO Energy's distribution system
where the customer installs, owns and maintains any transforming, switching
and other receiving equipment required.
Rate HT--High-Tension Power: Untransformed electric delivery service from PECO
Energy's standard high-tension lines where the customer installs, owns and
maintains any transforming, switching and other receiving equipment
required. Excludes certain special contracts.
Rate EP--Electric Propulsion: This rate is available only to the National Rail
Passenger Corporation and to the Southeastern Pennsylvania Transportation
Authority for untransformed electric delivery service from PECO Energy's
standard high-tension lines, where the customer installs, owns and maintains
any transforming, switching and other receiving equipment required and where
the service is supplied for the operation of electrified transit and
railroad systems and appurtenances.
Total Customers. The following tables show for the last five years the
number of retail electric customers and the percentage of all retail electric
customers in all rate classes (Table 3), retail electric usage by rate class
(Table 4) and retail electric revenues by rate class (Table 5). Not all
customers in all rate classes
56
are billed intangible transition charges. For the pro forma intangible
transition charges assessed to individual rate classes as of any series
issuance date and any adjustment thereto, in each case giving effect to the
issuance of transition bonds on that date, see the related prospectus
supplement. There can be no assurance that total customers, the composition of
total customers by customer category and rate class or usage levels or revenues
for each customer category and rate class will remain at or near the levels
reflected in the following tables. As of December 31, 2000, 222,521 customers
in the residential customer category (representing 16.28% of the total number
of customers in that category) and 49,990 customers in the commercial and
industrial customer category (representing 32.62% of the total number of
customers in that category) have chosen to purchase their generation from
electric generation suppliers other than PECO Energy.
TABLE 3
Retail Electric Customers For the Year Ended(1)
12/31/96 12/31/97
------------------------ ------------------------
Number of % of Number of % of
Customers Total Customers Total
----------- ----------- ----------- -----------
Residential
R(2) and OP(3) ............ 1,169,654 79.51% 1,177,996 79.47%
R-H ....................... 154,794 10.52 155,865 10.52
Total ..................... 1,324,448 90.03 1,333,861 89.99
Commercial and
Industrial
GS and POL(4) ............. 142,431 9.68% 144,142 9.72%
SL-P, SL-S, SL-E and T.L... 987 0.07 985 0.07
PD and HT ................. 3,299 0.22 3,308 0.22
EP ........................ 3 0.00 3 0.00
Total ..................... 146,720 9.97 148,438 10.01
Total ..................... 1,471,168 100.00% 1,482,299 100.00%
========= ====== ========= ======
12/31/98 12/31/99 12/31/00
------------------------ ------------------------ ------------------------
Number of % of Number of % of Number of % of
Customers Total Customers Total Customers Total
----------- ----------- ----------- ----------- ----------- -----------
Residential
R(2) and OP(3) ............ 1,186,864 79.49% 1,194,370 79.47% 1,208,883 79.50%
R-H ....................... 156,927 10.51 157,489 10.48 158,362 10.42
Total ..................... 1,343,791 90.00 1,351,859 89.95 1,367,245 89.92
Commercial and
Industrial
GS and POL(4) ............. 145,055 9.71% 146,771 9.77% 149,085 9.80%
SL-P, SL-S, SL-E and T.L... 1,050 0.07 1,076 0.07 972 0.06
PD and HT ................. 3,248 0.22 3,245 0.22 3,213 0.21
EP ........................ 3 0.00 3 0.00 3 0.00
Total ..................... 149,356 10.00 151,095 10.05 153,273 10.08
Total ..................... 1,493,147 100.00% 1,502,954 100.00% 1,520,518 100.00%
========= ====== ========= ====== ========= ======
- ------------
(1) Represents transmission and distribution customers who purchase their
generation from electric generation suppliers other than PECO Energy, but
including its affiliate that supplies electric generation.
(2) For a description of the meanings of rate class abbreviations, see "The
Seller and Servicer PECO Energy Company--Customers and Operating Revenues"
in this prospectus.
(3) Rate OP is available in conjunction with residential rate classes R and R-H
and with commercial and industrial rate class GS for those customers in rate
class GS who use residence electric delivery service.
(4) Rate POL is available in conjunction with commercial and industrial rate
class GS.
57
TABLE 4
Actual Retail Electric Usage (per megawatt-hour ("MWh")) For the Year Ended(1)
12/31/96 12/31/97
------------------------- -------------------------
% of % of
MWh Total MWh Total
------------ ----------- ------------ -----------
Residential
R(2) and OP(3) ......... 7,906,048 23.81% 7,858,466 23.89%
R-H .................... 2,765,279 8.33 2,548,231 7.75
Total .................. 10,671,327 32.14 10,406,697 31.63
Commercial and
Industrial
GS and POL(4) .......... 6,490,621 19.55% 6,684,791 20.32%
SL-P, SL-S, SL-E and TL 192,425 0.58 181,002 0.55
PD and HT .............. 15,208,015 45.81 15,034,087 45.70
EP ..................... 638,800 1.92 594,319 1.81
Total .................. 22,529,861 67.86 22,494,199 68.37
Total .................. 33,201,188 100.00% 32,900,896 100.00%
========== ====== ========== ======
12/31/98 12/31/99 12/31/00
------------------------- ------------------------- -------------------------
% of % of % of
MWh Total MWh Total MWh Total
------------ ----------- ------------ ----------- ------------ -----------
Residential
R(2) and OP(3) ......... 8,214,347 24.21% 8,571,927 24.82% 8,630,780 24.39%
R-H .................... 2,408,645 7.10 2,560,223 7.41 2,673,634 7.55
Total .................. 10,622,992 31.31 11,132,150 32.24 11,304,414 31.94
Commercial and
Industrial
GS and POL(4) .......... 6,887,794 20.30% 7,153,896 20.72% 7,481,196 21.14%
SL-P, SL-S, SL-E and TL 190,251 0.56 188,463 0.55 185,271 0.52
PD and HT .............. 15,678,316 46.21 15,476,999 44.82 15,827,969 44.72
EP ..................... 549,539 1.62 579,069 1.68 594,515 1.68
Total .................. 23,305,900 68.69 23,398,427 67.76 24,088,951 68.06
Total .................. 33,928,892 100.00% 34,530,577 100.00% 35,393,365 100.00%
========== ====== ========== ====== ========== ======
- ------------
(1) Represents usage of transmission and distribution customers who purchase
their generation from electric generation suppliers other than PECO Energy,
but including usage of customers who purchase generation from PECO Energy's
affiliate that supplies electric generation.
(2) For a description of the meanings of rate class abbreviations, see "The
Seller and Servicer PECO Energy Company--Customers and Operating Revenues"
in this prospectus.
(3) Rate OP is available in conjunction with residential rate classes R and R-H
and with commercial and industrial rate class GS for those customers in rate
class GS who use residential electric delivery service.
(4) Rate POL is available in conjunction with commercial and industrial rate
class GS.
TABLE 5
Retail Electric Revenues (dollars in thousands) For the Year Ended
12/31/96 12/31/97
------------------------ ------------------------
% of % of
$(000s) Total $(000s) Total
----------- ----------- ----------- -----------
Residential
R(1) and OP(2) ............. 1,092,398 33.13% 1,091,669 33.17%
R-H ........................ 277,760 8.43 265,781 8.08
Total ...................... 1,370,158 41.56 1,357,450 41.25
Commercial and
Industrial
GS and POL(3) .............. 748,561 22.71% 778,743 23.66%
SL-P, SL-S, SL-E and TL .... 32,815 1.00 30,305 0.92
PD and HT .................. 1,098,307 33.31 1,077,375 32.74
EP ......................... 46,979 1.42 46,994 1.43
Total ...................... 1,926,662 58.44 1,933,417 58.75
Total ...................... 3,296,820 100.00% 3,290,867 100.00%
========= ====== ========= ======
12/31/98 12/31/99 12/31/00
------------------------ ------------------------ ------------------------
% of % of % of
$(000s) Total $(000s) Total $(000s) Total
----------- ----------- ----------- ----------- ----------- -----------
Residential
R1 and OP2 ................. 1,121,346 33.93% 1,012,285 39.09% 1,010,531 38.83%
R-H ........................ 255,891 7.74 236,020 9.11 238,180 9.15
Total ...................... 1,377,237 41.68 1,248,305 48.21 1,248,711 47.98
Commercial and
Industrial
GS and POL3 ................ 783,682 23.72% 609,566 23.54% 580,420 22.30%
SL-P, SL-S, SL-E and TL .... 31,636 0.96 28,480 1.10 27,441 1.05
PD and HT .................. 1,066,868 32.28 665,456 25.70 715,818 27.50
EP ......................... 45,118 1.37 37,731 1.46 30,234 1.16
Total ...................... 1,927,304 58.32 1,341,233 51.79 1,353,913 52.02
Total ...................... 3,304,541 100.00% 2,589,538 100.00% 2,602,624 100.00%
========= ====== ========= ====== ========= ======
- ------------
(1) For a description of the meanings of rate class abbreviations, see "The
Seller and Servicer PECO Energy Company--Customers and Operating Revenues"
in this prospectus.
(2) Rate OP is available in conjunction with residential rate classes R and R-H
and with commercial and industrial rate class GS for those customers in rate
class GS who use residential electric delivery service.
(3) Rate POL is available in conjunction with commercial and industrial rate
class GS.
58
For over 87% of customers who were enrolled in customer choice as of
December 31, 2000, PECO Energy provides a single or consolidated bill for both
PECO Energy's distribution charges and the generation charges of the electric
generation suppliers servicing those customers. The remaining customers who are
not using PECO Energy's own generation supplier subsidiary have chosen to
receive dual bills: one bill encompasses PECO Energy's charges for transmission
and distribution and a separate bill contains the generation charges. For
customers choosing the consolidated bill option from PECO Energy, PECO Energy
pays the relevant electric generation supplier in full for generation charges
and is responsible for collecting those amounts from the customer. As of
December 31, 2000, PECO Energy billed $445.8 million on behalf of electric
generation suppliers. The electric generation suppliers who provide customers
with separate bills for generation are not required to provide revenue
information to PECO Energy.
Concentrations. For calendar year 2000, the largest 10 customers
represented approximately 10% of PECO Energy's retail electric revenues and
approximately 13.4% of PECO Energy's retail electric sales. There can be no
assurance that current customers will remain customers or that the levels of
customer concentration in the future will be similar to those set forth above.
See "Risk Factors--Servicing--Inaccurate Projections by Servicer May Result in
Losses to Transition Bondholders" in this prospectus.
Delinquency and Write-Off Experience. The following tables set forth the
delinquency and write-off experience with respect to payments to PECO Energy by
customer category for each of the periods indicated below. The delinquency and
net write-off experience with respect to payments to PECO Energy by electric
generation suppliers is included in the information provided on the tables
below. There can be no assurance that the future delinquency and write-off
experience for PECO Energy or for the intangible transition charges will be
similar to the historical experience set forth below:
TABLE 6
Delinquencies as a Percentage of Billed Retail Electric Revenues For the Year
Ended
12/31/96 12/31/97 12/31/98 12/31/99 12/31/00
---------- ---------- ---------- ---------- ---------
Residential
30+ days ............... 9.37% 9.51% 9.64% 9.51% 8.82%
60+ days ............... 8.09 8.21 8.51 8.49 7.83
90+ days ............... 7.08 7.18 7.67 7.77 7.12
Commercial and Industrial
30+ days ............... 0.55% 0.64% 0.61% 0.98% 1.45%
60+ days ............... 0.37 0.43 0.45 0.68 0.74
90+ days ............... 0.29 0.32 0.36 0.52 0.57
TABLE 7
Net Write-Offs as a Percentage of Billed Retail Electric Revenues For the Year
Ended
12/31/96 12/31/97 12/31/98 12/31/99 12/31/00
---------- ---------- ---------- ---------- ---------
Residential ................................... 4.56% 4.79% 4.66% 4.68% 3.45%
Commercial and Industrial ..................... 0.35 0.36 0.57 0.41 0.38
Total (Weighted by Customer Category) ......... 2.09 2.18 2.27 2.47 1.85
Through 1998, the residential customer category experienced increases in
delinquencies. Delinquencies were reduced during 1999 and 2000. In addition,
through 1997, the residential customer category experienced an increase in net
write-offs, which has subsequently been reduced during 1998, 1999 and 2000.
These reductions in delinquencies and net write-offs are due to the
implementation of credit and collection programs intended to reduce overall
delinquencies that resulted in reductions to residential past due account
balances of high-risk customers. See "--Limited Information on Customers
Creditworthiness."
59
During the past five years, delinquencies for commercial and industrial
customers have increased. The variance in delinquencies for the most recent
year was primarily due to the volume of receivables associated with customer
choice as well as problems terminating the electric service of delinquent
customers. Net write-offs for that customer category over the last five years
have not shown any discernible trend. Net write-offs in 1999 for commercial and
industrial customers remained above 1996 and 1997 totals, primarily due to
problems experienced with the collection agent responsible for terminating
electric service for these customers. New collection policies implemented
during 2000 assisted in reducing commercial and industrial write-off totals.
PECO Energy does not expect the delinquency or write-off experience with
respect to collections of intangible transition charges to differ substantially
from the experience that it will have with its other receivables.
Forecasting Customers and Usage
Accurate projections of the number of customers, usage and retail electric
revenue are important in setting and maintaining the intangible transition
charges or any adjusted intangible transition charges. See "The Qualified Rate
Orders and the Intangible Transition Charges--The Intangible Transition
Charges" and "Risk Factors--Servicing--Inaccurate Projections by Servicer May
Result in Losses to Transition Bondholders" in this prospectus.
PECO Energy's forecasts are produced by employees of PECO Energy and are
reviewed internally by senior management executives.
Customer projections are determined by PECO Energy based on demographic and
economic information obtained from various sources. There are different
methodologies used for different types of customers. The residential customer
forecasting process begins with a review of regional household growth,
population and residential construction trends within PECO Energy's retail
electric service territory and the surrounding counties. PECO Energy uses this
data to develop internal household forecasts for the counties in which it
operates. PECO Energy then employs its own historical data regarding the number
of households served by PECO Energy and their historical usage, as well as other
factors as PECO Energy deems relevant, to develop a projection of customers in
the residential customer category within its service area.
The forecasting process for smaller customers in the commercial and
industrial customer category begins with a review of economic trends and an
overview of economic prospects in the Philadelphia metropolitan area. These
external data are obtained from independent sources and local businesses. PECO
Energy uses these sources to develop internal business forecasts. PECO Energy
then considers its historical data regarding the businesses served by PECO
Energy, as well as such other factors as PECO Energy deems relevant, to develop
a projection of usage by these customers within its service area.
PECO Energy does not forecast customer usage or retail electric revenues
for Rate Class BLI. Customers subject to Rate BLI are located outside PECO
Energy's retail electric service territory yet receive electricity from PECO
Energy through a reciprocal agreement with the customer's utility. PECO Energy
is reimbursed for any service provided to customers subject to Rate BLI by the
utility in whose retail electric service territory such customer belongs. At
December 31, 2000, there were 12 customers subject to Rate BLI. These customers
are not being, and will not be, charged intangible transition charges.
The usage of large customers in the commercial and industrial customer
category is estimated in two stages. Usage for these customers with the highest
energy usage is projected separately. This is added to estimates of other large
customers in the commercial and industrial customer category to obtain the
aggregate forecast. The usage of the largest customers is derived with input
from the appropriate account executives for these customers. The account
executives provide data on these customers' plans regarding increase/decrease
in output, hours worked, space and potential cogeneration. The data is
converted into kilowatt-hours, and the net increment is added to the previous
year's data to derive the forecast. For other customers in this category, usage
forecast is derived through statistical analyses using historical data
corrected for unusual weather and billing-corrected usage patterns.
60
Actual sales can deviate from forecasted sales for many reasons, including:
o the general economic climate in PECO Energy's retail electric service
territory as it impacts net migration of customers,
o weather as it impacts air conditioning and heating usage,
o levels of business activity, and
o the availability of more energy efficient appliances and new energy
conservation technologies.
For the calendar year 2000, PECO Energy underestimated the number of
customers by 0.4%. For the calendar year 2000, actual usage exceeded forecasted
usage by 3.54% because of the weather and economic conditions in the PECO Energy
service area. During the last five years, no discernible trend is apparent with
respect to the historical forecast of customers. There can be no assurance that
the future variance between actual and projected customers in the aggregate or
by customer category or their usage will be similar to the historical experience
set forth below.
Assumptions about the retention of customers can bear a major impact on
revenue forecasts. The choice by a customer to have an alternative supplier
means that generation revenue may not be paid to PECO Energy. In order to
develop the retention estimates, PECO Energy factors in historical trends,
program impacts and the restructuring plan settlement. The appropriate changes
to revenues are then reflected in the forecast.
Summaries of the total annual forecasted and actual number of PECO Energy's
customers and their usage (by customer category) since 1996 are shown below.
TABLE 8
Forecasted Number Of Customers Variance For the Year Ended
12/31/96 12/31/97 12/31/98 12/31/99 12/31/00
------------- ------------- ------------- ------------- -------------
Residential
R and OP
Forecasted ........... 1,174,208 1,174,037 1,185,818 1,190,500 1,204,000
Actual ............... 1,169,654 1,177,996 1,186,864 1,194,370 1,208,883
Variance ............. (0.39%) 0.34% 0.09% 0.33% 0.41%
R-H
Forecasted ........... 157,336 157,045 156,739 157,700 159,000
Actual ............... 154,794 155,865 156,927 157,489 158,362
Variance ............. (1.62%) (0.75%) 0.12% (0.13%) (0.40%)
Commercial and Industrial
GS and POL
Forecasted ........... 142,441 143,445 145,019 146,914 147,200
Actual ............... 142,431 144,142 145,055 146,771 149,085
Variance ............. (0.01%) 0.49% 0.02% (0.10%) 1.28%
SL-P, SL-S, SL-E and TL
Forecasted ........... 940 987 987 1,054 1,077
Actual ............... 987 985 1,050 1,076 972
Variance ............. 5.00% (0.20%) 6.38% 2.09% (9.75%)
PD and HT
Forecasted ........... 3,363 3,264 3,241 3,250 3,250
Actual ............... 3,299 3,308 3,248 3,245 3,213
Variance ............. (1.90%) 1.35% 0.22% (0.15%) (1.14%)
EP
Forecasted ........... 3 3 3 3 3
Actual ............... 3 3 3 3 3
Variance ............. 0.00% 0.00% 0.00% 0.00% 0.00%
61
TABLE 9
Forecasted Customer Usage (In MWh) Variance For the Year Ended
12/31/96 12/31/97 12/31/98 12/31/99 12/31/00
----------------- ----------------- ----------------- ----------------- ----------------
Residential
R and OP
Forecasted ........... 7,852,000 7,867,001 8,111,000 8,122,193 8,222,775
Actual ............... 7,906,048 7,858,466 8,214,347 8,571,927 8,630,780
Variance ............. 0.69% (0.11%) 1.27% 5.54% 4.96%
R-H
Forecasted ........... 2,724,000 2,722,000 2,703,352 2,760,846 2,764,769
Actual ............... 2,765,279 2,548,231 2,408,645 2,560,223 2,673,634
Variance ............. 1.52% (6.38%) (10.90%) (7.27%) (3.30%)
Commercial and Industrial
GS and POL
Forecasted ........... 6,377,000 6,775,999 6,954,617 6,861,596 6,934,554
Actual ............... 6,490,621 6,684,791 6,887,794 7,153,896 7,481,196
Variance ............. 1.78% (1.35%) (0.96%) 4.26% 7.88%
SL-P, SL-S, SL-E and TL
Forecasted ........... 197,000 198,003 192,469 192,753 200,188
Actual ............... 192,425 181,002 190,251 188,463 185,271
Variance ............. (2.32%) ( 8.59%) (1.15%) (2.23%) (7.45%)
PD and HT
Forecasted ........... 15,804,000 15,597,482 14,980,154 14,891,098 15,401,026
Actual ............... 15,208,015 15,034,087 15,678,316 15,476,999 15,827,969
Variance ............. (3.77%) (3.61%) 4.66% 3.93% 2.77%
EP
Forecasted ........... 658,000 668,000 626,291 618,447 660,000
Actual ............... 638,800 594,319 549,539 579,069 594,515
Variance ............. (2.92%) (11.03%) (12.26%) (6.37%) (9.92%)
Billing Process
PECO Energy operates on a continuous billing cycle, with an approximately
equal number of bills being distributed each business day. For calendar year
2000, PECO Energy mailed out an average of 75,000 bills daily. PECO Energy
bills the majority of its customers monthly. Accounts with potential billing
errors are held by the computer system for review. This review examines
accounts that have abnormally high or low bills, potential meter-reading
errors, safety problems as identified by the meter-reading staff and possible
meter malfunctions. Subject to statutory and legal requirements, PECO Energy
may change its billing policies and procedures from time to time. It is
expected that any changes would be designed to enhance PECO Energy's ability to
recover on a timely basis amounts billed to customers.
Under the master servicing agreement, any changes instituted by PECO
Energy will apply to the servicing of intangible transition property so long as
PECO Energy is the servicer.
Limited Information on Customers' Creditworthiness
Under Pennsylvania law, PECO Energy is obligated to provide service to new
customers in the residential customer category. Credit bureau investigations
are performed on new customers through a social security number investigation.
PECO Energy is also starting to use other fraud detection measures so that
actions can be taken at the earliest stages to reduce the costs associated with
delinquent accounts. PECO Energy relies on the information provided by the
customer and its customer information system audits to indicate whether the
customer has been previously served by PECO Energy.
62
PECO Energy has initiated a program to require deposits from new
residential customers who pose a high degree of credit risk. PECO Energy
reserves the right to transfer deposit amounts to offset delinquencies which
develop and to terminate services for the failure to provide additional
deposits to offset what has been transferred to reduce outstanding arrearages.
As part of its obligation to provide universal service, PECO Energy has
developed a special rate program, the Customer Assistance Program, provided to
certain low income customers who are currently served under or otherwise qualify
for Rate R or R-H. Customers must apply for this rate and must demonstrate
annual household gross income below 150% of the federal poverty guidelines.
Customers in the Customer Assistance Program qualify for certain rate
adjustments and payment programs and have their pre-program arrearages in excess
of $500 forgiven if they remain current on the Customer Assistance Program for
six to twelve consecutive months. The development of any new arrearages during
this period will delay forgiveness. PECO Energy estimates the annual costs of
the Customer Assistance Program at $50 million, which it recovers through
adjustments to the distribution rates applicable to all customers. Pursuant to
the electric restructuring plan settlement, the initial maximum participation
for the Customer Assistance Program is 100,000 customers, subject to review by
the participants in the restructuring plan settlement, to ensure that total
annual Customer Assistance Program costs do not exceed $50 million and all
eligible customers are able to participate. As of December 31, 2000, there were
more than 84,000 customers enrolled in the Customer Assistance Program
accounting for approximately $48 million of billed revenues. Pursuant to the
provisions of the Pennsylvania Competition Act, the Pennsylvania Public Utility
Commission has adopted regulations that establish reporting requirements for
universal service programs, such as the Customer Assistance Program, that are
applicable to all electric distribution companies including PECO Energy.
For calendar year 2000, approximately 81% of total bill payments were
received by PECO Energy via the U.S. mail. During the same period,
approximately 10% of total payments were paid in person at either PECO Energy's
local business office or at approximately 310 pay stations (which are located
in unaffiliated businesses or organizations, such as supermarkets and
convenience stores) throughout the service territory. A total of 33 pay
stations are free of charge to the customers. Customers making payments at the
remaining 277 locations may be assessed a processing fee of up to $1.00 by the
payment agent. This has not had any material effect on the timing or amount of
collections. Other payment methods include pay-by-phone and direct debits of
customer accounts (including through the Internet) through a local bank, which
accounted for approximately 9% of bill payments collected for calendar year
2000.
Collection Process for the Residential Customer Category and Small
Customers in the Commercial and Industrial Category. Customer bills are due
approximately 22 days after mailing. If the customer does not pay the bill by
the due date, the customer will not be considered for termination until the
next bill is rendered, which is approximately 30 days from the last mailing
date.
For customers in PECO Energy's residential customer category and small
customers within the commercial industrial category, the collection process is
based on a recovery score assigned to each delinquent account. Each delinquent
customer is scored for approximate risk based on outstanding balance, payment
habits, length of time as a customer, time since last payment and previous
termination history. The score has been used since early 1998 to segment
customers into four specific collection strategies:
o The lowest risk customers are monitored with no collection activity,
since most customers in this category usually pay but pay late and pay the
associated finance charges.
o The next segment of customers are moved into a proactive collection call
program which is a collection call strategy designed to remind the
customer of the delinquency.
o Customers in the third segment are moved into a portfolio management
program where each customer's account is referred to a collection agency
that follows up on the account for 60 days using letters and collection
calls.
o The most chronic delinquent accounts comprise the fourth segment of
customers which are moved into a service termination process that is
initiated by mailing a ten-day notice.
63
If no payment is made within seven days, a 72-hour notice will be given
either over the telephone or at the property. If sufficient payment has not
been received ten days after the original notice, the account is sent to a
service termination vendor for termination. If the service termination vendor
makes contact with a responsible adult, the service is terminated. If the
service termination vendor does not make contact, a deferred notice is left.
Two days later, the service is terminated with or without contact if sufficient
payment has not been made. Power is not customarily disconnected if the
delinquent customer is subject to a Pennsylvania Public Utility
Commission-mandated winter moratorium that requires special approval from the
Pennsylvania Public Utility Commission prior to the disconnection of
electricity to residential customers from December 1 through March 31 of each
year. Currently, these accounts are managed during the winter moratorium
through a combination of letters and proactive phone contacts. Delinquencies
that accumulate during the winter moratorium continue to contribute to the
credit scoring, which can lead to termination after the winter moratorium.
If a customer's account is closed, either because the customer has moved
or the customer has failed to remedy a delinquent account, the account is sent
to a collection agency. Accounts are written-off only after efforts by the
collection agency are unsuccessful over 60 days. Continued efforts are made by
the collection agency for written-off accounts to increase collections. During
calendar year 2000, 103,808 accounts, totaling $48.6 million, were referred to
the collection agency; $4.5 million was recovered by the collection agency from
accounts previously referred to it. Further, $2.7 million in additional
recoveries of delinquencies were received through litigation. During calendar
year 2000, PECO Energy received total recoveries from all collection
initiatives of $190 million which was achieved through a total of 4,008,841
customer collection contacts. Collection recovery rates are monitored monthly.
Once written off, the uncollected account is monitored for six years and may be
collected or sold at any point during that time.
If a customer declares bankruptcy, a review is conducted to assess whether
the account is current. Good paying accounts are kept active. The accounts of
bankrupt customers having delinquencies are closed and written-off and efforts
are initiated to submit claims in the bankruptcy of these customers. Deposits
are required for delinquent bankrupt customers for which PECO Energy is
required to continue services. Although deposits are not otherwise mandated
from residential customers (except as noted above as part of the turn-on
process for those identified as having a high risk of becoming delinquent),
they are required as a condition of providing service to all new commercial and
industrial customers. These deposits are maintained for a minimum of three
years.
Collection Process for Large Customers in the Commercial and Industrial
Customer Category. For large customers within PECO Energy's commercial and
industrial customer category, the collection process is based on providing
special handling of accounts and attention to detail because of the importance
of each customer as a source of revenue. The delinquency of individual
customers may result from differing circumstances, and it is the operational
policy of PECO Energy in serving these accounts to have a firm understanding of
individual customers so that the collection strategy can be matched to the
particular account while ensuring that regulations are followed and collection
actions are performed legally. PECO Energy's goal for 2001 for the large
customers in the commercial and industrial customer category is for
delinquencies to be no greater than .75% of total revenue and write-offs to be
no greater than from .1% to .2% of revenue. PECO Energy's collection strategies
range from use of letters and phone contacts to disconnection and litigation.
Application of Customer Payments. The Pennsylvania Competition Act
provides that the Pennsylvania Public Utility Commission require the unbundling
of electric utility services, tariffs and customer bills to separate the
charges for generation, transmission and distribution for billing cycles
beginning in January, 1999. In the event that a customer makes a partial
payment toward an outstanding balance, the payment is applied first to
intangible transition charges, then to the competitive transition charges, then
to transmission and distribution charges and finally to electric generation
charges.
PECO Energy's electric tariff approved by the Pennsylvania Public Utility
Commission in its electric restructuring plan provides that when PECO Energy is
providing separate billing for its transmission and distribution charges and a
customer remits a partial payment to PECO Energy, the payment is applied as
follows:
(1) To the outstanding balance before direct access to electric
generation from electric generation suppliers or the installment
amount for a payment agreement on this balance,
64
(2) To the balance due for state tax charges,
(3) To the balance due or the installment amount for a payment agreement
for intangible transition charges,
(4) To the balance due or the installment amount for a payment agreement
for competitive transition charges,
(5) To the balance due or the installment amount for a payment agreement
for fixed and variable utility distribution service charges,
(6) To the current state tax charges,
(7) To the current intangible transition charges,
(8) To the current competitive transition charges,
(9) To the current fixed and variable utility distribution service
charges,
(10) To the balance due for prior charges for energy and capacity (if PECO
Energy is the provider of last resort),
(11) To the current charges for energy and capacity charges (if PECO Energy
is the provider of last resort), and
(12) To the non-basic service charges.
In the event PECO Energy is not providing separate billing for its
transmission and distribution charges, the master servicing agreement provides
that partial payments received by the servicer will be applied:
o first to state tax charges,
o then to intangible transition charges,
o then to competitive transition charges,
o then to transmission and distribution charges, and
o finally to electric generation charges.
PECO Energy's electric restructuring plan requires PECO Energy to allow
specified customers to prepay their bills, including intangible transition
charges, in a lump sum, based on a calculation that takes into account that
customer's last 12 months of demand and PECO Energy's weighted average cost of
capital. Prepayments, if any, are deposited into the reserve subaccount and
allocated pro rata among the outstanding transition bonds in accordance with
the principal amount and remaining months or years to maturity, so as to apply
those prepayments ratably over the remaining life of the outstanding transition
bonds. Only the portion of those customer prepayments allocable to the period
covered by any adjustment request is used to calculate the adjustments to the
intangible transition charges for the period covered by that adjustment
request.
Electric Generation Suppliers and Other Third Party Billers
The servicer, on behalf of the issuer, pursues any electric generation
supplier or other third party that fails to remit the applicable intangible
transition charges in a manner similar to that by which the servicer pursues
any failure by a customer to remit intangible transition charges. The servicer
has the right to bill and collect intangible transition charges and other
amounts payable to the issuer or the servicer directly from all customers
electing consolidated billing from an electric generation supplier or other
third party as follows:
o If the servicer does not receive payment for undisputed charges within 25
calendar days for customers in the residential customer category or 20
calendar days for customers in the commercial and industrial customer
category after the charges are communicated to the electric generation
supplier or other third party, then the servicer may provide notice of
breach to the electric generation supplier or other third party at any
time thereafter, at the servicer's discretion.
o Upon notice of a breach, the electric generation supplier or other third
party has 20 calendar days to cure that breach.
65
o If the electric generation supplier or other third party has not cured
that breach within 20 calendar days, the servicer may terminate
consolidated billing by the electric generation supplier or other third
party and take over billing functions for the customer.
o In no event will these procedures result in a customer being sent two
bills covering the same service.
o Neither the seller nor the servicer will pay any shortfalls resulting
from the failure of any electric generation suppliers or other third
parties to forward collections of intangible transition charges to the
servicer. See "Risk Factors--Servicing--It May Be More Difficult to
Collect Intangible Transition Charges Due to Billing by Third Parties" in
this prospectus.
To date no electric generation supplier has chosen to provide billing and
collection services to PECO Energy's customers.
THE ISSUER
PECO Energy Transition Trust, a statutory business trust established under
the laws of the State of Delaware, was formed on June 23, 1998 pursuant to a
trust agreement, amended and restated on May 2, 2000, between PECO Energy, as
grantor and sole owner of all beneficial interests in the issuer, the issuer
trustee and the other parties to the trust agreement. The amended and restated
trust agreement is referred to in this prospectus as the trust agreement. The
assets of the issuer consist of all transferred intangible transition property,
the other collateral and any money distributed to the issuer from the
collection account in accordance with the indenture. On March 25, 1999, the
issuer issued $4 billion of Series 1999-A Bonds pursuant to the First QRO and
on May 2, 2000, the issuer $1 billion of Series 2000-A Bonds pursuant to the
2000 QRO. Both audited and non-audited financial statements of the issuer are
included in this prospectus.
The issuer has been created for the purpose of:
o purchasing and owning the transferred intangible transition property,
o issuing transition bonds from time to time,
o pledging its interest in the transferred intangible transition property
and other collateral to the bond trustee under the indenture in order to
secure the transition bonds, and
o performing activities that are necessary, suitable or convenient to
accomplish these purposes, including but not limited to activities
relating to any necessary hedge or swap transaction or credit
enhancement.
The issuer's business may be managed by no fewer than one and no more than
five trustees appointed from time to time by PECO Energy or, in the event PECO
Energy transfers its interest in PECO Energy Transition Trust, by the new owner
or owners. The issuer will at all times have at least one trustee, which, in
the case of a natural person, will be a person who is a resident of the State
of Delaware, or in all other cases, has its principal place of business in the
State of Delaware. In addition, the issuer will always have at least one
trustee, the independent trustee, that is not and has not been for at least
three years from the date of his or her or its appointment:
o a direct or indirect legal or beneficial owner of the issuer or PECO
Energy or any of their respective affiliates,
o a relative, supplier, employee, officer, director, manager, contractor or
material creditor of the issuer or PECO Energy or any of their respective
affiliates, or
o a person who controls PECO Energy or its affiliates.
The Delaware trustee and the independent trustee may be the same person or
entity and is referred to in this prospectus as the "issuer trustee." First
Union Trust Company, National Association of Wilmington, Delaware currently
serves as the issuer trustee, the Delaware trustee and the independent trustee.
Currently there are two other trustees who are representatives of PECO Energy
and are referred to as the "beneficiary trustees." The issuer trustee and the
beneficiary trustees are collectively referred to in this prospectus as the
"trustees."
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The issuer trustee and one of the beneficiary trustees has served since
the establishment of the issuer. The trustees devote such time as is necessary
to the affairs of the issuer. The following two people are beneficiary trustees
as of the date of this prospectus:
Name Age Title
---- --- -----
George R. Shicora .......... 54 Beneficiary Trustee (principal executive officer)
Thomas R. Miller ........... 40 Beneficiary Trustee (principal financial and accounting officer)
George R. Shicora is Manager of Investment at Exelon Corporation and has
been an Assistant Treasurer at Exelon Corporation since the merger of PECO
Energy with Unicom Corp. Mr. Shicora has been a beneficiary trustee of the
issuer since its establishment. Mr. Shicora has served as Assistant Treasurer
of PECO Energy since 1995 and has held various positions at PECO Energy since
1968.
Mr. Miller has served as Director of Finance of Exelon Corporation since
the merger of PECO Energy with Unicom Corporation. He held a similar position
at PECO Energy from 1999 until the merger. From 1987 to 1999, he held a variety
of financial positions with Conoco, Inc., most recently as Director, Financial
Strategy. Conoco, Inc. is involved in exploring for and developing, producing
and selling crude oil, natural gas and other related products. Conoco, Inc. is
also engaged in developing and operating power facilities.
The beneficiary trustees are not compensated by the issuer for their
services on behalf of the issuer. The issuer trustee is paid an annual retainer
from the assets of the issuer and is reimbursed for its reasonable expenses,
including, without limitation, the reasonable compensation, expenses and
disbursements of any agents, representatives, experts and counsel the issuer
trustee may employ in connection with the exercise and performance of its
rights and duties under the trust agreement, the indenture, the sale agreement
and the master servicing agreement. As of the date of this prospectus, the
issuer has paid the issuer trustee approximately $21,935.
The trust agreement provides that the trustees shall not be personally
liable under any circumstances except for:
o liabilities arising from their own willful misconduct or gross
negligence,
o liabilities arising from the failure by any of the trustees to perform
obligations expressly undertaken in the trust agreement or
o taxes, fees or other charges, based on or measured by any fees,
commissions or compensation received by the trustees in connection with
the transactions described in this prospectus.
The trust agreement further provides that, to the fullest extent permitted
by law, the trust will indemnify the trustees against any liability incurred in
connection with their services as trustees for the issuer, unless that
liability is based on or arises in connection with the circumstances described
above.
The trust agreement provides that the trust created under the trust
agreement shall dissolve and, after satisfaction of the creditors of the issuer
as required by applicable law, property held by the issuer will be distributed
to PECO Energy, or in the event of a transfer to any other owner, that other
owner, thirty years from the date of its creation or sooner, at the option and
expense, and upon written instruction, of PECO Energy, but in no event before
payment in full of all series of transition bonds.
The issuer has no intent to file, and PECO Energy has advised the issuer
that it has no intent to cause the filing of, a voluntary petition for relief
under the Bankruptcy Code with respect to the issuer so long as the issuer is
solvent and does not reasonably foresee becoming insolvent.
The trust agreement requires the issuer to take all reasonable steps to
continue its identity as a separate legal entity and to make it apparent to
third persons that it is an entity with assets and liabilities distinct from
those of PECO Energy, other affiliates of PECO Energy, the trustees or any
other person, and that, except for federal income tax purposes, it is not a
division of PECO Energy or any of its affiliated entities or any other person.
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The principal place of business of the issuer is c/o First Union Trust
Company, National Association, One Rodney Square, 920 King Street, 1st Floor,
Wilmington, Delaware 19801 and its telephone number is 302-888-7532.
USE OF PROCEEDS
The issuer will use the proceeds of the issuance of the transition bonds
offered by this prospectus to redeem the principal amount of Series 1999-A
Class A-3 and Class A-5 Bonds described in the related prospectus supplement.
THE TRANSITION BONDS
The transition bonds offered by this prospectus will be issued as
additional bonds under and secured by a base indenture between the issuer and
the bond trustee dated as of March 1, 1999, as supplemented by the Series
1999-A supplemental indenture and the Series 2000-A supplemental indenture,
each of which is filed as an exhibit to the registration statement of which
this prospectus forms a part. The terms of each series of transition bonds
offered by this prospectus will be provided in a separate supplement to the
base indenture. The following summary describes the material terms and
provisions of the transition bonds being offered by this prospectus. The
particular terms of the transition bonds of any series offered by any
prospectus supplement will be described in that prospectus supplement. Please
see the forms of indenture and transition bonds and the related prospectus
supplement for a complete description of all terms and provisions of the
transition bonds being offered by this prospectus, portions of which are
summarized in this section.
General
The transition bonds may be issued in one or more series, each comprised
of one or more classes. The terms of all transition bonds of the same series
will be identical in all respects, unless the series is comprised of more than
one class, in which case the terms of all transition bonds of the same class
will be identical in all respects.
The supplemental indenture will specify the following terms of the related
series of transition bonds and, if applicable, the classes of that series:
(1) the designation of the series and, if applicable, the classes of that
series,
(2) the aggregate principal amount of the transition bonds of the series
and, if applicable, each class of that series,
(3) the bond rate of the series and, if applicable, each class of that
series or the formula, if any, used to calculate the applicable bond
rate or bond rates,
(4) the payment dates for the series,
(5) the monthly allocated interest balances for the series,
(6) the monthly allocated principal balances for the series,
(7) the expected final payment date of the series and, if applicable,
each class of that series,
(8) the series termination date for the series and, if applicable, the
class termination dates for each class of that series,
(9) the series issuance date for the series,
(10) the place or places for payments with respect to the series,
(11) the authorized initial denominations for the series,
(12) the provisions, if any, for redemption of the series by the issuer,
(13) the expected amortization schedule for the series,
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(14) the overcollateralization amount with respect to the series, the pro
forma calculated overcollateralization level for each payment date and
the monthly allocated overcollateralization balance for each monthly
allocation date,
(15) the calculation dates and adjustment dates for the series or class,
(16) the terms of any credit enhancement applicable to the series or
class,
(17) the terms of any hedge or swap transaction applicable to the series
or class, and
(18) any other terms of the series or class that are not inconsistent with
the provisions of the indenture.
The applicable prospectus supplement will set forth the procedure for the
manner of the issuance of the transition bonds of each series offered by this
prospectus. Generally, each series of transition bonds will initially be
represented by one or more transition bonds registered in the name of Cede &
Co., as the nominee of The Depository Trust Company. The transition bonds will
be available for purchase in initial denominations specified in the applicable
prospectus supplement (which denominations will be not less than $1,000).
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 The Depository Trust Company upon instructions from the
participants and all references in this prospectus to payments, notices,
reports and statements to transition bondholders will refer to payments,
notices, reports and statements to The Depository Trust Company or Cede & Co.,
as the registered holder of each series of transition bonds, for distribution
to transition bondholders in accordance with The Depository Trust Company's
procedures with respect to these payments, notices, reports and statements. See
"--Book-Entry Registration" and "--Definitive Transition Bonds" below.
Interest and Principal
Interest will accrue on the principal balance of transition bonds of a
series or class offered by this prospectus at the bond rate specified in or
determined in the manner specified in the applicable prospectus supplement and
will be payable to the transition bondholders of that series or class on each
payment date, commencing on the payment date specified in the related
prospectus supplement.
On any payment date with respect to any series, the issuer will make
principal payments on that series only until the outstanding principal balance
of that series has been reduced to the principal balance specified for that
payment date in the expected amortization schedule for that series on that
payment date and only to the extent funds are available for the payment as
described in this prospectus. Accordingly, principal of that series or class of
transition bonds may be paid later than reflected in the expected amortization
schedule for that series. See "Risk Factors--Unusual Nature of Intangible
Transition Property" and "Weighted Average Life and Yield Considerations" in
this prospectus.
The failure to make a scheduled payment of principal on the transition
bonds, other than upon redemption or on the series termination date or, if
applicable, class termination date, does not constitute an event of default
under the indenture. The entire unpaid principal amount of the transition bonds
will be due and payable if an event of default under the indenture occurs and
is continuing and the bond trustee or the holders of a majority in principal
amount of the transition bonds of all series then outstanding have declared the
transition bonds to be immediately due and payable. See "The Indenture--Events
of Default; Rights Upon Event of Default" and "Weighted Average Life and Yield
Considerations" in this prospectus.
Floating Rate Transition Bonds
In connection with the issuance of a class or classes of floating rate
transition bonds, the issuer may arrange for one or more hedge or swap
transactions. If the issuer enters into or arranges for any hedge or swap
transaction, the applicable prospectus supplement will include a description
of:
(1) the material terms of that transaction,
(2) the identity of the counterparty or counterparties,
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(3) any payments under that hedge or swap transaction to be made by or to
the issuer or the bond trustee, as assignee of the issuer,
(4) deposits in and withdrawals from any subaccount of the collection
account with respect to that class or classes of floating rate
transition bonds and that transaction,
(5) the formula for calculating the floating rate of interest of that class
or classes prior to termination of that transaction, and
(6) the rights of transition bondholders with respect to the termination of
or specified other events related to that transaction.
Redemption
Redemption provisions, if any, for any series of transition bonds offered
by this prospectus will be specified in the related prospectus supplement,
including the premiums, if any, payable upon redemption. The redemption price
in any event will not be less than the principal balance of that series, plus
interest at the applicable bond rate accrued to the redemption date. Unless the
context requires otherwise, all references in this prospectus to principal of
the transition bonds of a series being redeemed includes any resulting premium
that might be payable on those transition bonds, as described in the applicable
prospectus supplement.
Except as described below, each series of transition bonds offered by this
prospectus will be subject to mandatory redemption in whole at a redemption
price equal to the principal amount thereof, plus interest accrued to the
redemption date, if PECO Energy is obligated to pay liquidated damages. PECO
Energy will be required to pay liquidated damages as a result of a breach by
PECO Energy of specified representations relating to intangible transition
property under the sale agreement if that breach continues beyond a 90-day
grace period and has a material adverse effect on the transition bondholders or
if the payment of certain indemnification amounts by the seller related to a
breach of specified other representations is reasonably expected to be incurred
beyond the 90-day period immediately following the breach and these amounts are
reasonably expected to exceed the de minimis loss amount. However, if PECO
Energy is obligated to pay liquidated damages for a breach of a representation
and warranty which relates to one or more of the qualified rate orders, but not
all of the qualified rate orders, then:
o the amount of liquidated damages will include the then outstanding
principal amount of only the series of transition bonds issued in
connection with the affected qualified rate order or orders as of the
redemption date, plus accrued interest to the redemption date, and
o only the series of transition bonds issued in connection with the
affected qualified rate order or orders will be subject to mandatory
redemption.
The bond trustee, who may consult with the servicer and other third
parties, will have sole responsibility to determine whether a breach by PECO
Energy of any of these representations has a material adverse effect on the
transition bondholders. See "The Sale Agreement--Representations and Warranties
of the Seller" in this prospectus.
Notice of redemption of any series of transition bonds will be given by
the bond trustee to each registered holder of a transition bond to be redeemed
by first-class mail, postage prepaid, mailed not less than five days nor more
than 45 days prior to the date of redemption or in any other manner or at any
other time as may be specified in the related prospectus supplement. Notice of
optional redemption may be conditioned upon the deposit of moneys with the bond
trustee before the redemption date and that notice shall be of no effect unless
those 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 bond trustee at that time, and shall no longer be considered
"outstanding" under the indenture. The transition bondholders of those
transition bonds will have no further rights with respect to those transition
bonds, except to receive payment of the redemption price of those transition
bonds and unpaid interest accrued to the date fixed for redemption, from the
bond trustee.
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Credit Enhancement
Credit enhancement with respect to all series of transition bonds is
provided by adjustments to the intangible transition charges and amounts on
deposit in the reserve subaccount, the overcollateralization subaccount and the
capital subaccount. In addition, for any series of transition bonds or one or
more classes of that series, additional credit enhancement may be provided. The
amounts and types of credit enhancement, and the provider of credit
enhancement, if any, for each series of transition bonds offered by this
prospectus or one or more classes of that series will be described in the
applicable prospectus supplement. Credit enhancement may be in the form of an
additional reserve account, additional overcollateralization, a financial
guaranty insurance policy, letter of credit, credit or liquidity facility,
maturity guaranty, repurchase obligation, third-party payment or cash deposit,
or any combination of the foregoing, as may be set forth in the applicable
prospectus supplement. If specified in the applicable prospectus supplement,
credit enhancement for a series of transition bonds may cover one or more other
series of transition bonds.
If any additional credit enhancement is provided, the applicable
prospectus supplement will include a description of:
(1) the amount payable under that credit enhancement,
(2) any conditions to payment under that credit enhancement not otherwise
described in this prospectus,
(3) the conditions, if any, under which the amount payable under that
credit enhancement may be reduced and under which that credit
enhancement may be terminated or replaced, and
(4) any material provisions of any applicable agreement relating to that
credit enhancement.
Additionally, the applicable prospectus supplement may describe material
information with respect to the provider of any third-party credit enhancement,
including:
(1) a brief description of its principal business activities,
(2) its principal place of business, place of incorporation and the
jurisdiction under which it is chartered or licensed to do business,
(3) if applicable, the identity of regulatory agencies which exercise
primary jurisdiction over the conduct of its business, and
(4) its total assets and stockholders' equity or policyholders' surplus, if
applicable, as of a date specified in the applicable prospectus
supplement.
Book-Entry Registration
All classes of transition bonds offered by this prospectus will be
book-entry transition bonds, which are initially represented by one or more
bonds registered in the name of Cede & Co. (referred to as Cede throughout this
prospectus), as nominee of The Depository Trust Company (referred to as DTC
throughout this prospectus), or another securities depository and are available
only in the form of book-entries; provided, however, the applicable prospectus
supplement relating to a series of transition bonds may provide that the
transition bonds of that series or a class of that series will be issued as
definitive transition bonds. Transition bondholders may also hold transition
bonds of a class through Clearstream, Luxembourg or Euroclear (in Europe), if
they are participants in those systems or indirectly through organizations that
are participants in those systems.
Cede, as nominee for DTC, will hold the global bond or bonds representing
the transition bonds. Clearstream, Luxembourg and Euroclear will hold omnibus
positions on behalf of their participants through customers' securities
accounts in Clearstream, Luxembourg's and Euroclear's names on the books of
their respective depositories which in turn will hold those positions in
customers' securities accounts in the depositories' names on the books of DTC.
DTC is a limited purpose trust company organized under the laws of the
State of New York, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the New York Uniform
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Commercial Code and a "clearing agency" registered under Section 17A of the
Exchange Act. DTC was created to hold securities for its participants and to
facilitate the clearance and settlement of securities transactions between
participants through electronic book-entries, thereby eliminating the need for
physical movement of bonds. Participants include securities brokers and
dealers, banks, trust companies and clearing corporations, and may include
other organizations, including the underwriters. Indirect access to the DTC
system also is available to others such as banks, brokers, dealers and trust
companies that clear through or maintain a custodial relationship with a
participant, either directly or indirectly.
Transfers between participants will occur in accordance with DTC rules.
Transfers between Clearstream, Luxembourg participants 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,
Luxembourg 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 depositary. Cross-market transactions will require
delivery of instructions to the relevant European international clearing system
by the counterparty in that system in accordance with its rules and procedures
and within its established deadlines (European time). The relevant European
international clearing system will, if the transaction meets its settlement
requirements, deliver instructions to its depositary 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, Luxembourg
participants and Euroclear participants may not deliver instructions directly
to the depositories.
Because of time-zone differences, credits of securities received in
Clearstream, Luxembourg or Euroclear as a result of a transaction with a DTC
participant will be made during subsequent settlement processing and dated the
business day following the DTC settlement date. These credits or any
transactions in those transition bonds settled during that processing will be
reported to the relevant Euroclear or Clearstream, Luxembourg participant on
that business day. Cash received in Clearstream, Luxembourg or Euroclear as a
result of sales of transition bonds by or through a Clearstream, Luxembourg
participant or a Euroclear participant to a DTC participant will be received
with value on the DTC settlement date but will be available in the relevant
Clearstream, Luxembourg or Euroclear cash account only as of the business day
following settlement in DTC.
Transition bondholders that are not direct or indirect DTC participants
but desire to purchase, sell or otherwise transfer ownership of, or other
interests in, transition bonds may do so only through direct or indirect DTC
participants. In addition, transition bondholders will receive all payments of
principal and interest on the transition bonds, through the DTC participants
who in turn will receive them from DTC. Under a book-entry format, transition
bondholders will receive payments after the related payment date, because,
while payments are required to be forwarded to Cede, as nominee for DTC, on
each of those dates, DTC will forward such payments to its participants, which
thereafter will be required to forward them to indirect participants or holders
of beneficial interests in the transition bonds. The issuer and the bond
trustee, and any paying agent, transfer agent or registrar may treat the
registered holder in whose name any transition bond is registered--expected to
be Cede--as the absolute owner of that transition bond, whether or not that
transition bond is overdue and notwithstanding any notice of ownership or
writing on that transition bond or any notice to the contrary, for the purpose
of making payments and for all other purposes.
Unless and until definitive transition bonds are issued, it is anticipated
that the only "holder" of transition bonds of any series will be Cede, as
nominee of DTC. Transition bondholders will only be permitted to exercise their
rights as transition bondholders indirectly through DTC participants and DTC.
All references in this prospectus to actions by transition bondholders thus
refer to actions taken by DTC upon instructions from its participants, and all
references in this prospectus to payments, notices, reports and statements to
transition bondholders refer to payments, notices, reports and statements to
Cede, as the registered holder of the transition bonds, for payments to the
beneficial owners of the transition bonds in accordance with DTC procedures.
While any book-entry transition bonds of a series are outstanding, except
under the circumstances described below, under the rules, regulations and
procedures creating and affecting DTC and its operations,
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DTC is required to make book-entry transfers among participants on whose behalf
it acts with respect to the book-entry transition bonds and is required to
receive and transmit payments of principal of, and interest on, the book-entry
transition bonds. Direct and indirect participants with whom transition
bondholders have accounts with respect to book-entry transition bonds are
similarly required to make book-entry transfers and receive and transmit those
payments on behalf of their respective transition bondholders. Accordingly,
although transition bondholders will not possess physical bonds, the governing
rules of DTC provide a mechanism by which transition bondholders will receive
payments and will be able to transfer their interests.
Because DTC can only act on behalf of its participants, who in turn act on
behalf of indirect participants and specified banks, the ability of holders of
beneficial interests in the transition bonds to pledge transition bonds to
persons or entities that do not participate in the DTC system, or otherwise
take actions in respect of those transition bonds, may be limited due to the
lack of definitive transition bonds.
DTC has advised the bond trustee that it will take any action permitted to
be taken by a transition bondholder under the indenture only at the direction
of one or more participants to whose account with DTC the transition bonds are
credited.
Clearstream, Luxembourg is incorporated under the laws of Luxembourg.
Clearstream, Luxembourg holds securities for its customers and facilitates the
clearance and settlement of securities transactions between its customers
through electronic book-entry changes in their accounts thereby eliminating the
need for physical movement of securities. Transactions may be settled by
Clearstream, Luxembourg in any of 36 currencies, including United States
Dollars. Clearstream, Luxembourg provides to its customers, among other things,
services for safekeeping, administration, clearance and settlement of
internationally traded securities and securities lending and borrowing.
Clearstream, Luxembourg also deals with domestic securities markets in over 30
countries through established depository and custodial relationships.
Clearstream, Luxembourg is registered as a bank in Luxembourg, and as such is
subject to regulation by the Commission De Surveillance Du Secteur Financier,
'CSSF', which supervises Luxembourg Banks. Clearstream, Luxembourg's customers
are world-wide financial institutions including underwriters, securities brokers
and dealers, banks, trust companies, clearing corporations and certain other
organizations and may include the underwriters of any series of transition
bonds. Clearstream, Luxembourg's U.S. customers are limited to securities
brokers and dealers and banks. Currently, Clearstream, Luxembourg has
approximately 2,000 customers located in over 80 countries, including all major
European countries, Canada and the United States. Indirect access to
Clearstream, Luxembourg is also available to other institutions that clear
through or maintain a custodial relationship with an account holder of
Clearstream, Luxembourg. Clearstream, Luxembourg has established an electronic
bridge with Euroclear Bank S.A./N.V. as the operator of the Euroclear System in
Brussels to facilitate settlement of trades between Clearstream, Luxembourg and
Euroclear.
Euroclear was created in 1968 to hold securities for participants of the
Euroclear System and to clear and settle transactions between Euroclear
participants through simultaneous electronic book-entry delivery against
payment, thereby eliminating the need for physical movement of securities and
any risk from lack of simultaneous transfers of securities and cash.
Transactions may now be settled in any of 40 currencies, including United States
dollars. The Euroclear System includes various other services, including
securities lending and borrowing, and interfaces with domestic markets in
several countries generally similar to the arrangements for cross-market
transfers with DTC described above. The Euroclear System is operated by
Euroclear Bank S.A./N.V. as the Euroclear operator. All operations are conducted
by the Euroclear operator, and all Euroclear securities clearance accounts and
Euroclear cash accounts are accounts with the Euroclear operator. The Euroclear
operator establishes policy for the Euroclear System on behalf of Euroclear
participants. Euroclear participants include banks (including central banks),
securities brokers and dealers and other professional financial intermediaries
and may include the underwriters of any series of transition bonds. Indirect
access to the Euroclear System is also available to other firms that clear
through or maintain a custodial relationship with a Euroclear participant,
either directly or indirectly.
Securities clearance accounts and cash accounts with the operator of the
Euroclear System are governed by the Terms and Conditions Governing Use of
Euroclear and the related Operating Procedures of Euroclear and applicable
Belgian law. These governing terms and conditions govern transfers of
securities and cash within the Euroclear System, withdrawals of securities and
cash from the Euroclear System and receipts of
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payments with respect to securities in the Euroclear System. All securities in
the Euroclear System are held on a fungible basis without attribution of
specific securities to specific securities clearance accounts. The operator of
the Euroclear System acts under these governing terms and conditions only on
behalf of Euroclear participants and has no record of or relationship with
persons holding through Euroclear participants.
Payments with respect to transition bonds held through Clearstream,
Luxembourg or Euroclear will be credited to the cash accounts of Clearstream,
Luxembourg participants or Euroclear participants in accordance with the
relevant systems' rules and procedures, to the extent received by its
depositary. These payments will be subject to tax reporting in accordance with
relevant United States tax laws and regulations. See "United States Taxation"
in this prospectus.
Clearstream, Luxembourg 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, Luxembourg participant or
Euroclear participant only in accordance with its relevant rules and procedures
and subject to its depositary's ability to effect such actions on its behalf
through DTC.
Although DTC, Clearstream, Luxembourg and Euroclear have agreed to the
foregoing procedures in order to facilitate transfers of transition bonds among
participants of DTC, Clearstream, Luxembourg and Euroclear, they are under no
obligation to perform or continue to perform such procedures and such
procedures may be discontinued at any time.
Definitive Transition Bonds
Each series or class of transition bonds offered by this prospectus will
be issued in fully registered, certificated form to transition bondholders or
their nominees, rather than to DTC or its nominee, only if:
(1) the issuer advises the bond trustee in writing that DTC is no longer
willing or able to discharge properly its responsibilities as
depository with respect to that series or 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,
transition bondholders representing at least a majority of the
outstanding principal amount of the transition bonds of all series
advise the bond trustee through DTC in writing that the continuation
of a book-entry system through DTC, or a successor to DTC, is no
longer in the transition bondholders' best interest.
Upon the occurrence of any event described in the immediately preceding
paragraph, DTC will be required to notify all affected transition bondholders
through participants of the availability of definitive transition bonds. Upon
surrender by DTC of the definitive bonds representing the applicable transition
bonds and receipt of instructions for re-registration, the bond trustee will
authenticate and deliver definitive transition bonds, and thereafter the bond
trustee will recognize the holders of these definitive transition bonds as
transition bondholders under the indenture.
Payments of principal of, and interest on, the applicable transition bonds
will thereafter be made by the bond trustee, as paying agent, in accordance
with the procedures set forth in the indenture directly to holders of
definitive transition bonds in whose names the definitive transition bonds were
registered at the close of business on the related record date. These payments
will be made by check mailed to the address of that holder as it appears on the
register maintained by the bond trustee. The final payment on any transition
bond, however, will be made only upon presentation and surrender of that
transition bond at the office or agency specified in the notice of final
payment to transition bondholders.
Definitive transition bonds will be transferable and exchangeable at the
offices of the transfer agent and registrar, which will initially be the bond
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
with that registration of transfer or exchange.
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WEIGHTED AVERAGE LIFE AND YIELD CONSIDERATIONS
The rate of principal payments on each series or class of transition bonds
offered by this prospectus, the aggregate amount of each interest payment on
each series or class of transition bonds and the actual final payment date of
each series or class of transition bonds will be dependent on the rate and
timing of receipt of collections of intangible transition charges. Accelerated
receipts of collections of intangible transition charges will generally not,
however, result in payment of principal on the transition bonds earlier than
the related expected final payment dates since receipts in excess of the
amounts necessary to amortize the transition bonds in accordance with the
applicable expected amortization schedule will be deposited in the
overcollateralization subaccount or reserve subaccount. However, delayed
receipts of collections of intangible transition charges 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 or acceleration of any class or series
of transition bonds in accordance with the terms of that series or class will
result in payment of principal earlier than the related expected final payment
dates.
The actual payments on each payment date for each series or class of
transition bonds and the weighted average life of that series or class will be
affected primarily by the rate of collections of intangible transition charges
and the timing of receipt of collections of intangible transition charges, as
well as amounts available in the reserve subaccount, the overcollateralization
subaccount and the capital subaccount. Because the intangible transition
charges will be calculated based on estimates of usage and revenue, the
aggregate amount of collections of intangible transition charges 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.
Although the intangible transition charges will be adjusted from time to
time based in part on the actual rate of collections of intangible transition
charges, no assurances are given that the servicer will be able to forecast
accurately actual electricity usage impacting billed revenue from which
intangible transition charges are allocated and the rate of delinquencies and
write-offs or implement adjustments to the intangible transition charges that
will cause collections of intangible transition charges to be received at any
particular rate. See "Risk Factors--Unusual Nature of Intangible Transition
Property" and "The Qualified Rate Orders and the Intangible Transition
Charges--The Intangible Transition Charges--The Intangible Transition Charge
Adjustment Process" in this prospectus.
If collections of intangible transition charges are received at a slower
rate than expected, transition bonds may be retired later than expected.
Because principal will only be paid at a rate not faster than that contemplated
in the expected amortization schedule for each series or class, except in the
event of a redemption or the acceleration of the final payment date of the
transition bonds after an event of default as specified in the indenture, the
transition bonds are not expected to be paid earlier than scheduled. A payment
on a date that is earlier than forecasted will result in a shorter weighted
average life, and a payment on a date that is later than forecasted will result
in a longer weighted average life. In addition, if a larger portion of the
delayed payments on the transition bonds is received in later years, this will
result in a longer weighted average life of the transition bonds.
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THE SALE AGREEMENT
The following summary describes all material terms and provisions of the
amended and restated sale agreement. The amended and restated sale agreement,
is referred to in this prospectus and all related prospectus supplements as the
sale agreement. The indenture provides that the sale agreement may be amended
with the consent of the bond trustee but without the consent of the transition
bondholders or the counterparty to any hedge or swap transaction, subject to
the conditions described under the caption "The Indenture--Modifications to the
Sale Agreement and the Master Servicing Agreement" below.
The form of the sale agreement has been filed as an exhibit to the
registration statement of which this prospectus forms a part. Please see that
form of sale agreement for a complete description of all its terms and
provisions.
Sale and Assignment of Intangible Transition Property
The seller may sell intangible transition property retained by the seller
to one or more entities other than the issuer to finance stranded costs other
than through the issuer. Neither these sales nor the terms of any transition
bonds issued to finance these sales will be subject to the prior review by or
consent of the bondholders of transition bonds issued under the indenture. All
collections of intangible transition charges received by the servicer will be
allocated among the issuer and any other issuers based on their respective
Percentages. Intangible transition property may not be sold to another issuer
if the sale would result in the credit rating of any outstanding series of
transition bonds being reduced or withdrawn. In addition, the purchaser of that
intangible transition property must become a party to the master servicing
agreement. See "The Master Servicing Agreement--Addition of Other Issuers" in
this prospectus.
The sale agreement and a related bill of sale were executed by the seller
and the issuer when the Series 1999-A Bonds were issued. At that time, the
seller sold and assigned to the issuer, without recourse, except as provided in
the sale agreement, the intangible transition property authorized by the First
QRO representing the irrevocable right to receive through intangible transition
charges amounts sufficient to recover qualified transition expenses related to
the Series 1999-A Bonds. The date that this intangible transition property,
referred to in this prospectus as the initial intangible transition property,
was sold by the seller is referred to in this prospectus as the initial
transfer date.
Under the sale agreement, the seller may sell additional intangible
transition property to the issuer, subject to the satisfaction of several
conditions including the execution of a subsequent bill of sale and the
delivery of notice of the transfer to the rating agencies and the issuer. The
sale of the intangible transition property authorized by the 2000 QRO was a
sale of additional intangible transition property and is referred to in this
prospectus as a sale of subsequent intangible transition property. The sale of
subsequent intangible transition property was effective on a date, to be
referred to as a subsequent transfer date, specified in the written notice
provided by the seller to the rating agencies and the issuer. On the series
issuance date for the first series of transition bonds authorized under the
2000 QRO, the seller sold to the issuer, without recourse, except as provided
in the sale agreement, the subsequent intangible transition property authorized
by the 2000 QRO which represented the irrevocable right to receive through
intangible transition charges amounts sufficient to recover qualified
transition expenses with respect to the related transition bonds.
In accordance with the Pennsylvania Competition Act, upon the execution
and delivery of the original sale agreement and the related bill of sale, the
sale of the initial intangible transition property was perfected as against all
third persons, including judicial lien creditors, and upon the execution of the
amended and restated sale agreement and a subsequent bill of sale and the
delivery of written notice to the rating agencies and the issuer, the sale of
subsequent intangible transition property described in that notice and bill of
sale was also perfected against all third persons, including judicial lien
creditors. No sale of intangible transition property will be made in connection
with the issuance of the transition bonds offered pursuant to this prospectus
because such issuances are to be refunding issuances. Rather, all the existing
collateral will secure all of the transition bonds outstanding, including the
remaining Series 1999-A Bonds, the Series 2000-A Bonds and any transition bonds
offered pursuant to this prospectus.
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The seller's accounting records and computer systems reflect the sales of
intangible transition property to the issuer. The seller treats the Series
1999-A Bonds and the Series 2000-A Bonds and will treat all transition bonds as
its debt for federal income tax purposes as long as the transition bonds are
outstanding.
Each sale of intangible transition property under the sale agreement is
subject to the satisfaction or waiver of each of the following conditions:
(1) on or prior to each transfer date, the seller shall have delivered
to the issuer a duly executed bill of sale identifying the intangible
transition property to be conveyed on that date, in the form required
by the sale agreement,
(2) as of the transfer date, the seller was not insolvent and will not
have been made insolvent by that sale, and the seller is not aware of
any pending insolvency with respect to itself,
(3) as of the transfer date, no breach by the seller of its
representations, warranties or covenants in the sale agreement shall
exist, and no servicer default under the master servicing agreement
shall have occurred and be continuing,
(4) as of the transfer date, the issuer shall have sufficient funds
available to pay the purchase price for the transferred intangible
transition property to be conveyed on that date under the sale
agreement, and all conditions to the issuance of one or more series
of transition bonds intended to provide those funds set forth in the
indenture shall have been satisfied or waived,
(5) on or prior to the transfer date, the seller shall have taken all
action required to transfer to the issuer ownership of the
transferred intangible transition property to be conveyed on that
date, free and clear of all liens other than liens created by the
issuer under the indenture, and the issuer shall have taken, or the
servicer shall have taken on behalf of the issuer, any action
required for the issuer to grant the bond trustee a first priority
perfected security interest in the collateral and maintain that
security interest as of that date,
(6) in the case of a sale of subsequent intangible transition property
only, the seller shall have provided the issuer and the rating
agencies with a timely written notice specifying the subsequent
transfer date for that subsequent intangible transition property, on
or prior to that subsequent transfer date,
(7) the seller shall have delivered to the rating agencies and the
issuer the opinion of counsel specified in the sale agreement and
other opinions of counsel to the issuer trustee and the bond trustee,
and
(8) the seller shall have delivered to the bond trustee and the issuer
an officers' certificate confirming the satisfaction of each
condition precedent specified above.
Representations and Warranties of the Seller
In the sale agreement, the seller makes representations and warranties to
the issuer and the bond trustee, as collateral assignee of the issuer, as of
each transfer date with respect to the intangible transition property being
sold on that date and as of each date on which the issuer issues any series of
transition bonds to the effect, that:
(1) all information provided by the seller to the issuer with respect to
the transferred intangible transition property is correct in all
material respects,
(2) the transfers and assignments contemplated by the sale agreement,
when completed, constitute outright sales of the intangible
transition property from the seller to the issuer, and the beneficial
interest in and title to the transferred intangible transition
property would not be part of the debtor's estate in the event of the
filing of a bankruptcy petition by or against the seller under any
bankruptcy law,
(3) the seller is the sole owner of the intangible transition property
being sold to the issuer on the relevant transfer date, the
transferred intangible transition property has been validly
transferred
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and sold to the issuer free and clear of all liens other than liens
created by the issuer under the indenture and all filings, including
filings with the Pennsylvania Public Utility Commission under the
Pennsylvania Competition Act, necessary in any jurisdiction to give the
issuer a valid ownership interest in transferred intangible transition
property free and clear of all liens of the seller or anyone claiming
through the seller and to give the issuer a first priority perfected
security interest in transferred intangible transition property have been
made, other than any of those filings--except for filings with the
Pennsylvania Public Utility Commission under the Pennsylvania Competition
Act and filings under the Uniform Commercial Code with the Secretary of
State of the State of Delaware--the absence of which would not have an
adverse impact on:
(x) the ability of the servicer to collect intangible transition
charges with respect to the transferred intangible transition
property, or
(y) the rights of the issuer with respect to the transferred
intangible transition property,
(4) each of the qualified rate orders has been issued by the Pennsylvania
Public Utility Commission in accordance with the Pennsylvania
Competition Act, each of the qualified rate orders and the process by
which each was issued comply with all applicable laws, rules and
regulations and the qualified rate orders are in full force and
effect,
(5) as of the date of issuance of any series of transition bonds issued
under this prospectus, those transition bonds are entitled to the
protections provided by the Pennsylvania Competition Act and,
accordingly, the provisions of each of the qualified rate orders
relating to the intangible transition property and intangible
transition charges are not revocable by the Pennsylvania Public
Utility Commission,
(6) (x) under the Pennsylvania Competition Act, neither the Commonwealth
of Pennsylvania nor the Pennsylvania Public Utility Commission
may limit, alter or in any way impair or reduce the value of
intangible transition property or intangible transition charges
approved by the qualified rate orders or any rights under the
qualified rate orders, except such a limitation or alteration may
be made by the Commonwealth of Pennsylvania or the Pennsylvania
Public Utility Commission if adequate compensation is made by law
for the full protection of the intangible transition charges and
of transition bondholders,
(y) under the Contract Clauses of the Constitutions of the
Commonwealth of Pennsylvania and the United States, neither the
Commonwealth of Pennsylvania nor the Pennsylvania Public Utility
Commission can take any action that substantially impairs the
rights of the transition bondholders unless that action is a
reasonable exercise of the Commonwealth of Pennsylvania's
sovereign powers and appropriate to further a legitimate public
purpose, and
(z) under the Takings Clauses of the Constitutions of the
Commonwealth of Pennsylvania and the United States, if that
action constitutes a permanent appropriation of the property
interest of transition bondholders in the intangible transition
property and deprives the transition bondholders of their
reasonable expectations arising from their investments in
transition bonds, just compensation, as determined by a court of
competent jurisdiction, must be provided to transition
bondholders,
(7) there is no order by any court providing for the revocation,
alteration, limitation or other impairment of the Pennsylvania
Competition Act, the First QRO, the 2000 QRO, the intangible
transition property or the intangible transition charges or any
rights arising under any of them or which seeks to enjoin the
performance of any obligations under the First QRO or the 2000 QRO,
(8) 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 intangible transition
property, except those that have been obtained or made,
78
(9) except as disclosed by the seller to the issuer, there are no
proceedings or investigations pending or, to the best of the
seller's knowledge, threatened before any court, federal or state
regulatory body, administrative agency or other governmental
instrumentality having jurisdiction over the seller or its
properties challenging the First QRO, the 2000 QRO or the
Pennsylvania Competition Act,
(10) no failure on any subsequent transfer date or any time after those
dates to satisfy any condition imposed by the Pennsylvania
Competition Act with respect to the recovery of stranded costs will
adversely affect the creation or sale under the sale agreement of
the intangible transition property or the right to collect
intangible transition charges,
(11) the assumptions used in calculating intangible transition charges
are reasonable and made in good faith,
(12) (x) intangible transition property, other than intangible transition
property, if any, retained by the seller, constitutes a current
property right,
(y) intangible transition property includes (A) the irrevocable
right of the issuer and any other issuers, to receive through
intangible transition charges an amount sufficient to recover
all of the seller's qualified transition expenses described in
the qualified rate orders in an amount equal to the aggregate
principal amount of transition bonds plus an amount sufficient
to provide for any credit enhancement, including the
overcollateralization amount relating to each series of
transition bonds, to fund any reserves and to pay interest,
premium, if any, servicing fees and other expenses relating to
the transition bonds, and (B) all right, title and interest of
the seller or its assignee applicable to the transition bonds in
the qualified rate orders and in all revenues, collections,
claims, payments, money, or proceeds of or arising from the
intangible transition charges applicable to the transition bonds
set forth in the qualified rate orders to the extent that in
accordance with the Pennsylvania Competition Act, the qualified
rate orders and the rates and charges authorized under the
qualified rate orders are declared to be irrevocable, and
(z) designated parts of the qualified rate orders, including those
covering the right to collect intangible transition charges,
have been declared to be irrevocable by the Pennsylvania Public
Utility Commission,
(13) the seller is a corporation duly organized and in good standing
under the laws of the Commonwealth of Pennsylvania, with corporate
power and authority to own its properties and conduct its business
as currently owned or conducted,
(14) the seller has the corporate power and authority to execute and
deliver the sale agreement and to carry out its terms; the seller
has full corporate power and authority to own the intangible
transition property and sell the subsequent intangible transition
property, on the applicable subsequent transfer date; the seller has
duly authorized that transfer to the issuer by all necessary
corporate action; and the execution, delivery and performance of the
sale agreement have been duly authorized by the seller by all
necessary corporate action,
(15) the sale agreement constitutes a legal, valid and binding obligation
of the seller, enforceable against the seller in accordance with its
terms, subject to customary exceptions relating to bankruptcy and
equitable principles,
(16) the consummation of the transactions contemplated by the sale
agreement and the fulfillment of the terms of that agreement do not
conflict with, result in any breach of any of the terms and
provisions of, nor constitute, with or without notice or lapse of
time, a default under, the articles of incorporation or by-laws of
the seller, or any indenture, agreement or other instrument to which
the seller is a party or by which it shall be bound; nor result in
the creation or imposition of any lien upon any of its
properties--other than the lien of seller's mortgage on seller's
monthly servicing fee under the master servicing agreement and any
rights under the sale agreement--under the terms of any indenture,
agreement or other instrument;
79
nor violate any law or any order, rule or regulation applicable to
the seller of any court or of any federal or state regulatory body,
administrative agency or other governmental instrumentality having
jurisdiction over the seller or its properties,
(17) except for continuation filings under the Uniform Commercial Code,
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 by the seller
of the sale agreement, the performance by the seller of the
transactions contemplated by the sale agreement or the fulfillment
by the seller of the terms of the sale agreement, except those which
have previously been obtained or made,
(18) there are no proceedings or investigations pending or, to the
seller's best knowledge, threatened, before any court, federal or
state regulatory body, administrative agency or other governmental
instrumentality having jurisdiction over the seller or its
properties:
(x) asserting the invalidity of the sale agreement, the master
servicing agreement, any bills of sale for intangible transition
property, the issuer's trust agreement, or the certificate of
trust filed with the State of Delaware to form the issuer,
collectively referred to in this prospectus as the basic
documents, or the transition bonds,
(y) seeking to prevent the issuance of transition bonds or the
consummation of the transactions contemplated by the basic
documents or the transition bonds, or
(z) except as disclosed by the seller to the issuer, seeking any
determination or ruling that could be reasonably expected to
materially and adversely affect the performance by the seller of
its obligations under, or the validity or enforceability of, the
basic documents or the transition bonds,
(19) after giving effect to the sale of any transferred intangible
transition property under the sale agreement, the seller:
(v) is solvent and expects to remain solvent,
(w) is adequately capitalized to conduct its business and affairs
considering its size and the nature of its business and intended
purposes,
(x) is not engaged nor does it expect to engage in a business for
which its remaining property represents unreasonably small
capital,
(y) believes that it will be able to pay its debts as they become
due and that such belief is reasonable,
(z) is able to pay its debts as they mature and does not intend to
incur, or believe that it will incur, indebtedness that it will
not be able to repay at its maturity,
(20) the seller is duly qualified to do business as a foreign corporation
in good standing, and has obtained all necessary licenses and
approvals, in all jurisdictions in which the ownership or lease of
property or the conduct of its business shall require those
qualifications, licenses or approvals, except where the failure to
so qualify would not be reasonably likely to have a material adverse
effect on the seller's business, operations, assets, revenues,
properties or prospects, and
(21) fixed amounts payable by the issuer to any swap counterparty under
any swap or hedge transaction with the issuer are properly
includable in intangible transition charges.
Subject to the conditions set forth below, the seller will be required to
pay liquidated damages in the following two circumstances:
o first, if the seller breaches any representation or warranty specified
in (2), (3), (4), (5), (7) or (12) above that has a material adverse
effect on the transition bondholders of any series, or
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o second, if the seller breaches any representation or warranty specified
in (6), (8), (9), (13), (14), (15) or (16) above and the full amount of
losses attributable to that breach are reasonably expected to be
incurred beyond a 90-day period immediately following that breach.
However, if the seller is obligated to pay liquidated damages for a
breach of one of the representations and warranties specified above and that
breach relates to one or more of the qualified rate orders, but not all of
the qualified rate orders, then:
o the amount of liquidated damages will include the then outstanding
principal amount of only the series of transition bonds issued in
connection with the affected qualified rate order or orders as of the
redemption date, plus accrued interest to the redemption date, and
o only the series of transition bonds issued in connection with the
affected qualified rate order or orders will be subject to mandatory
redemption.
In both circumstances, the seller will pay the liquidated damages to the
bond trustee, as assignee of the issuer, for deposit into the general
subaccount of the collection account for application to the relevant series
subaccounts.
In the first circumstance (i.e., a breach of the representations or
warranties in (2), (3), (4), (5), (7) or (12) above), the liquidated damages
will be payable 90 days after the breach if the seller had, immediately
prior to the breach, a long term debt rating of at least "A3" by Moody's and
"BBB" by Standard & Poor's and the equivalent of "BBB" by any other rating
agency and the seller enters into a binding agreement with the issuer to pay
any amounts necessary so that all interest payments which will become due on
the transition bonds during that 90-day period will be paid in full. If the
seller does not have those long term debt ratings, the seller may still pay
liquidated damages 90 days after that breach so long as it deposits an
amount in escrow with the bond trustee sufficient, taking into account
amounts on deposit in the collection account which will be available for
that purpose, to pay all interest payments which will become due on the
transition bonds during that 90-day period. This deposit must occur within
two business days after that breach. If the seller does not have those long
term debt ratings and does not make that deposit, liquidated damages will be
payable two business days after the date of the breach.
The seller will not be obligated to pay liquidated damages, however, for
a breach in such first circumstance if:
(i) within 90 days after the date of the occurrence of the breach, that
breach is cured or the seller takes remedial action such that there
is not and will not be a material adverse effect on the transition
bondholders as a result of that breach, and
(ii) either:
(x) if the seller had, immediately prior to the breach, the long
term debt ratings specified in the preceding paragraph, the
seller enters into the binding agreement also specified in the
preceding paragraph, or
(y) if the seller does not have those long term debt ratings, the
seller makes the escrow deposit specified in the preceding
paragraph.
In the event that within that 90-day period, the breach is cured or the
seller takes the remedial action described in subsection (i) above, any amounts
paid by the seller to the bond trustee, as assignee of the issuer, which have
not been distributed pursuant to the indenture will be returned to the seller
at the end of that 90-day period.
In the second circumstance (i.e., a breach of the representations or
warranties in (6), (8), (9), (13), (14), (15) or (16) above), liquidated damages
will be payable on the first monthly allocation date following the expiration of
the 90-day period which follows that breach.
The seller need not pay the liquidated damages in such second
circumstances, however, if the full amount of losses attributable to the breach
is reasonably expected not to exceed the de minimis loss amount. In that case,
on the monthly allocation date immediately following the initial loss
calculation date, the seller shall pay
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to the bond trustee, as assignee of the issuer, for deposit in the loss
subaccount of the collection account, the aggregate expected amount of those
losses for all monthly allocation dates on which losses are expected to be
incurred. Following this deposit, the seller's obligation to pay loss amounts
or liquidated damages, as applicable, as a result of those losses shall be
waived so long as actual losses incurred on any monthly allocation date do not
exceed the de minimis loss amount. If the aggregate amount of those losses
exceeds the amounts paid by the seller, on the next monthly allocation date,
the seller shall pay to the bond trustee, as assignee of the issuer, the amount
of that excess for that monthly allocation date and the expected amount of
excess for all subsequent monthly allocation dates.
The seller will also indemnify the issuer and the bond trustee and
specified related parties, against:
(1) all taxes, other than any taxes imposed on transition bondholders
solely as a result of their ownership of transition bonds, resulting
from the acquisition or holding of transferred intangible transition
property by the issuer or the issuance and sale by the issuer of
transition bonds, and
(2) losses, damages, payments or expenses which result from:
(x) the seller's willful misconduct, bad faith or gross negligence
in the performance of its duties under the sale agreement,
(y) the seller's reckless disregard of its obligations and duties
under the sale agreement, or
(z) the seller's breach of any representations or warranties in (1),
(6), (8), (9), (10), (11), (13), (14), (15), (16), (17), (18),
(19), (20) or (21) above.
The indemnity amounts will not exceed liquidated damages.
The obligation to pay liquidated damages and 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. If the seller receives written notice of a breach described
in (x), (y) or (z) above from the issuer or bond trustee, the seller will notify
the servicer of the occurrence of the breach so that the servicer may calculate
the amount of indemnification in accordance with the provisions of the master
servicing agreement. Amounts on deposit in the reserve subaccount, the
overcollateralization subaccount and the capital subaccount shall not be
available to satisfy any indemnification amounts owed by the seller under the
sale agreement.
In addition, if the seller breaches its representation and warranty in (21)
above, the seller will indemnify the applicable swap counterparty in accordance
with the provisions of the preceding paragraph and any indemnification payments
will be paid to the applicable swap counterparty as provided in "The Indenture--
Allocations and Payments" in this prospectus.
The seller will not indemnify the issuer or the bond trustee on behalf of
the transition bondholders as a result of the Commonwealth of Pennsylvania's
exercise of its power under the Pennsylvania Competition Act or a change in law
by legislative enactment or constitutional amendment or the Commonwealth's
limitation, alteration, impairment or reduction of the value of intangible
transition property or intangible transition charges after the issuance date of
any series of transition bonds in breach of the pledge of the Commonwealth under
the Pennsylvania Competition Act. See "Risk Factors--Unusual Nature of
Intangible Transition Property--Legal Challenges Could Adversely Affect
Transition Bondholders" and "--Changes in Law May Result in Losses to Transition
Bondholders" in this prospectus.
In addition to the foregoing representations and warranties, the seller has
also covenanted that it will deliver all collections of intangible transition
charges it receives or the proceeds of collections of intangible transition
charges, other than collections of intangible transition charges relating to
intangible transition property retained by the seller, to the servicer and will
promptly notify the bond trustee of any lien on any intangible transition
property other than the conveyances under the sale agreement or the indenture,
conveyances to other issuers, or in the case of intangible transition property
retained by the seller, the lien of seller's mortgage.
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The seller is also be obligated to take those 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:
(1) to protect the issuer and the transition bondholders from claims,
state actions or other actions or proceedings of third parties which,
if successfully pursued, would result in a breach of any of the
seller's representations and warranties in the sale agreement, or
(2) to block or overturn any attempts to cause a repeal of, modification
of or supplement to the Pennsylvania Competition Act, the qualified
rate orders or the rights of holders of intangible transition
property by legislative enactment or constitutional amendment that
would be adverse to the holders of intangible transition property.
In addition, the seller is required to execute and file those filings,
including filings with the Pennsylvania Public Utility Commission under the
Pennsylvania Competition Act, as may be required to fully preserve, maintain and
protect the interests of the issuer in the transferred intangible transition
property. Other than as described in the previous paragraph, the seller is not
under any obligation to appear in, prosecute or defend any legal action that is
not incidental to its obligations under the sale agreement and that in its
opinion may involve it in any expense or liability.
Matters Regarding the Seller
The sale agreement provides that certain persons which succeed to the major
part of the electric distribution business of the seller shall be the successor
to the seller if those persons execute an agreement of assumption to perform
every obligation of the seller under the sale agreement. The sale agreement
further requires that:
(1) immediately after giving effect to that transaction, no
representation or warranty made in the sale agreement shall have been
breached and no servicer default, and no event that, after notice or
lapse of time, or both, would become a servicer default shall have
occurred and be continuing,
(2) the rating agencies shall have received prior written notice of that
transaction, and
(3) specified officers' certificates and opinions of counsel shall have
been delivered to the issuer and the bond trustee.
Governing Law
The sale agreement is governed by and construed under the laws of the
Commonwealth of Pennsylvania.
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THE MASTER SERVICING AGREEMENT
The following summary describes all material terms and provisions of the
amended and restated master servicing agreement under which the servicer
services all transferred intangible transition property. The amended and
restated master servicing agreement is referred to in this prospectus and all
related prospectus supplements as the master servicing agreement.
The form of the master servicing agreement has been filed as an exhibit to
the registration statement of which this prospectus forms a part. Please see
that form of master servicing agreement for a complete description of all its
terms and provisions.
The master servicing agreement may be amended by the parties to that
agreement with the consent of the bond trustee under the indenture and all bond
trustees of any other issuer, if any. The indenture provides that the master
servicing agreement may be amended with the consent of the bond trustee but
without the consent of the transition bondholders or the counterparty to any
hedge or swap transaction, subject to the conditions described under the caption
"The Indenture--Modification to the Sale Agreement and the Master Servicing
Agreement" below.
Because the master servicing agreement relates to all serviced intangible
transition property (as opposed to just the serviced intangible transition
property owned by the issuer), the rights and obligations set forth in that
agreement will involve other bond trustees to the extent that the purchasers of
intangible transition property from the seller (other than the issuer) do not
select the same bond trustee as the issuer.
Servicing Procedures
General. The servicer manages, services and administers, and makes
collections in respect of, the serviced intangible transition property. The
servicer's duties include:
(1) calculating and billing the intangible transition charges and
collecting, from customers, electric generation suppliers and other
third parties, as applicable, all collections of intangible
transition charges,
(2) responding to inquiries by customers, electric generation suppliers
and other third parties, the Pennsylvania Public Utility Commission,
or any federal, local or other state governmental authority with
respect to the serviced intangible transition property and intangible
transition charges,
(3) accounting for collections of intangible transition charges,
investigating delinquencies, processing and depositing collections
and making periodic remittances, furnishing periodic reports to the
issuer, the bond trustee and the rating agencies,
(4) selling, as agent for the issuer and any other issuers, defaulted or
written-off accounts in accordance with the servicer's usual and
customary practices, and
(5) taking action in connection with adjustments to the intangible
transition charges as described below under "--Intangible Transition
Charge Adjustment Process."
See also "The Qualified Rate Orders and the Intangible Transition
Charges--Competitive Billing" in this prospectus.
The servicer will notify the issuer, the bond trustees and the rating
agencies in writing of any laws or Pennsylvania Public Utility Commission
regulations promulgated after the execution of the master servicing agreement
that have a material adverse effect on the servicer's ability to perform its
duties.
Any collections of intangible transition charges received by the servicer
are allocated between the issuer and any other issuers based on their respective
Percentages during the calendar month the charges are expected to be collected.
The servicer will institute any action or proceeding necessary to compel
performance by the Pennsylvania Public Utility Commission or the Commonwealth of
Pennsylvania of any of their obligations or duties under
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the Pennsylvania Competition Act or any of the qualified rate orders. The cost
of this kind of action reasonably allocated by the servicer to the serviced
intangible transition property, based on the ratio that property bears to all
intangible transition property, will be payable from collections of intangible
transition charges as an operating expense at the time those costs are
incurred.
Intangible Transition Charge Adjustment Process. The master servicing
agreement requires the servicer to seek, and the Pennsylvania Competition Act
and the First QRO and the 2000 QRO require the Pennsylvania Public Utility
Commission to approve, adjustments to the intangible transition charges charged
to each rate class within any customer category based on actual collections of
intangible transition charges and updated assumptions by the servicer as to
projected future sales from which intangible transition charges are allocated,
expected delinquencies and write-offs and future payments and expenses relating
to the intangible transition property and the transition bonds. The servicer is
required to file requests with the Pennsylvania Public Utility Commission for
those adjustments on May 14th of each year and on the additional date or dates
specified in the prospectus supplement for any series of transition bonds. In
accordance with the Pennsylvania Competition Act and the First QRO and the 2000
QRO, the Pennsylvania Public Utility Commission has 90 days to approve annual
adjustments. In addition, those qualified rate orders provide that adjustments
during the final calendar year of collections of intangible transition charges
for any series of transition bonds may be implemented quarterly or monthly.
The servicer agrees to calculate these adjustments to result in:
(1) the outstanding principal balance of each series equaling the amount
provided for in the expected amortization schedule for that series,
and
(2) the amount on deposit in the overcollateralization subaccount
equaling the calculated overcollateralization level,
by
(1) the next adjustment date or the payment date closest to the next
adjustment date, or
(2) the expected final payment date, as applicable, for each series,
taking into account any amounts on deposit in the reserve subaccount other than
specified customer prepayments.
The annual adjustments to the intangible transition charges are expected to
be implemented on or prior to August 12th of each year, and, for each series of
transition bonds, during the period commencing 12 months prior to the last
scheduled payment date for the payment of principal on the last class of each
series of transition bonds on the date or dates specified in the related
prospectus supplement. Those adjustments to the intangible transition charges
will cease for each series on the final adjustment date specified in the
prospectus supplement for that series.
Intangible Transition Charge Collections. The servicer is required to remit
all collections of intangible transition charges, from whatever source, and all
proceeds of other collateral, if any, of the issuer received by the servicer, to
the bond trustee and other issuers' bond trustees for deposit under the
indenture and the indentures to which any other issuers are party on each
remittance date. As long as PECO Energy or any successor to PECO Energy's
electric distribution business is the servicer, the remittance date is the last
day of each month (or if the last day is not a business day, the immediately
following business day) --provided that:
(1) no servicer default has occurred and is continuing under the master
servicing agreement, and
(2) (x) PECO Energy or its successor maintains a short-term rating of at
least "A-1" by Standard & Poor's, "P-1" by Moody's and, if rated
by Fitch, Inc., "F-2" by Fitch, Inc.--and for five business days
following a reduction in, any such rating, or
(y) the rating agency condition will have been satisfied for each of
the rating agencies other than Moody's, to which notice will be
sent, and any conditions or limitations imposed by those rating
agencies in connection with that satisfaction of the rating
agency condition are complied with.
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Otherwise, the remittance date is two business days after any collections of
intangible transition charges or proceeds of other collateral are received by
the servicer. The monthly period represented by each calendar month is referred
to in this prospectus as the collection period. Until collections of intangible
transition charges are remitted to the collection account, the servicer will not
segregate them from its general funds. Remittances of collections of intangible
transition charges will not include interest on these collections prior to the
remittance date or late fees from customers, which the servicer will be entitled
to retain.
Servicer Advances
If specified in the annex to the master servicing agreement relating to any
series of transition bonds, the servicer makes advances of interest or principal
on that series of transition bonds in the manner and to the extent specified in
that annex.
Servicing Compensation; Releases
The issuer and each other issuer, individually and not jointly, agrees to
pay the servicer the servicing fees for their respective series of transition
bonds. The servicing fee for each series, together with any portion of that
servicing fee that remains unpaid from prior payment dates, is paid solely to
the extent funds are available for payment as described under "The
Indenture--Allocations and Payments" in this prospectus. The servicing fee is
paid prior to the payment of or provision for any amounts of interest on and
principal of the transition bonds.
In the master servicing agreement, the servicer releases the issuer, every
other issuer, the bond trustee and all other bond trustees from any and all
claims, subject to exceptions relating to the serviced intangible transition
property or the servicer's servicing activities with respect to the serviced
intangible transition property.
Servicer Duties
In the master servicing agreement, the servicer has agreed that, in
servicing the serviced intangible transition property:
(1) except where the failure to comply with any of the following would
not adversely affect the issuer's, any other issuer's, the bond
trustee's or another issuer's bond trustee's interests in intangible
transition property,
(w) it will manage, service, administer and make collections in
respect of the serviced intangible transition property with
reasonable care and in material compliance with applicable law,
including all applicable Pennsylvania Public Utility Commission
regulations and guidelines, using the same degree of care and
diligence that the servicer exercises with respect to billing and
collection activities that the servicer conducts for itself and
others,
(x) it will follow standards, policies and procedures in performing
its duties as servicer that are customary in the servicer's
industry,
(y) it will use all reasonable efforts, consistent with its customary
servicing procedures, to enforce and maintain rights in respect
of the serviced intangible transition property, and
(z) it will calculate the intangible transition charges in compliance
with the Pennsylvania Competition Act, any applicable qualified
rate orders and any applicable tariffs,
(2) it will keep on file, in accordance with customary procedures, all
documents related to intangible transition property and will maintain
accurate and complete accounts, records and computer systems
pertaining to the intangible transition property, and
(3) it will use all reasonable efforts consistent with its customary
servicing procedures to collect all amounts owed in respect of
intangible transition property as they become due.
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The duties of the servicer set forth in the master servicing agreement are
qualified by any Pennsylvania Public Utility Commission regulations or orders in
effect at the time those duties are to be performed.
Servicer Representations and Warranties
In the master servicing agreement, the servicer makes representations and
warranties as of each date that the seller sells or otherwise transfers any
intangible transition property to the issuer and any other issuer and as of each
date on which the issuer or any other issuer issues any series of transition
bonds to the effect that:
(1) the servicer is a corporation duly organized and in good standing
under the laws of the state of its incorporation, with the corporate
power and authority to own its properties and conduct its business as
those properties are currently owned and that business is presently
conducted and to execute, deliver and carry out the terms of the
master servicing agreement and has the power, authority and legal
right to service the serviced intangible transition property,
(2) the servicer is duly qualified to do business as a foreign
corporation in good standing in all jurisdictions in which it is
required to do so,
(3) the servicer's execution, delivery and performance of the master
servicing agreement have been duly authorized by the servicer by all
necessary corporate action,
(4) the master servicing agreement constitutes a legal, valid and
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 master
servicing agreement does not conflict with or result in any breach of
the terms and provisions of or constitute a default under the
servicer's articles of incorporation or by-laws or any material
agreement to which the servicer is a party or bound, result in the
creation or imposition of any lien upon the servicer's properties
(other than the lien of seller's mortgage on its interest in the
master servicing agreement) or violate any law or any order, rule or
regulation applicable to the servicer or its properties,
(6) except for filings with the Pennsylvania Public Utility Commission
for revised intangible transition charges and Uniform Commercial Code
continuation filings, no governmental approvals, authorizations,
consents, orders, or other actions or filings are required for the
servicer to execute, deliver and perform its obligations under the
master servicing agreement, except those which have previously been
obtained or made, and
(7) no proceeding or investigation 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:
(x) except as disclosed by the servicer to the issuer and any other
issuers, seeking any determination or ruling that might
materially and adversely affect the performance by the servicer
of its obligations under, or the validity or enforceability
against the servicer of, the master servicing agreement, or
(y) relating to the servicer and which might adversely affect the
federal or state income tax attributes of the transition bonds.
Servicer Indemnification
Under the master servicing agreement, the servicer agrees to indemnify the
issuer, any other issuers, the bond trustee, on behalf of the transition
bondholders, any bond trustees of any other issuers on behalf of any holders of
transition bonds issued by other issuers, and certain other specified parties,
against any costs, expenses, losses, damages, claims and liabilities that may be
imposed upon, incurred by or asserted against that person as a result of:
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(1) the servicer's willful misfeasance, bad faith or gross negligence in
the performance of its duties or observance of its covenants under
the master servicing agreement or the servicer's reckless disregard
of its obligations and duties under the master servicing agreement,
and
(2) the servicer's breach of any of its representations or warranties
under the master servicing agreement.
Statements to Issuer and Bond Trustee
For each date on which adjustments to intangible transition charges are
calculated, the servicer provides to the issuer, the bond trustee and each of
the rating agencies a statement indicating, with respect to the serviced
intangible transition property:
(1) the outstanding principal balance for each series and the amount
provided in the expected amortization schedule for each series as of
the immediately preceding payment date,
(2) the amount on deposit in the overcollateralization subaccount and
the calculated overcollateralization level as of the immediately
preceding payment date,
(3) the sum of the amounts provided in the expected amortization
schedule for each outstanding series for each payment date prior to
the next adjustment date and the servicer's projection of the
aggregate principal amount of all series as of each payment date
prior to the next adjustment date,
(4) the calculated overcollateralization level for each payment date
prior to the next adjustment date and the servicer's projection of
the amount on deposit in the overcollateralization subaccount as of
each payment date prior to the next adjustment date, and
(5) the projected collections of intangible transition charges for the
payment date immediately before the next adjustment date through that
adjustment date.
On or before each remittance date, the servicer prepares and furnishes to
the issuer and the bond trustee a statement setting forth the aggregate amount
remitted or to be remitted by the servicer to the bond trustee for deposit on
that remittance date under the indenture.
Moreover, at least three business days before each monthly allocation date,
the servicer prepares and furnishes to the issuer, the bond trustee, each
counterparty to a hedge or swap transaction and the rating agencies a statement
setting forth the transfers and payments to be made on each monthly allocation
date and the relevant amounts. Further, at least three business days before each
payment date for each series of transition bonds, the servicer prepares and
furnishes to the issuer and the bond trustee a statement of the amounts to be
paid to the holders of transition bonds of each series. On the basis of this
information, the bond trustee will furnish to transition bondholders the payment
date report described under "The Indenture-- Reports to Transition Bondholders"
in this prospectus.
Evidence as to Compliance
The master servicing agreement provides that a firm of independent public
accountants will furnish to the issuer, any other issuers, the bond trustee and
any bond trustees of any other issuers and the rating agencies, on or before
March 31 of each year, beginning March 31, 2001, a statement as to compliance by
the servicer during the preceding calendar year, or the relevant portion of that
year, with standards relating to the servicing of intangible transition
property. This annual accountant's report will state that the firm has performed
specified procedures in connection with the servicer's compliance with the
servicing procedures of the master servicing agreement, identifying the results
of those procedures and including any exceptions noted. The annual accountant's
report will also indicate that the accounting firm providing that report is
independent of the servicer within the meaning of the Code of Professional
Ethics of the American Institute of Certified Public Accountants.
The master servicing agreement also provides for delivery to the issuer, any
other issuers, the bond trustee and any bond trustees of any other issuers and
the rating agencies, on or before March 31 of each
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year, a certificate signed by an officer of the servicer to the effect that the
servicer has fulfilled its obligations under the master servicing agreement for
the preceding calendar year, or the relevant portion of that year, or, if there
has been a default in the fulfillment of any such obligation, describing each
default. The servicer has agreed to give the issuer, any other issuers, the
bond trustee and any bond trustees of any other issuers and the rating agencies
notice of any servicer default under the master servicing agreement.
Matters Regarding the Servicer
Under the First QRO and the 2000 QRO, PECO Energy may assign its obligations
under the master servicing agreement to any electric distribution company, as
that term is defined in the Pennsylvania Competition Act, which succeeds to the
major part of PECO Energy's electric distribution business. Prior to any
assignment, the servicer shall provide written notice of that assignment to each
of the rating agencies. Under the master servicing agreement, a person which
succeeds to the major part of the electric distribution business of the
servicer, which person assumes the obligations of the servicer, will be the
successor of the servicer under the master servicing agreement. The master
servicing agreement further requires that:
(1) immediately after giving effect to that transaction, no
representation or warranty made by the servicer in the master
servicing agreement shall have been breached and no servicer default,
and no event which, after notice or lapse of time, or both, would
become a servicer default shall have occurred and be continuing,
(2) specified officers' certificates and opinions of counsel shall have
been delivered to the issuer, any other issuer, the bond trustee (and
any bond trustees of other issuers) and the rating agencies, and
(3) prior written notice shall have been received by the rating
agencies.
The master servicing agreement provides that, subject to the foregoing
provisions, PECO Energy shall not resign from the obligations and duties imposed
on it as servicer except upon a determination, communicated to the issuer, any
other issuer, the bond trustee (and any bond trustee of other issuers) and each
rating agency and evidenced by an opinion of counsel, that the performance of
its duties under the master servicing agreement are no longer permissible under
applicable law. No such resignation shall become effective until a successor
servicer has assumed the servicing obligations and duties of PECO Energy under
the master servicing agreement.
In addition, the First QRO and the 2000 QRO and the Pennsylvania Competition
Act require that the servicer's responsibility to collect the applicable
intangible transition charges and other obligations under the master servicing
agreement must be undertaken and performed by any other entity that provides
transmission and distribution service to the customers.
Except as expressly provided in the master servicing agreement, the servicer
will not be liable to the issuer or any other issuer for any action taken or for
refraining from taking any action under the master servicing agreement or for
errors in judgment, except to the extent that liability is imposed by reason of
the servicer's willful misfeasance, bad faith or gross negligence in the
performance of its duties or by reason of reckless disregard of obligations and
duties under the master servicing agreement.
Servicer Defaults
Servicer defaults under the master servicing agreement include:
(1) any failure by the servicer to deliver to the bond trustee, on
behalf of the issuer, or to the bond trustee of any other issuer (on
behalf of any other issuer) any required remittance that shall
continue unremedied for a period of three business days after written
notice of that failure is received by the servicer,
(2) any failure by the servicer duly to observe or perform in any
material respect any other covenant or agreement in the master
servicing agreement or any other basic document to which it is a
party, which failure materially and adversely affects intangible
transition property and which
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continues unremedied for 30 days after notice of that failure has
been given to the servicer, by the issuer, any other issuer or the
bond trustee (or any bond trustee of any other issuer) or after
discovery of that failure by an officer of the servicer, as the case
may be,
(3) any representation or warranty made by the servicer in the master
servicing agreement shall prove to have been incorrect when made,
which has a material adverse effect on any of the transition
bondholders, the issuer or any other issuer and which continues
unremedied for 60 days after notice of that failure has been given to
the servicer by the issuer or any other issuer or the bond trustee
(or any bond trustee of any other issuer), and
(4) certain events of insolvency, readjustment of debt, marshaling of
assets and liabilities, or similar proceedings of the servicer and
actions by the servicer indicating its insolvency, reorganization
under bankruptcy proceedings or inability to pay its obligations.
The bond trustee, together with the bond trustees of any other issuers, if
any, may waive any default by the servicer, except a default in making any
required remittances to the bond trustee or any bond trustee of any other
issuer, if any.
Rights Upon Servicer Default
As long as a servicer default under the master servicing agreement remains
unremedied, the bond trustee, or, if transition bonds issued by other issuers
are outstanding, one or more of the bond trustees of these other issuers and the
bond trustee representing a majority of the outstanding principal amount of all
transition bonds issued, may terminate all the rights and obligations of the
servicer under the master servicing agreement, other than the servicer's
indemnification obligation and obligation to continue performing its functions
as servicer until a successor servicer is appointed. After that, a successor
servicer appointed by the bond trustee (or if there is more than one, the bond
trustees representing a majority of all the transition bondholders of the issuer
and any other issuers) will succeed to all the responsibilities, duties and
liabilities of the servicer under the master servicing agreement and will be
entitled to similar compensation arrangements. Upon a servicer default based
upon the commencement of a case by or against the servicer under the Bankruptcy
Code or similar laws, the bond trustees and the issuers may be prevented from
effecting a transfer of servicing. See "Risk Factors--Bankruptcy; Creditors'
Rights" in this prospectus.
The bond trustee and any bond trustee of any other issuer may make
arrangements for compensation to be paid to any successor servicer, which in no
event may be greater than the servicing compensation paid to the servicer under
the master servicing agreement.
In addition, upon a servicer default because of a failure to make required
remittances, the issuer, any other issuers or their respective pledgees or
transferees will have the right to apply to the Pennsylvania Public Utility
Commission for sequestration and payment of revenues arising from the intangible
transition property.
Successor Servicer
In accordance with the provisions of the First QRO and the 2000 QRO and
under the provisions of the master servicing agreement, if for any reason a
third party assumes or succeeds to the role of the servicer under the master
servicing agreement, the master servicing agreement requires the servicer to
cooperate with the issuer, any other issuers, the bond trustee, any bond
trustees of any other issuers and the successor servicer in terminating the
servicer's rights and responsibilities under the master servicing agreement,
including the transfer to the successor servicer of all documentation pertaining
to intangible transition property and all cash amounts then held by the servicer
for remittance or subsequently acquired by the servicer. The master servicing
agreement provides that the servicer will be liable for all reasonable costs and
expenses incurred in transferring servicing responsibilities to the successor
servicer. A successor servicer may not resign unless it is prohibited from
serving by law. The predecessor servicer is obligated, on an ongoing basis, to
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 master servicing agreement.
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Addition of Other Issuers
Upon the execution and delivery by the servicer and a purchaser of
intangible transition property from the seller of a supplement to the master
servicing agreement entered into for the purpose of adding that purchaser as a
party, that purchaser will become a party to the master servicing agreement, as
if originally named in it. The addition of any such purchaser will not require
the consent of the issuer or any other issuer under the master servicing
agreement.
Governing Law
The master servicing agreement is governed by and construed under the laws
of the Commonwealth of Pennsylvania.
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THE INDENTURE
The following summary describes all material terms and provisions of the
indenture under which transition bonds offered by this prospectus will be
issued.
The indenture, including the form of the supplemental indenture under
which subsequent series of transition bonds will be issued, has been filed as
an exhibit to the registration statement of which this prospectus forms a part.
Please see the indenture, including the form of supplemental indenture, for a
complete description of all terms and provisions of the indenture and
supplemental indenture, portions of which are summarized in this section.
Security
To secure the payment of principal of and premium, if any, and interest
on, and any other amounts owing in respect of, the transition bonds issued
under the indenture, the issuer grants to the bond 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 serviced intangible transition property sold by the seller to the
issuer from time to time under the sale agreement and all proceeds of
that property,
(2) the sale agreement (except for specific provisions related to the
indemnification of the issuer),
(3) all bills of sale delivered by the seller under the sale agreement,
(4) the master servicing agreement (except for specific provisions
related to the indemnification of the issuer),
(5) the collection account and all amounts on deposit in that account
from time to time,
(6) any hedge or swap agreements to which the issuer is a party,
(7) all other property of whatever kind owned from time to time by the
issuer, including all accounts, accounts receivable and chattel
paper,
(8) all present and future claims, demands, causes and choses in action
in respect of any or all of the foregoing, and
(9) all payments on or under, and all proceeds of every kind and nature
whatsoever in respect of, any or all of the foregoing, provided that
cash or other property distributed to the issuer from the collection
account in accordance with the provisions of the indenture will not
be subject to the lien of the indenture.
See "--Allocation and Payments" below.
Issuance in Series or Classes
Transition bonds may be issued under the indenture from time to time to
finance the purchase by the issuer of intangible transition property (a
"financing issuance") or to pay the cost of refunding, through redemption or
payment, all or part of the transition bonds issued under the indenture (a
"refunding issuance"). Any series of transition bonds may include one or more
classes which differ as to interest rate and amortization of principal. The
terms of all transition bonds of the same series are to be identical, unless
that series is comprised of 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 and, if applicable, classes of that series,
will be set forth in the related prospectus supplement for that series. The
terms of that series and any classes of that series are not subject to prior
review by, or consent of, the transition bondholders of any previously issued
series. See "Risk Factors--The Transition Bonds--Issuance of Additional Series
May Adversely Affect Outstanding Transition Bonds" and "The Transition Bonds"
in this prospectus. Under the indenture, the bond trustee will authenticate and
deliver an additional series of transition bonds only upon receipt by the bond
trustee of, among other things, a certificate of the issuer that no event of
default has
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occurred and is continuing, an opinion of counsel to the issuer and evidence of
satisfaction that the issuance of that additional series of transition bonds
will not result in any rating agency reducing or withdrawing its then-current
rating of any outstanding series or class of transition bonds. The notification
in writing by each rating agency to PECO Energy, the servicer, the bond trustee
and the issuer that any action will not result in such a reduction or
withdrawal is referred to in this prospectus as the rating agency condition.
In addition, in connection with the issuance of each new series, the
issuer will have to provide a certificate or opinion of a firm of independent
certified public accountants of recognized national reputation to the effect
that, based on the assumptions used in calculating the initial intangible
transition charges with respect to the transferred intangible transition
property or, if applicable, the most recent revised intangible transition
charges with respect to the transferred intangible transition property, after
giving effect to the issuance of that series and the application of the
proceeds from that issuance, those intangible transition charges will be
sufficient to pay all fees and expenses of servicing the transition bonds,
interest on each series of transition bonds when due and principal of each
series of transition bonds in accordance with the expected amortization
schedule for that series and to fund the calculated overcollateralization level
and to replenish the capital subaccount as of each payment date.
If the issuance is a refunding issuance, the amount of money necessary to
pay premiums, if any, and the outstanding principal balance of and interest on
the transition bonds being refunded shall be deposited into a separate account
with the bond trustee.
Collection Account
Under the indenture, the issuer has established one or more segregated
trust accounts in the bond trustee's name, which collectively comprise the
collection account, with the bond trustee or at another eligible institution.
The collection account is divided into subaccounts, which need not be separate
bank accounts:
o the general subaccount,
o one or more series subaccounts,
o one or more class subaccounts,
o the overcollateralization subaccount,
o the capital subaccount,
o the reserve subaccount, and
o if required by the indenture, one or more defeasance subaccounts, a loss
subaccount and an interest deposit subaccount.
All amounts in the collection account not allocated to any other
subaccount will be allocated to the general subaccount. Unless the context
indicates otherwise, references in this prospectus to the collection account
include all of the subaccounts contained in the collection account. The
indenture requires that all monies deposited from time to time in the
collection account, all deposits in the collection account under the indenture
and all investments made in eligible investments with those monies be held by
the bond trustee in the collection account as part of the collateral.
"Eligible institution" means:
(1) the corporate trust department of the bond trustee, or
(2) a depository institution organized under the laws of the United
States of America or any state (or any domestic branch of a foreign
bank), which
(x) has (A) a long-term unsecured debt rating of "AAA" by Standard &
Poor's and "Aa3" by Moody's and (B) a short-term rating of "A-1+"
by Standard & Poor's and "P-1" by Moody's, or any other
long-term, short-term or certificate of deposit rating acceptable
to the rating agencies and
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(y) whose deposits are insured by the Federal Deposit Insurance
Corporation.
So long as no default or event of default under the indenture has occurred and
is continuing, all funds in the collection account may be invested in any of
the following eligible investments:
(1) direct obligations of, or obligations fully and unconditionally
guaranteed as to timely payment by, the United States of America,
(2) demand deposits, time deposits, certificates of deposit, or bankers'
acceptances of eligible institutions which are described in clause
(x) of the preceding paragraph,
(3) commercial paper, other than commercial paper issued by PECO Energy
or the servicer or any of their affiliates, having, at the time of
investment or contractual commitment to invest, a rating in the
highest rating category from each rating agency,
(4) money market funds which have the highest rating from each rating
agency,
(5) repurchase obligations with respect to any security that is a direct
obligation of, or fully guaranteed by, the United States of America
or agencies or instrumentalities of the United States of America the
obligations of which are backed by the full faith and credit of the
United States of America, entered into with an eligible institution,
or
(6) any other investment permitted by each rating agency
in each case which mature no later than the business day prior to the next
payment date for the applicable series or class.
The bond trustee has access to the collection account for the purpose of
making deposits in and withdrawals from the collection account in accordance
with the indenture. Eligible investments, however, may not be sold, liquidated
or disposed of at a loss prior to their respective maturities.
On each remittance date, the servicer remits all collections of intangible
transition charges, from whatever source, allocated to the issuer under the
master servicing agreement and all proceeds of other collateral received by the
servicer to the bond trustee under the indenture for deposit pursuant to the
indenture. In addition, amounts remitted by any counterparty to any hedge or
swap transaction are required to be deposited in the class subaccount for the
class to which these amounts relate. Further, the bond trustee will deposit all
indemnity amounts remitted to the bond trustee by the seller or servicer or
otherwise received by the bond trustee and liquidated damages remitted by the
seller into the general subaccount of the collection account. Loss amounts
remitted by the seller to the bond trustee will be deposited in the loss
subaccount, and interest deposit amounts remitted by the seller to the bond
trustee shall be deposited in the interest deposit subaccount. The seller will
be required in specified circumstances to pay loss amounts and interest deposit
amounts in connection with certain breaches under the sale agreement. Payments
of interest deposit amounts, if any, must be made under a binding agreement
with the issuer entered into by the seller or an escrow agreement pursuant to
the sale agreement.
General Subaccount. Collections of intangible transition charges remitted
by the servicer to the bond trustee, as well as any liquidated damages and
indemnity amounts remitted by PECO Energy or the servicer or otherwise received
by the bond trustee or the issuer, are deposited in the general subaccount. On
each monthly allocation date, the bond trustee draws on available amounts in
the general subaccount to make the allocations and payments described in
"--Allocations and Payments" below.
Reserve Subaccount. Collections of intangible transition charges available
on any monthly allocation date above that necessary to pay:
(1) amounts payable in respect of fees and expenses of the bond trustee
and the servicer and other fees and expenses,
(2) amounts distributable to series subaccounts for principal of and
interest paid on the next payment date and to class subaccounts, if
any, for principal of and interest paid on the day before the next
payment date, and
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(3) amounts allocable to the overcollateralization subaccount
are deposited in the reserve subaccount.
Amounts in the reserve subaccount are invested in eligible investments,
and the issuer is entitled to earnings on those amounts, subject to the
limitations described under "--Allocations and Payments" below. On each monthly
allocation date, the bond trustee draws on amounts in the reserve subaccount,
if any, to the extent amounts available in the general subaccount, the interest
deposit subaccount (with respect to the payment of Interest) and the loss
subaccount (for payments contemplated by (1) through (8) in "--Allocations and
Payments" below) are insufficient to:
(1) make scheduled distributions to the series subaccounts, and
(2) pay expenses of the issuer, the bond trustee, the servicer and other
specified fees and expenses.
See "--Allocations and Payments" below.
Overcollateralization Subaccount. Collections of intangible transition
charges to the extent available, as described under "--Allocation and Payments"
below, are deposited in the overcollateralization subaccount on each monthly
allocation date up to the monthly allocated overcollateralization balances for
all series. Amounts in the overcollateralization subaccount are invested in
eligible investments, and the issuer is entitled to earnings on those amounts,
subject to the limitations described under "--Allocations and Payments" below.
On each monthly allocation date, the bond trustee draws on amounts in the
overcollateralization subaccount to the extent amounts on deposit in the
general subaccount, the interest deposit subaccount (with respect to the
payment of Interest), the loss subaccount (for payments contemplated by (1)
through (8) in "--Allocations and Payments" below) and the reserve subaccount
are insufficient to:
(1) make scheduled distributions to the series subaccounts, and
(2) pay expenses of the issuer, the bond trustee and the servicer and
other specified fees and expenses.
If any series or class of transition bonds is redeemed or any series is
fully amortized as of any monthly allocation date, the amount by which amounts
on deposit in the overcollateralization subaccount exceed the monthly allocated
overcollateralization balances for all series will be released to the issuer,
free of the lien of the indenture.
Capital Subaccount. In connection with the issuance of the Series 1999-A
Bonds and the Series 2000-A Bonds, PECO Energy made capital contributions to
the issuer and the issuer paid such amounts to the bond trustee for deposit
into the capital subaccount which is invested in eligible investments. The
issuer is entitled to earnings on those amounts subject to the limitations
described under "--Allocations and Payments" below. The bond trustee will draw
on amounts in the capital subaccount, if any, to the extent amounts available
in the general subaccount, the interest deposit subaccount (with respect to the
payment of Interest), the loss subaccount (for payments contemplated by (1)
through (8) in "--Allocations and Payments" below), the reserve subaccount and
the overcollateralization subaccount are insufficient to:
(1) make scheduled distributions to the series subaccounts, and
(2) pay expenses of the issuer, the bond trustee and the servicer and
other specified fees and expenses.
If any series or class of transition bonds is redeemed or any series is
fully amortized as of any monthly allocation date, the amount by which amounts
on deposit in the capital subaccount exceed the required capital amount will be
released to the issuer, free of the lien of the indenture.
Series Subaccount. Upon the issuance of each series of transition bonds, a
series subaccount must be established with respect to that series. On each
monthly allocation date, deposits are made to each series subaccount as
described under "--Allocations and Payments" below. On each payment date, the
bond trustee withdraws funds from the series subaccount to make payments on the
related series of transition bonds including any payments due to any provider
of any applicable swap agreement, as specified in the related
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prospectus supplement. Any balance remaining in any series subaccount on any
payment date after payments have been made to transition bondholders of the
related series and to any applicable swap counterparty will be transferred to
the general subaccount for allocation on the next monthly allocation date.
Class Subaccount. If specified in the related prospectus supplement, a
class subaccount will be established with respect to the designated class or
classes. Payments to and from any counterparty to a hedge or swap transaction
are made from or deposited to, as applicable, the applicable class subaccounts
as described in the related prospectus supplement. On each payment date,
amounts on deposit in the class subaccount are applied to make payments with
respect to the related class, as specified in the related prospectus
supplement. Any balance remaining in any class subaccount on any payment date
after payments have been made to transition bondholders of the related class is
transferred to the general subaccount for allocation on the next monthly
allocation date.
Loss Subaccount. Prior to the deposit of any loss amounts in the
collection account, the issuer shall establish the loss subaccount, and any
loss amounts remitted by the seller to the bond trustee shall be deposited in
that subaccount. The bond trustee will draw on amounts in the loss subaccount,
if any, as described under "--Allocations and Payments" below.
Interest Deposit Subaccount. Prior to the deposit of any interest deposit
amounts in the collection account, the issuer shall establish the interest
deposit subaccount and any interest deposit amounts remitted by the seller to
the bond trustee shall be deposited in that subaccount. The bond trustee will
draw on amounts in the interest deposit subaccount, if any, as described under
"--Allocations and Payments" below.
Defeasance Subaccount. In the event funds are remitted to the bond trustee
in connection with the exercise of the legal defeasance option or the covenant
defeasance option, the issuer shall establish a defeasance subaccount for each
series to be defeased into which those funds shall be deposited. All amounts in
the defeasance subaccount will be applied by the bond trustee, in accordance
with the provisions of the transition bonds and the indenture, to the payment
to the holders of the particular transition bonds for the payment or redemption
of which those amounts were deposited with the bond trustee, including all sums
due for principal, premium, if any, and interest. The indenture requires that
no funds in the defeasance subaccount for any series of transition bonds be
invested in eligible investments or otherwise. U.S. government obligations
deposited by the issuer with the bond trustee for a covenant or legal
defeasance may, however, remain as such. See "--Legal Defeasance and Covenant
Defeasance" below.
Allocations and Payments
On each monthly allocation date, the bond trustee applies all amounts on
deposit in the general subaccount of the collection account and any investment
earnings on those amounts in the following priority:
(1) all amounts owed to the bond trustee (including legal fees and
expenses, indemnity amounts and loss amounts) are paid to the bond
trustee,
(2) all amounts owed to the issuer trustee (including legal fees and
expenses, indemnity amounts and loss amounts) are paid to the issuer
trustee,
(3) the monthly servicing fee and all unpaid monthly servicing fees from
prior monthly allocation dates are paid to the servicer,
(4) so long as no event of default has occurred and is continuing or
would be caused by that payment, all operating expenses other than
those referred to in clauses (1), (2) and (3) above are paid to the
persons entitled to that payment, provided that the amount paid on
any monthly allocation date pursuant to this clause (4) may not
exceed $12,500 in the aggregate for all series,
(5) an amount equal to Interest--which means in the case of any series or
class for which a hedge or swap agreement is in effect and the issuer
receives payments due from the applicable swap counterparty, the
regular fixed payment to the counterparty without regard to netting,
but not payment for the breakage or termination of the related hedge
or swap agreement--on each series of transition bonds for that
monthly allocation date are transferred on a Pro Rata basis to the
series subaccount for that series,
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(6) an amount equal to any Principal of any series or class of the
transition bonds payable as a result of acceleration triggered by an
event of default, any Principal of any series or class of transition
bonds payable on a series termination date or class termination date,
as applicable, that will occur prior to the next monthly allocation
date and any Principal of and premium on a series or class of
transition bonds payable on a redemption date that will occur prior
to the next monthly allocation date are transferred on a Pro Rata
basis to the series subaccount for that series, taking into account
amounts on deposit in that subaccount in respect of Principal as of
that monthly allocation date,
(7) an amount equal to Principal with respect to each series of
transition bonds for that monthly allocation date not provided for
pursuant to clause (6) above is transferred on a Pro Rata basis to
the series subaccount for that series,
(8) all unpaid operating expenses, indemnity amounts and loss amounts are
paid to the persons entitled to that payment,
(9) overcollateralization with respect to all series of transition bonds
for that monthly allocation date is transferred to the
overcollateralization subaccount,
(10) any termination or breakage amounts owed to any counterparty to a
swap or hedge transaction under any hedge or swap agreement is paid
to that counterparty,
(11) provided that no event of default has occurred and is continuing, an
amount up to the amount of net investment earnings on amounts in the
general subaccount of the collection account since the previous
monthly allocation date will be released to the issuer free from the
lien of the indenture,
(12) the balance, if any, is allocated to the reserve subaccount, and
(13) following repayment of all outstanding series of transition bonds,
the balance, if any, will be released to the issuer free from the
lien of the indenture.
The payment of the bond trustee's and issuer trustee's indemnities specified in
items (1) and (2) above will be made only if:
o those indemnity payments would not result in an event of default under
the indenture and
o the issuer provides notice to the rating agencies of the indemnity amount
and, if reasonably required by the rating agencies, an officer's
certificate and other documentation that certifies that those payments
are not reasonably expected to result in an event of default.
If on any monthly allocation date funds on deposit in the general
subaccount are insufficient to make the allocations contemplated by clauses (1)
through (9) above, the bond trustee will draw from amounts on deposit in the
following subaccounts up to the amount of that shortfall, in order to make
those payments and transfers:
o first, from the interest deposit subaccount, with respect to the payments
or transfers contemplated by clause (5) above only,
o then from the loss subaccount, with respect to the payments or transfers
contemplated by clauses (1) through (8) above only, and
o thereafter from the reserve subaccount, then from the
overcollateralization subaccount and finally from the capital subaccount.
On each payment date for any series, the amounts on deposit in the series
subaccount for that series remaining after the allocations, if any, described
in the next paragraph (other than net income or other gain thereon, which, so
long as no event of default has occurred and is continuing, are released to the
issuer free of the lien of the indenture) are applied as follows (in the
priority indicated):
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o interest due and payable on the transition bonds of that series, together
with any overdue interest and, to the extent permitted by law, interest
thereon, are paid to the holders of transition bonds of that series (in
the case of classes with hedge or swap transactions, only amounts on
deposit in the applicable class subaccount will be so applied),
o the balance, if any, up to the principal amount of the transition bonds
of that series that is scheduled to be paid by that payment date in
accordance with the expected amortization schedule for that series or,
with respect to any series of transition bonds payable as a result of
acceleration triggered by an event of default or to be redeemed pursuant
to the indenture, the outstanding principal amount of that series and
premium, if any, is paid to the holders of transition bonds of that
series, and
o the balance, if any, is transferred to the general subaccount for
allocation on the next monthly allocation date.
On the business day preceding each payment date, the amounts on deposit in
any series subaccount for classes of that series for which one or more class
subaccounts have been established (other than net income or other gain, which,
so long as no event of default has occurred and is continuing, is released to
the issuer free of the lien of the indenture) is allocated to the applicable
class subaccount in accordance with the related prospectus supplement, up to
the gross amount, if any, owed to the applicable counterparty to any hedge or
swap transaction entered into by the issuer in respect of regular fixed
payments in accordance with the related hedge or swap agreement but not
breakage or termination of that agreement. On that day, net amounts owed to
that counterparty are paid from, or net amounts paid by that counterparty are
deposited into, that class subaccount. See "The Indenture--Allocations and
Payments" in this prospectus.
All payments to transition bondholders of a series pursuant to the first
and second bullet points of the second preceding paragraph are made pro rata
based on the respective principal amounts of transition bonds of that series
held by those transition bondholders, unless, in the case of a series comprised
of two or more classes, the applicable supplemental indenture for that series
specifies otherwise. All payments to transition bondholders of a class pursuant
to the first or second bullet points of the second preceding paragraph are made
pro rata based on the respective principal amounts of transition bonds of that
class held by those transition bondholders. If on any payment date a
counterparty to any hedge or swap transaction entered into by the issuer has
failed to fully pay amounts due to the issuer under the applicable hedge or
swap agreement related to a class of transition bonds for which a class
subaccount has been established, after all series subaccounts have accessed the
reserve subaccount as provided for in the indenture, the bond trustee will
transfer to such class subaccount amounts on deposit in the reserve subaccount
up to the amount of any applicable shortfall; provided, that the bond trustee
shall have received from the servicer a certificate to the effect that, based
on the servicer's best assumptions and projections at the time, those amounts
will not be needed to cover shortfalls on any other class or series on any
monthly allocation date prior to the next adjustment date.
Liquidated Damages
Liquidated damages will be deposited into the general subaccount of the
collection account as provided in the sale agreement and applied on the date
specified by the issuer for the redemption of the transition bonds as a result
of receiving such liquidated damages (referred to in this prospectus as the
liquidated damages redemption date), which date may not be more than five days
after receipt of liquidated damages by the issuer, in the following amounts and
priority:
(1) all amounts owed by the issuer to the bond trustee and the issuer
trustee (including legal fees and expenses) shall be paid to the bond
trustee and the issuer trustee, respectively,
(2) the monthly servicing fee or the portion of the servicing fee accrued
from and including the immediately preceding monthly allocation date
to but excluding the liquidated damages redemption date and all
unpaid monthly servicing fees from prior monthly allocation dates
shall be paid to the servicer,
(3) all other operating expenses shall be paid to the persons entitled to
that payment; provided that if PECO Energy is the servicer, all
amounts owed to the servicer will be paid per clause (5) below; if
PECO Energy is not the servicer, then payments to the servicer under
this clause may not exceed $150,000,
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(4) the redemption price and accrued interest for each series of
transition bonds shall be paid to transition bondholders of that
series and any amounts due to any counterparty under a hedge or swap
agreement shall be paid to that counterparty; provided, that if the
issuer receives liquidated damages from the seller as a result of a
breach of a representation and warranty which relates to one or more
of the qualified rate orders, but not all of the qualified rate
orders:
(x) only the series of transition bonds issued in connection with the
affected qualified rate order or orders will be redeemed, and
(y) only the redemption price and accrued interest for the series of
transition bonds being redeemed shall be paid to transition
bondholders of that series and only amounts due to any
counterparty under a hedge or swap agreement entered into in
connection with the issuance of the affected transition bonds
shall be paid to that counterparty,
(5) any other operating expenses owed to the servicer not yet paid shall
be paid to the servicer, and
(6) the balance, if any, will be released to the issuer, free from the
lien of the indenture; provided that if the issuer receives
liquidated damages from the seller as a result of a breach of a
representation and warranty which relates to one of the qualified
rate orders, but not both qualified rate orders, then the balance, if
any, will remain in the general subaccount of the collection account.
Reports to Transition Bondholders
With respect to each series of transition bonds, on or prior to each
payment date, the bond trustee delivers a statement prepared by the bond
trustee to each transition bondholder of that series which includes, to the
extent applicable, the following information, and any other information so
specified in the applicable supplemental indenture, as to the transition bonds
of that series with respect to that payment date or the period since the
previous payment date, as applicable:
(1) the amount paid to those transition bondholders in respect of
principal,
(2) the amount paid to those transition bondholders in respect of
interest,
(3) the outstanding principal balance and the amount provided in the
expected amortization schedule, in each case for that series and as
of the most recent payment date,
(4) the amount on deposit in the overcollateralization subaccount and the
calculated overcollateralization level, in each case for all series
and as of the most recent payment date,
(5) the amount on deposit in the capital subaccount as of the most recent
payment date and the required capital amount, and
(6) the amount, if any, on deposit in the reserve subaccount as of the
most recent payment date.
The bond trustee's responsibility to provide this information is limited to the
availability, timeliness and accuracy of the information provided to it by the
servicer, as required by the master servicing agreement.
Modification of Indenture
Without the consent of any of the holders of the outstanding transition
bonds or the counterparty to any hedge or swap transaction but with prior
notice to the rating agencies, the issuer and the bond trustee may execute a
supplemental indenture for any of the following purposes:
(1) to correct or amplify the description of the collateral, or to better
assure, convey and confirm unto the bond trustee the collateral, or
to subject to the lien of the indenture additional property,
(2) to evidence the succession, in compliance with the applicable
provisions of the indenture, of another person to the issuer, and the
assumption by any such successor of the covenants of the issuer
contained in the indenture and in the transition bonds,
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(3) to add to the covenants of the issuer, for the benefit of the holders
of the transition bonds, or to surrender any right or power in the
indenture conferred upon the issuer,
(4) to convey, transfer, assign, mortgage or pledge any property to or
with the bond trustee,
(5) to cure any ambiguity, to correct or supplement any provision of the
indenture or in any supplemental indenture which may be inconsistent
with any other provision of the indenture or in any supplemental
indenture or to make any other provisions with respect to matters or
questions arising under the indenture or in any supplemental
indenture, provided, however, that:
(x) that action will not, as evidenced by an opinion of counsel,
adversely affect in any material respect the interests of any
transition bondholder or any swap or hedge counterparty; and
(y) the rating agency condition (other than with respect to Moody's)
will have been satisfied with respect to that action and notice
of that action will have been provided to Moody's,
(6) to evidence and provide for the acceptance of the appointment under
the indenture by a successor bond trustee with respect to the
transition bonds and to add to or change any of the provisions of the
indenture as shall be necessary to facilitate the administration of
the trusts under the indenture by more than one bond trustee, under
requirements of the indenture,
(7) to modify, eliminate or add to the provisions of the indenture to the
extent as shall be necessary to effect the qualification of the
indenture under the Trust Indenture Act of 1939, as amended, or under
any similar federal statute hereafter enacted and to add to the
indenture the other provisions as may be expressly required by the
Trust Indenture Act of 1939, as amended,
(8) to set forth the terms of any series that has not previously been
authorized by a supplemental indenture, or
(9) to provide for any hedge or swap transactions with respect to any
floating rate series or class of transition bonds or any series or
class specific credit enhancement, provided, however, that:
(x) that action will not, as evidenced by an opinion of counsel,
adversely affect in any material respect the interests of any
transition bondholder, and
(y) the rating agency condition (other than with respect to Moody's)
will have been satisfied with respect thereto and notice of that
action will have been provided to Moody's.
Additionally, without the consent of any of the transition bondholders or
the counterparty to any hedge or swap transaction, the issuer and bond trustee
may execute a supplemental indenture to add provisions to, or change in any
manner or eliminate any provisions of, the indenture, or to modify in any
manner the rights of the transition bondholders under the indenture; provided,
however:
(1) that action will not, as evidenced by an opinion of counsel,
adversely affect in any material respect the interests of any
transition bondholder, and
(2) that the rating agency condition will have been satisfied with
respect to that action.
The issuer and the bond 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
outstanding amount of the transition bonds of each series or class to be
affected, execute a supplemental indenture for the purpose of adding any
provisions to, or changing in any manner or eliminating any of the provisions
of, the indenture or modifying in any manner the rights of the transition
bondholders under the indenture; provided, however, that no such supplemental
indenture will, without the consent of the holder of each outstanding
transition bond of each series or class affected by that supplemental
indenture:
(1) change the date of payment of any installment of principal of or
premium, if any, or interest on any transition bond, or reduce the
principal amount of any transition bond, the interest rate specified
on any transition bond or the redemption price or the premium, if
any, with respect to any transition bond, change the provisions of
the indenture and the related applicable supplemental indenture
relating to the application of collections on, or the proceeds of the
sale
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of, the collateral to payment of principal of or premium, if any, or
interest on the transition bonds, or change any place of payment
where, or the coin or currency in which, any transition bond or any
interest on a transition bond is payable,
(2) impair the right to institute suit for the enforcement of provisions
of the indenture regarding payment,
(3) reduce the percentage of the aggregate amount of the outstanding
transition bonds, or of a series or class of transition bonds, the
consent of the holders of which is required for any supplemental
indenture, or the consent of the holders of which is required for any
waiver of compliance with specified provisions of the indenture or of
specified defaults under the indenture and their consequences
provided for in the indenture,
(4) reduce the percentage of the outstanding amount of the transition
bonds required to direct the bond trustee to direct the issuer to
sell or liquidate the collateral,
(5) modify any provision of the section of the indenture relating to the
consent of transition bondholders with respect to supplemental
indentures, except to increase any percentage specified in the
indenture or to provide that specified additional provisions of the
indenture or the basic documents cannot be modified or waived without
the consent of the holder of each outstanding transition bond
affected by that modification or waiver,
(6) modify any of the provisions of the indenture in a manner as to
affect the amount of any payment of interest, principal or premium,
if any, payable on any transition bond on any payment date or to
affect the rights of transition bondholders to the benefit of any
provisions for the mandatory redemption of the transition bonds
contained in the indenture or change the redemption dates, expected
amortization schedule or series termination dates or class
termination dates of any transition bonds,
(7) decrease the required capital amount or the overcollateralization
amount with respect to any series, or the calculated
overcollateralization level with respect to any payment date,
(8) modify or alter the provisions of the indenture regarding the voting
of transition bonds held by the issuer, the seller, an affiliate of
either of them or any obligor on the transition bonds,
(9) decrease the percentage of the aggregate principal amount of the
transition bonds required to amend the sections of the indenture
which specify the applicable percentage of the aggregate principal
amount of the transition bonds necessary to amend the indenture or
related agreements, or
(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 permitted or
contemplated in the indenture, terminate the lien of the indenture
on any property at any time subject to the lien of the indenture or
deprive the holder of any transition bond of the security provided
by the lien of the indenture.
Enforcement of the Sale Agreement and the Master Servicing Agreement
The indenture provides that the issuer will take all lawful actions to
enforce its rights under the sale agreement and the master servicing agreement
and to compel or secure the performance and observance by PECO Energy and the
servicer of each of their respective obligations to the issuer under or in
connection with the sale agreement and the master servicing agreement. 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 and the master servicing
agreement. However, if the issuer or servicer proposes to amend, modify, waive,
supplement, terminate or surrender, or agree to any amendment, modification,
supplement, termination, waiver or surrender of, the process for adjusting
intangible transition charges, the issuer will notify the bond trustee and each
counterparty to a hedge or swap transaction,
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the bond trustee will notify transition bondholders of that proposal and the
bond trustee will consent to that amendment, modification, supplement,
termination, waiver or surrender only with the consent of the holder of each
outstanding transition bond of each series or class affected by that amendment,
modification, supplement, termination, waiver or surrender.
If an event of default occurs and is continuing, the bond trustee may,
and, at the direction of the holders of a majority of the outstanding principal
amount of the transition bonds of all series will, exercise all rights,
remedies, powers, privileges and claims of the issuer against the seller or the
servicer under or in connection with the sale agreement and the master
servicing agreement, and any right of the issuer to take that action will be
suspended.
Modifications to the Sale Agreement and the Master Servicing Agreement
With the consent of the bond trustee, the sale agreement and the master
servicing agreement may be amended at any time and from time to time, without
the consent of the transition bondholders or the counterparty to any hedge or
swap transaction, provided that the amendment will not, as evidenced by an
officer's certificate, adversely affect the interest of any transition
bondholder or the counterparty to any hedge or swap transaction (except, in the
case of a swap counterparty, with the consent of that counterparty, which
consent may not be unreasonably withheld) or change the adjustment process for
the intangible transition charges. The bond trustee will not withhold its
consent to that amendment so long as the rating agency condition is satisfied
in connection with that amendment by each rating agency other than Moody's--and
the issuer will have furnished Moody's with written notice of that amendment
prior to the effectiveness of that amendment--and the foregoing officer's
certificate is provided.
No amendment, modification, waiver, supplement, termination or surrender
of the terms of the sale agreement or master servicing agreement, or waiver of
timely performance or observance by the seller or the servicer under the sale
agreement or master servicing agreement, respectively, in each case in a way as
would adversely affect the interests of transition bondholders or the
counterparty to any hedge or swap transaction (except, in the case of a swap
counterparty, with the consent of that counterparty, which consent may not be
unreasonably withheld) is permitted nor will the bond trustee consent to any of
these amendments, modifications, waivers, supplements, terminations or
surrenders. If the issuer, the seller or the servicer otherwise proposes to
amend, modify, waive, supplement, terminate or surrender, or agree to any
amendment, modification, waiver, supplement, termination or surrender of the
terms of the sale agreement or the master servicing agreement or waive timely
performance or observance by the seller or the servicer under the sale
agreement or master servicing agreement, respectively, the issuer will notify
the bond trustee and any applicable hedge or swap counterparty and the bond
trustee will notify the transition bondholders. The bond trustee will consent
to any of these amendments, modifications, waivers, supplements, terminations
or surrenders only with the consent of the holders of at least a majority of
the outstanding principal amount of the transition bonds of each series or
class.
The issuer will furnish to each of the rating agencies:
(1) prior to the execution of any such amendment or consent, written
notification of the substance of that amendment or consent, and
(2) promptly after the execution of any such amendment or consent, a copy
of that amendment or consent.
Events of Default; Rights Upon Event of Default
An event of default is defined in the indenture as being:
(1) a default for five days or more in the payment of any interest on any
transition bond,
(2) a default in the payment of the then unpaid principal of any
transition bond of any series on the series termination date for that
series or, if applicable, any class on the class termination date for
that class,
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(3) a default in the payment of the redemption price for any transition
bond on the redemption date for that transition bond,
(4) a default in the observance or performance of any covenant or
agreement of the issuer made in the indenture, other than those
specifically dealt with in (1), (2) or (3) above, and the
continuation of any of these defaults for a period of thirty days
after notice of that default is given to the issuer by the bond
trustee or to the issuer and the bond trustee by the holders of at
least 25% in outstanding principal amount of the transition bonds of
any series, and
(5) events of bankruptcy, insolvency, receivership or liquidation of the
issuer.
If an event of default occurs and is continuing and is known to the bond
trustee, the bond trustee is required to mail notice of the event of default to
each holder of transition bonds within 90 days after the event of default
occurs. The bond trustee may withhold notice of an event of default if:
(1) the event of default does not relate to a default in payment of
principal or interest on any transition bond and
(2) a committee of responsible officers of the bond trustee determines in
good faith that it is in the interest of the holders of transition
bonds to withhold notice.
If an event of default occurs and is continuing, the bond trustee or
holders of a majority in principal amount of the transition bonds of all series
then outstanding may declare the principal of all series of the transition
bonds to be immediately due and payable. That declaration may, under specified
circumstances, be rescinded by the holders of a majority in principal amount of
all series of the transition bonds then outstanding.
If the transition bonds of all series have been declared to be due and
payable following an event of default, the bond trustee may, in its discretion,
either sell the collateral or elect to have the issuer maintain possession of
the collateral and continue to apply distributions on the collateral as if
there had been no declaration of acceleration. The bond trustee is prohibited
from selling the collateral following an event of default other than a default
in the payment of any principal, a default for five days or more in the payment
of any interest on any transition bond of any series or a default on the
payment of the price set for redemption in the related supplemental indenture
for any transition bond on the date for redemption for that transition bond set
in the related supplemental indenture unless:
(1) the holders of 100% of the principal amount of all series of
transition bonds consent to that sale,
(2) the proceeds of that sale or liquidation are sufficient to pay in
full the principal of and premium, if any, and accrued interest on
the outstanding transition bonds, or
(3) the bond 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 bond trustee obtains the consent of the holders of
66 2/3% of the aggregate outstanding amount of the transition bonds
of each series.
Subject to the provisions of the indenture relating to the duties of the
bond trustee, in case an event of default occurs and is continuing, the bond
trustee will be under no obligation to exercise any of the rights or powers
under the indenture at the request or direction of any of the holders of
transition bonds of any series if the bond trustee reasonably believes it will
not be adequately indemnified against the costs, expenses and liabilities which
might be incurred by it in complying with that request. Subject to those
provisions for indemnification and limitations contained in the indenture, the
holders of a majority in principal amount of the outstanding transition bonds
of all series will have the right to direct the time, method and place of
conducting any proceeding or any remedy available to the bond trustee; provided
that:
(1) that direction shall not conflict with any rule of law or with the
indenture,
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(2) subject to provisions in the indenture, any direction to the bond
trustee to sell or liquidate the collateral shall be by the holders
of 100% of the principal amount of all series of transition bonds
then outstanding, and
(3) the bond trustee may take any other action deemed proper by the bond
trustee that is not inconsistent with that direction.
If the bond trustee elects to retain the collateral in accordance with the
indenture, then any direction to the bond trustee by holders of transition
bonds representing less than 100% of the outstanding amount of the transition
bonds of all series to sell or liquidate the collateral will be of no force and
effect.
The holders of a majority in principal amount of the transition bonds of
all series then outstanding may, in some cases, waive any default with respect
to the transition bonds, except a default in the payment of principal of or
premium, if any, or interest 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 series and classes affected.
No transition bondholder of any series will have the right to institute
any proceeding, judicial or otherwise, or to avail itself of the remedies
provided in Section 2812(d)(3)(v) of the Pennsylvania Competition Act, with
respect to the indenture, unless:
(1) that holder previously has given to the bond trustee written notice
of a continuing event of default,
(2) the holders of not less than 25% in principal amount of the
outstanding transition bonds of each series have made written request
of the bond trustee to institute that proceeding in its own name as
bond trustee,
(3) that holder or holders have offered the bond trustee security or
indemnity reasonably satisfactory to the bond trustee against the
costs, expenses, and liabilities to be incurred in complying with
that request,
(4) the bond trustee for 60 days after its receipt of that notice,
request and offer has failed to institute that proceeding, and
(5) no direction inconsistent with that written request has been given to
the bond trustee during that 60-day period by the holders of a
majority in principal amount of the outstanding transition bonds of
all series.
Covenants
The issuer will keep in effect its existence, rights and franchises as a
statutory business trust under Delaware law, 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 that consolidation or merger or to
whom substantially all of those assets are sold is organized under
the laws of the United States or any state of the United States and
shall expressly assume by a supplemental indenture the due and
punctual payment of the principal of and premium, if any, and
interest on all transition bonds and the performance of the issuer's
obligations under the indenture,
(2) that entity expressly assumes all obligations and succeeds to all
rights of the issuer under the sale agreement and the master
servicing agreement under an assignment and assumption agreement
executed and delivered to the bond trustee,
(3) no default or event of default will have occurred and be continuing
immediately after giving effect to that merger, consolidation or
sale,
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(4) the rating agency condition will have been satisfied with respect to
that consolidation or merger or sale by each rating agency, except
Moody's--and the issuer shall have furnished Moody's with prior
written notice of that consolidation, merger or sale,
(5) the issuer has received an opinion of counsel to the effect that the
consolidation, merger or sale of assets would have no material
adverse tax consequence to the issuer or any transition bondholder,
that consolidation, merger or sale complies with the indenture and
all conditions precedent in the indenture relating to that
transaction and will result in the bond trustee maintaining a
continuing valid first priority security interest in the collateral,
(6) none of the intangible transition property, the qualified rate orders
or PECO Energy's, the seller's, the servicer's or the issuer's rights
under the Pennsylvania Competition Act or the qualified rate orders
are impaired by that consolidation, merger or sale, and
(7) any action that is necessary to maintain the lien and security
interest created by the indenture will have been taken.
The issuer will from time to time execute and deliver those documents,
make all filings and take any other action necessary or advisable to maintain
and preserve the lien and security interest--and priority of that lien and
security interest--of the indenture and will not permit the validity of the
indenture to be impaired, the lien to be amended, hypothecated, subordinated or
terminated or discharged, or any person to be released from any covenants or
obligations except as expressly permitted by the indenture, nor will it permit
any lien, charge, excise, 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 of the collateral or any interest in the collateral or
the proceeds of the collateral, or permit the lien of the indenture not to
constitute a continuing valid first priority security interest in the
collateral.
The issuer may not:
(1) except as expressly permitted by the indenture, the sale agreement or
the master servicing agreement sell, transfer, exchange or otherwise
dispose of any of the collateral unless directed to do so by the bond
trustee in accordance with the indenture, or
(2) claim any credit on, or make any deduction from the principal or
premium, if any, or interest payable in respect of, the transition
bonds, other than amounts properly withheld under the Internal
Revenue Code, or assert any claim against any present or former
transition bondholder because of the payment of taxes levied or
assessed upon the issuer.
The issuer may not engage in any business other than purchasing and owning
the transferred intangible transition property, issuing transition bonds from
time to time, pledging its interest in the collateral to the bond trustee under
the indenture in order to secure the transition bonds, and performing
activities that are necessary, suitable or convenient to accomplish the
foregoing or are incidental to the foregoing.
The issuer may not issue, incur, assume or guarantee any indebtedness
except for the transition bonds 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 do so--any stock,
obligations, assets or securities of, or any other interest in, or make any
capital contribution to, any other person, except that the issuer may invest
funds in eligible investments. The issuer may not, except as contemplated by
the indenture, the sale agreement, the master servicing agreement and related
documents, including the trust agreement, make any loan or advance or credit to
any person. The issuer will not make any expenditure--by long-term or operating
lease or otherwise--for capital assets--either realty or personalty--other than
intangible transition property purchased from the seller under, and in
accordance with, the sale agreement. The issuer may not make any payments,
distributions or dividends to any holder of beneficial interests in the issuer
in respect of that beneficial interest, except in accordance with the
indenture.
The issuer is also obligated to duly and punctually perform all of its
obligations pursuant to any hedge or swap agreement to which it is a party.
Further, the issuer may not terminate or amend any hedge or swap
105
agreement to which it is a party while any related floating rate transition
bonds of a class remain outstanding except pursuant to the terms of that hedge
or swap agreement and then only with the consent of holders of two-thirds of
the aggregate outstanding amount of the related class.
The issuer will cause the servicer to deliver to the bond trustee the
annual accountant's report, compliance certificates and monthly reports
regarding distributions and other statements required by the master servicing
agreement. See "The Master Servicing Agreement" in this prospectus.
List of Transition Bondholders
Any transition bondholder or group of transition bondholders--each of whom
has owned a transition bond for at least six months--may, by written request to
the bond trustee, obtain access to the list of all transition bondholders
maintained by the bond trustee for the purpose of communicating with other
transition bondholders with respect to their rights under the indenture or the
transition bonds. The bond trustee may elect not to afford the 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 is required to file annually with the bond trustee a written
statement as to the fulfillment of its obligations under the indenture. In
addition, the issuer must furnish to the bond trustee an opinion of counsel
concerning filings made by the issuer on an annual basis and before the
effectiveness of any amendment to the sale agreement or the master servicing
agreement.
Bond Trustee's Annual Report
If required by the Trust Indenture Act of 1939, as amended, the bond
trustee will be required to mail each year to all transition bondholders a
brief report relating to, among other things, its eligibility and qualification
to continue as the bond 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 bond trustee's individual
capacity, the property and funds physically held by the bond trustee as such,
any additional issue of a series of transition bonds not previously reported
and any action taken by it that materially affects the transition bonds of any
series and that has not been previously reported.
Satisfaction and Discharge of Indenture
The indenture will be discharged with respect to the transition bonds of
any series upon the delivery to the bond trustee for cancellation of all the
transition bonds of that series or upon the expected final payment date or the
date of redemption for that series, provided that the issuer has deposited
funds sufficient for the payment in full of all of the transition bonds of that
series with the bond trustee, in trust for such purpose, and the issuer has
delivered to the bond trustee the officer's certificate and opinion of counsel
specified in the indenture. Those deposited funds will be segregated and held
apart solely for paying those transition bonds, and those transition bonds
shall not be entitled to any amounts on deposit in the collection account.
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 ("legal defeasance option"), or
(2) its obligations to comply with specified covenants, including some of
the covenants described under "The Indenture--Covenants" (the
"covenant defeasance option").
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.
106
If the issuer exercises the legal defeasance option with respect to any
series, that series shall be entitled to payment only from the funds or other
obligations set aside under the indenture for payment of that amount on the
expected final payment date or redemption date for that series as described
below. That series of transition bonds shall not be subject to payment through
redemption or acceleration prior to that expected final payment date or
redemption date, as applicable. If the issuer exercises the covenant defeasance
option with respect to any series, the transition bonds of that 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.
The issuer may exercise the legal defeasance option or the covenant
defeasance option with respect to any series of transition bonds only if:
(1) the issuer irrevocably deposits or causes to be deposited in trust
with the bond trustee cash or U.S. Government Obligations for the
payment of principal of and premium, if any, and interest on those
transition bonds to the expected final payment date or redemption
date for those transition bonds, as applicable, that deposit to be
made in the defeasance subaccount for that series of transition
bonds,
(2) the issuer delivers to the bond trustee a certificate from a
nationally recognized firm of independent accountants expressing its
opinion that the payments of principal and interest when due and
without reinvestment will provide cash at the times and in the
amounts as will be sufficient to pay in respect of the transition
bonds of that series:
(x) principal in accordance with the expected amortization schedule
for that series, or if that series is to be redeemed, the
redemption price of that redemption on the redemption date for
that series, and
(y) 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 that deposit
and after giving effect to that deposit,
(5) in the case of the legal defeasance option, the issuer delivers to
the bond trustee an opinion of counsel stating that:
(x) the issuer has received from, or there has been published by, the
Internal Revenue Service a ruling, or
(y) since the date of execution of the indenture, there has been a
change in the applicable federal income tax law,
in either case to the effect that, and the opinion shall confirm 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 that
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 that legal defeasance had not occurred,
(6) in the case of the covenant defeasance option, the issuer delivers to
the bond 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 that 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 that covenant defeasance
had not occurred, and
(7) the issuer delivers to the bond 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.
107
There will be no other conditions to the exercise by the issuer of its
legal defeasance option or its covenant defeasance option.
The Bond Trustee
The Bank of New York is the bond trustee under the indenture. The bond
trustee may resign at any time by so notifying the issuer. The holders of a
majority in principal amount of the transition bonds of all series then
outstanding may remove the bond trustee by so notifying the issuer and the bond
trustee and may appoint a successor bond trustee. The issuer will remove the
bond trustee if the bond trustee ceases to be eligible to continue as such
under the indenture, the bond trustee becomes insolvent, a receiver or other
public officer takes charge of the bond trustee or its property or the bond
trustee becomes incapable of acting. If the bond trustee resigns or is removed
or a vacancy exists in the office of bond trustee for any reason, the issuer
will be obligated to appoint a successor bond trustee eligible under the
indenture. Any resignation or removal of the bond trustee and appointment of a
successor bond trustee will not become effective until acceptance of the
appointment by a successor bond trustee. The issuer is required under the
indenture to provide the rating agencies with written notice of any successor
bond trustee.
The bond trustee will at all times satisfy the requirements of the Trust
Indenture Act of 1939, as amended, and have a combined capital and surplus of
at least $50 million and a long term debt rating of "Baa3" or better by Moody's
and "BBB-" by Fitch, Inc. (if currently rated by Fitch, Inc.). If the bond
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 shall without any further action
be the successor bond trustee.
Governing Law
The indenture is governed by and construed under the laws of the
Commonwealth of Pennsylvania.
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UNITED STATES TAXATION
General
This section summarizes the material U.S. tax consequences to holders of
transition bonds offered by this prospectus. However, the discussion is limited
in the following ways:
o The discussion only covers you if you buy your transition bonds in the
initial offering.
o The discussion only covers you if you hold your transition bonds as a
capital asset--that is, for investment purposes--and if you do not have a
special tax status.
o The discussion does not cover tax consequences that depend upon your
particular situation in addition to your ownership of transition bonds.
We suggest that you consult your tax advisor about the consequences of
holding transition bonds in your particular situation.
o The discussion is based on current law. Changes in the law may change the
tax treatment of the transition bonds, possibly on a retroactive basis.
o The discussion generally does not cover state, local or foreign law.
o The discussion does not apply to you if you are a non-U.S. holder of
transition bonds and if you (a) own 10% or more of the voting stock of
PECO Energy, (b) are a "controlled foreign corporation" with respect to
PECO Energy, or (c) are a bank making a loan in the ordinary course of
its business.
Taxation of the Issuer and of the Transition Bonds
In connection with the issuance of the First QRO and the Series 1999-A
Bonds, PECO Energy obtained a ruling from the Internal Revenue Service
regarding certain aspects of those transactions. It was the opinion of our
special tax counsel, Ballard Spahr Andrews & Ingersoll, LLP, at the time of the
issuance of the Series 2000-A Bonds that the principles set forth in the
Internal Revenue Service ruling were equally applicable to the 2000 QRO and the
related series of transition bonds. A ruling has been requested from the
Internal Revenue Service regarding certain aspects of the issuance of the
transition bonds offered by this prospectus. As a consequence, our special tax
counsel is of the opinion that:
(1) the issuer will be treated as a division of PECO Energy and will not
be treated as a separate taxable entity,
(2) the issuance of the transition bonds offered by this prospectus will
not result in the recognition of gross income by PECO Energy or by
the issuer, and
(3) the transition bonds offered by this prospectus will be classified
as obligations of PECO Energy for U.S. federal income tax purposes.
We have relied on the ruling and the opinion in preparing this section.
IF YOU ARE CONSIDERING BUYING TRANSITION BONDS OFFERED BY THIS PROSPECTUS,
WE SUGGEST THAT YOU CONSULT YOUR TAX ADVISORS ABOUT THE FEDERAL, STATE, LOCAL
AND FOREIGN TAX CONSEQUENCES OF HOLDING THE TRANSITION BONDS IN YOUR PARTICULAR
SITUATION.
109
Tax Consequences to U.S. Holders
This section applies to you if you are a "U.S. Holder." A "U.S. Holder"
is:
o an individual U.S. citizen or resident alien,
o a corporation, or entity taxable as a corporation, that was created under
U.S. law (federal or state), or
o an estate or trust whose worldwide income is subject to U.S. federal
income tax.
If a partnership or other similar pass-through entity holds transition bonds,
the tax treatment of a partner or other member will generally depend upon the
status of the member and upon the activities of the pass-through entity. We
suggest that partners of partnerships or similar entities holding transition
bonds consult their tax advisors.
Interest
o If you are a cash method taxpayer, including most individual holders, you
must report interest paid on the transition bonds offered by this
prospectus in your income when you receive it.
o If you are an accrual method taxpayer, you must report interest paid on
the transition bonds offered by this prospectus in your income as it
accrues.
Sale or Retirement of Transition Bonds
On a sale or retirement of a transition bond:
o You will have taxable gain or loss equal to the difference between the
amount received by you and your tax basis in the transition bond. Your
tax basis in the transition bond is your cost, subject to adjustments.
o Your gain or loss will generally be capital gain or loss, and will be
long-term capital gain or loss if you held the transition bond for more
than one year. Generally, with minor exceptions, taxpayers are not
permitted to offset capital losses against ordinary income.
o If you sell the transition bond between interest payment dates, a portion
of the amount you receive reflects interest that has accrued on the
transition bond but has not yet been paid by the sale date. That amount
is treated as ordinary interest income and not as sale proceeds.
Information Reporting and Backup Withholding
Under the tax rules concerning information reporting to the Internal
Revenue Service:
o Assuming you hold your transition bonds through a broker or other
securities intermediary, the intermediary is required to provide
information to the Internal Revenue Service concerning interest and
retirement proceeds we pay on transition bonds you own, unless an
exemption applies.
o Similarly, unless an exemption applies, you must provide the intermediary
with your Taxpayer Identification Number for its use in reporting
information to the Internal Revenue Service. If you are an individual,
this is your social security number. You are also required to comply with
other Internal Revenue Service requirements concerning information
reporting.
o If you are subject to these requirements but do not comply, the
intermediary is required to withhold 31% of all amounts payable to you on
the transition bonds, including principal payments. If the intermediary
withholds payments, you may use the withheld amount as a credit against
your federal income tax liability.
o All U.S. Holders that are individuals are subject to these requirements.
Some U.S. Holders, including all corporations, tax-exempt organizations
and individual retirement accounts, are exempt from these requirements.
110
Tax Consequences to Non-U.S. Holders
This section applies to you if you are a "Non-U.S. Holder." A "Non-U.S.
Holder" is:
o an individual that is a nonresident alien,
o a corporation organized or created under non-U.S. law, or
o an estate or trust that is not taxable in the U.S. on its worldwide
income.
Withholding Taxes
Generally, payments of principal and interest on the transition bonds will
not be subject to U.S. withholding taxes.
However, in order for the exemption from withholding taxes to apply to
you, you must meet one of the following requirements:
o You provide your name, address, and a signed statement that you are the
beneficial owner of the transition bond and are not a U.S. Holder. This
statement is generally made on Form W-8BEN.
o You hold transition bonds directly through a "qualified intermediary" and
the qualified intermediary has sufficient information in its files
indicating that you are not a U.S. Holder. A qualified intermediary is a
bank, broker or other intermediary that (1) is either a U.S. or non-U.S.
entity, (2) is acting out of a non-U.S. branch or office and (3) has
signed an agreement with the IRS providing that it will administer all or
a part of the U.S. tax withholding rules under specified procedures.
o You or your agent claim an exemption from withholding tax under an
applicable tax treaty. This claim is generally made on Form W-8BEN.
o You or your agent claim an exemption from withholding tax on the ground
that the income is effectively connected with the conduct of a trade or
business in the U.S. This claim is generally made on Form W-8ECI.
The rules regarding withholding are complex and vary depending on your
individual situation. They are also subject to change, and certain transition
rules apply for calendar year 2001. In addition, special rules apply to certain
types of non-U.S. holders of transition bonds, including partnerships, trusts,
and other entities treated as pass-through entities for U.S. federal income tax
purposes. We suggest that you consult with your tax advisor regarding the
specific methods for satisfying these requirements. A claim for exemption will
not be valid if the person receiving the claim has actual knowledge that the
statements on the applicable form are false.
Sale or Retirement of Transition Bonds
If you sell a transition bond or it is redeemed, you will not be subject
to federal income tax on any gain unless one of the following applies:
o The gain is connected with a trade or business that you conduct in the
U.S.
o You are an individual, you are present in the U.S. for at least 183 days
during the year in which you dispose of the transition bond, and other
conditions are satisfied.
o The gain represents accrued interest, in which case the rules for
interest would apply.
U.S. Trade or Business
If you hold a transition bond in connection with a trade or business that
you are conducting in the U.S.:
o Any interest on the transition bond, and any gain from disposing of the
transition bond, generally will be subject to income tax as if you were a
U.S. Holder.
o If you are a corporation, you may be subject to the "branch profits tax"
on your earnings that are connected with your U.S. trade or business,
including earnings from the transition bond. This tax is 30%, but may be
reduced or eliminated by an applicable income tax treaty.
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Estate Taxes
If you are an individual, the transition bonds will not be subject to U.S.
estate tax when you die. However, this rule only applies if, at the time of
your death, payments on the transition bond would not have been connected to a
trade or business that you were conducting in the U.S.
Information Reporting and Backup Withholding
U.S. rules concerning information reporting and backup withholding are
described above under "Tax Consequences to U.S. Holders--Information Reporting
and Backup Withholding." Under these rules:
o Principal and interest payments received by you will be automatically
exempt from the usual rules if you provide the tax certifications needed
to avoid withholding tax on interest, as described above under "--Tax
Consequences to Non-U.S. Holders--Withholding Taxes." The exemption does
not apply if the recipient of the applicable form knows or has reason to
know that the form is false. However, interest payments made to you will
be reported to the Internal Revenue Service on Form 1042-S.
o Sale proceeds you receive on a sale of your transition bonds through a
broker may be subject to information reporting or backup withholding if
you are not eligible for an exemption. In particular, information
reporting and backup reporting may apply if you use the U.S. office of a
broker, and information reporting--but not backup withholding--may apply
if you use the foreign office of a broker if the broker has specified
connections to the U.S. We suggest that you consult your tax advisor
concerning information reporting and backup withholding on a sale.
MATERIAL COMMONWEALTH OF PENNSYLVANIA TAX MATTERS
In the opinion of Ballard Spahr Andrews & Ingersoll, LLP, interest from
the transition bonds received by a person who is not otherwise subject to
corporate or personal income tax in Pennsylvania will not be subject to these
taxes. Transition bonds held by deceased Pennsylvania residents may be subject
to Pennsylvania inheritance and estate taxes.
Due to the litigation involving the constitutionality of personal property
taxes heretofore in effect, none are currently imposed in Pennsylvania. In the
event enforcement of the personal property tax is resumed, residents of
Pennsylvania, other than corporations and specified other exempt persons
holding transition bonds, would be subject to these taxes. Nonresidents would
be exempt. The taxes referred to include the County Personal Property Tax and
the additional property taxes formerly imposed on Pittsburgh residents by the
School District of Pittsburgh and the City of Pittsburgh.
112
ERISA CONSIDERATIONS
Employee benefit plans are permitted to purchase transition bonds offered
by this prospectus.
ERISA and Section 4975 of the Internal Revenue Code impose specified
requirements on employee benefit plans and some other plans and arrangements,
including individual retirement accounts and annuities, Keogh plans and some
collective investment funds or insurance company general or separate accounts
in which those plans, accounts or arrangements are invested (collectively,
"Plans"), and on persons who are fiduciaries with respect to Plans. ERISA
imposes on Plan fiduciaries certain general fiduciary requirements including
the obligation to discharge their duties solely in the interest of, and for the
exclusive purpose of providing benefits to, a Plan's participants and
beneficiaries and with the skill and diligence of a prudent person acting in a
like capacity. In addition, Section 406 of ERISA and Section 4975 of the
Internal Revenue Code prohibit a broad range of "prohibited transactions"
involving assets of a Plan ("Plan Assets") and persons who have certain
specified relationships to the Plan ("parties in interest" under ERISA and
"disqualified persons" under the Internal Revenue Code), unless a statutory or
administrative exemption is available.
There is a greater likelihood that prohibited transactions may arise if
the assets of the issuer were considered to be Plan Assets with respect to any
Plan that acquired transition bonds. Under certain circumstances currently
effective Department of Labor regulations apply a "look through" rule under
which the assets of any entity in which a Plan makes an equity investment may
constitute Plan Assets. However, the transition bonds are debt for state law
purposes and should not be considered to have "substantial equity features." As
a result, a Plan's acquisition of transition bonds should not cause assets of
the issuer to be considered to be Plan Assets.
If you are considering whether to purchase transition bonds with Plan
Assets, we suggest that you consult with your legal advisor and refer to the
related prospectus supplement for further guidance.
PLAN OF DISTRIBUTION
The transition bonds of each series offered by this prospectus may be sold
to or through underwriters named in the related prospectus supplement by a
negotiated firm commitment underwriting and public reoffering by the
underwriters or 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 intends that transition bonds will be offered
through various methods from time to time and 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.
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, and any discounts or commissions received by them
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 of 1933, as amended. These underwriters or agents will be identified, and
any compensation received from the issuer will be described, in the related
prospectus supplement.
Under agreements which may be entered into by PECO Energy, the issuer,
underwriters and agents who participate in the distribution of the transition
bonds may be entitled to indemnification by PECO Energy and the issuer against
liabilities specified in those agreements, including under the Securities Act
of 1933, as amended.
113
The underwriters may, from time to time, buy and sell transition bonds,
but there can be no assurance that an active secondary market will develop and
there is no assurance that any such market, if established, will continue.
RATINGS
It is a condition of any underwriter's obligation to purchase the
transition bonds that each class receive the rating indicated in the related
prospectus supplement, which will be in one of the four highest categories,
from at least one rating agency.
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 class of transition bonds upon initial issuance will not be lowered or
withdrawn by a rating agency at any time after that initial issuance. If a
rating of any class of transition bonds is revised or withdrawn, the liquidity
of that 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
series termination date or class termination date.
LEGAL MATTERS
Some legal matters relating to the issuance of the transition bonds will
be passed upon for the issuer by Ballard Spahr Andrews & Ingersoll, LLP,
Philadelphia, Pennsylvania, and for the underwriters by Cravath, Swaine &
Moore, New York, New York. Some legal matters relating to the issuer and
issuance of the transition bonds under the laws of the State of Delaware will
be passed upon for the issuer by Richards, Layton & Finger, P.A., Wilmington,
Delaware.
EXPERTS
The financial statements as of December 31, 1999 and 1998 and for the year
ended December 31, 1999 and the period from June 23, 1998 (date of inception)
to December 31, 1998, included in this prospectus have 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.
The projected amounts included within the Annual Stranded Cost
Amortization and Return disclosure in the "PECO Energy's Electric Restructuring
Plan" section were not prepared with a view toward compliance with published
guidelines of the SEC, the guidelines established by the American Institute of
Certified Public Accountants for preparation and presentation of financial
projections, or generally accepted accounting principles. These projected
amounts included in this prospectus have been prepared by, and are the
responsibility of, the issuer's management. PricewaterhouseCoopers LLP, the
issuer's accountants, has neither examined nor compiled these projections and
accordingly, PricewaterhoueCoopers LLP does not express an opinion or any other
form assurance with respect thereto. The PricewaterhouseCoopers LLP report
included in this prospectus relates to the issuer's historical financial
information, It does not extend to the projections and should not be read to do
so.
114
GLOSSARY OF DEFINED TERMS
Set forth below is a glossary of defined terms used in this prospectus.
"2000 QRO" means the qualified rate order issued by the Pennsylvania
Public Utility Commission to PECO Energy on March 16, 2000.
"adjustment request" means each request filed by the servicer with the
Pennsylvania Public Utility Commission for adjustments to the intangible
transition charges assessed to each rate class within any customer category
based on actual collections of intangible transition charges and updated
assumptions by the servicer as to the projected future usage of electricity by
customers on which intangible transition charges are assessed, expected
delinquencies and write-offs and future payments and expenses relating to the
intangible transition property and the transition bonds.
"Bankruptcy Code" means Title 11 of the United States Code, as the same
may be amended, modified or supplemented from time to time.
"basic documents" means, collectively, the sale agreement, the master
servicing agreement, any bills of sale for intangible transition property, the
indenture, the trust agreement, and the certificate of trust filed with the
State of Delaware to form the issuer.
"business day" means any day other than a Saturday, Sunday or a day on
which banking institutions in the City of Philadelphia, the City of New York or
the State of Delaware are required by law or executive order to remain closed.
"calculated overcollateralization level" means the amount anticipated to
be on deposit in the overcollateralization subaccount for all series of
transition bonds as of each payment date, as specified in each prospectus
supplement.
"calculation date" means, with respect to any series of transition bonds,
each date on which the servicer is required to file an adjustment request, as
specified in the related prospectus supplement.
"capital subaccount" means a subaccount of the collection account in which
the amount of capital required to be held by the issuer for a series of
transition bonds will be deposited by the issuer on the date of issuance of
that series.
"Clearstream, Luxembourg" means Clearstream Bank Societe Anonyme,
Luxembourg.
"collection account" means the single collection account for all series of
transition bonds established by the issuer and held by the bond trustee under
the indenture.
"covenant defeasance option" means the right of the issuer to, at any
time, terminate its obligations to comply with specified covenants as described
in "The Indenture--Legal Defeasance and Covenant Defeasance."
"de minimis loss amount" means 1/12 of 1% of the annual outstanding
balance of the transition bonds per monthly allocation date.
"DTC" means The Depository Trust Company.
"Euroclear" means the Euroclear System.
"event of default" means an event specified as an event of default under
the indenture for the transition bonds described in this prospectus and the
related prospectus supplements.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"expected amortization schedule" means, with respect to any series or
class of transition bonds, the expected amortization schedule for the principal
balance of that series or class, as set forth in the related prospectus
supplement.
"Final Order" means the Pennsylvania Public Utility Commission's order
dated May 14, 1998, of which the First QRO is a part, approving the
restructuring plan settlement.
115
"First QRO" means the qualified rate order dated May 14, 1998 issued by
the Pennsylvania Public Utility Commission to PECO Energy.
"Fitch, Inc." means Fitch, Inc., or its successor.
"general subaccount" means a subaccount of the collection account into
which funds received from collections of intangible transition charges,
indemnity amounts and investment earnings will initially be allocated.
"indemnity amounts" means any amounts paid by the seller or servicer to
the bond trustee, for itself or on behalf of all transition bondholders,
related to specified indemnification obligations under the sale agreement and
the master servicing agreement described in this prospectus and the related
prospectus supplement.
"initial loss calculation date" means the monthly allocation date
immediately following the day which is 90 days after the seller receives a
notice from the issuer or the bond trustee, that the seller is required to
indemnify the bond trustee under the sale agreement.
"Interest" means, for any monthly allocation date for any series of
transition bonds, the sum of, without duplication:
o in the case of any series or class not described in the next
subparagraph, an amount that would cause the amount on deposit for
interest in the series subaccount, without regard to investment income
for that series, to equal the monthly allocated interest balance for that
series and that monthly allocation date,
o in the case of any series or class subject to a swap agreement pursuant
to which the issuer is receiving payments due thereunder from the
applicable counterparty, the regular fixed payment to a related
counterparty without netting, but not payment in respect of breakage or
termination of the related swap agreement,
o if the transition bonds have been declared due and payable, all accrued
and unpaid interest,
o for a series to be redeemed prior to the next monthly allocation date,
the amount of interest that will be payable as interest on that series on
the redemption date, and
o any interest due on that series on a payment date or other date for the
payment of interest and not paid and, to the extent permitted by law,
interest on that amount.
"interest deposit subaccount" means a subaccount of the collection account
into which designated interest payments remitted by seller to the bond trustee
will be deposited.
"IP&L" means Indianapolis Power & Light Company.
"legal defeasance option" means the right of the issuer to, at any time,
terminate all of its obligations under the indenture with respect to the
transition bonds of any series as described in "The Indenture--Legal Defeasance
and Covenant Defeasance."
"liquidated damages" means an amount sufficient to pay all expenses and
indemnity payments due to the bond trustee, the issuer trustee or the issuer
and the principal of all outstanding transition bonds adversely affected by the
breach of specified representations and warranties, plus accrued interest to
the date of redemption and breakage costs or termination fees, if any, due to
any counterparty to any hedge or swap transaction applicable to the applicable
transition bonds entered into by the issuer payable by PECO Energy for the
breach of designated representations concerning intangible transition property
under the sale agreement as described in this prospectus and the related
prospectus supplement.
"loss amounts" means any amounts remitted by the seller to the bond
trustee pursuant to the sale agreement in respect of losses as a result of
willful misconduct, bad faith, gross negligence or reckless disregard of its
obligations under the sale agreement or the breach of designated
representations and warranties in the sale agreement by the seller as described
in this prospectus and the related prospectus supplement.
116
"loss subaccount" means a subaccount of the collection account into which
loss amounts remitted by the seller to the bond trustee will be deposited.
"master servicing agreement" means the Amended and Restated Master
Servicing Agreement between PECO Energy, as servicer, and the issuer, dated as
of March 25, 1999, as amended and restated as of the closing date for the
issuance of the first series of transition bonds under the 2000 QRO, as the
same has been or may be further amended and supplemented from time to time.
"monthly allocated interest balance" and the "monthly allocated principal
balance," if applicable, for each monthly allocation date and each series will
each be set forth in the related prospectus supplement for that series and will
be calculated such that amounts scheduled to be paid on each payment date for
Interest and Principal, respectively, for that series and that monthly
allocation date will be expected to be on deposit in the applicable series
subaccount as of the monthly allocation date prior to that payment date,
whether from collections of intangible transition charges or payments made by
any counterparty to a swap or hedge transaction entered into by the issuer.
"monthly allocated overcollateralization balance" for each monthly
allocation date will be set forth in the first prospectus supplement and
adjusted to reflect redemptions or defeasances of transition bonds and
issuances of additional series of transition bonds and will be calculated such
that the calculated overcollateralization level for each payment date will be
expected to be on deposit in the overcollateralization subaccount as of the
monthly allocation date prior to that payment date.
"monthly allocation date" means the first day of each calendar month, or
if that day is not a business day, the following business day. On this date,
the bond trustee allocates amounts on deposit in the general subaccount as
described in "The Indenture--Allocations and Payments" in this prospectus.
"Moody's" means Moody's Investors Service, Inc., or its successor.
"overcollateralization" means, for any monthly allocation date, an amount
that would cause the balance in the overcollateralization subaccount to equal
the monthly allocated overcollateralization balance for that monthly allocation
date, without regard to investment earnings.
"overcollateralization subaccount" means a subaccount of the collection
account into which the overcollateralization amount will be deposited over the
expected life of a series of transition bonds.
"PECO Energy" means PECO Energy Company, a Pennsylvania corporation.
"Percentage" means, for the issuer or any other issuer of transition
bonds, the percentage equivalent of a fraction:
o the numerator of which is the aggregate intangible transition charges (as
adjusted from time to time) applicable to all series of transition bonds
issued by the issuer or any other issuer, as applicable, and
o the denominator of which is the aggregate intangible transition charges
(as adjusted from time to time) applicable to all series of transition
bonds issued by the issuer and all other issuers.
"Principal" means, for any monthly allocation date and any series of
transition bonds, an amount that:
o would cause the amount on deposit for principal in the series subaccount,
without regard to investment income, for that series to equal the monthly
allocated principal balance for that series and that monthly allocation
date,
o if the transition bonds have been declared due and payable, the principal
amount of that series,
o for a series to be redeemed prior to the next monthly allocation date,
the amount that will be payable as principal of that series on the
redemption date, or
o any principal due on that series on a payment date or other date for the
payment of principal and not paid.
117
"Pro Rata" means, for any series of transition bonds, a ratio,
o in the case of the amount of Interest allocated to the series
subaccounts, the numerator of which is the monthly allocated interest
balance for that series for that monthly allocation date and the
denominator of which is the sum of monthly interest balances for all
series for that monthly allocation date,
o in the case of the amount of Principal allocated to the series
subaccounts as a result of an acceleration or redemption, the numerator
of which is the amount allocable for that series as a result of that
event and the denominator of which is the amount allocable to all series
as a result of acceleration or redemption, and
o in the case of the amount of Principal otherwise allocated to the
allocated principal balance for that series for that monthly allocation
date and the denominator of which is the sum of monthly allocated
principal balances for all series for that monthly allocation date.
"qualified rate orders" means the first qualified rate order issued by the
Pennsylvania Public Utility Commission to PECO Energy Company on May 14, 1998,
the second qualified rate order issued to PECO Energy Company on March 16, 2000
and any subsequent order of the Pennsylvania Public Utility Commission, adopted
in accordance with the Pennsylvania Competition Act, which creates intangible
transition property and authorizes the imposition and collection of intangible
transition charges by PECO Energy or its assignee. This term also includes any
order that is supplemental to any of the foregoing.
"qualified transition expenses," as set forth in the qualified rate
orders, means, collectively, the aggregate principal amount of the transition
bonds and an amount sufficient to provide for any credit enhancement, to fund
any reserves, and to pay interest, premiums, if any, costs of defeasance,
servicing fees and other fees, costs and charges relating to transition bonds.
"rating agency" means any rating agency rating the transition bonds of any
class or series at the time of issuance of that class or series at the request
of the issuer.
"rating agency condition" means, with respect to any action, the
notification in writing by each rating agency to PECO Energy, the servicer, the
bond trustee and the issuer that any such action will not result in a reduction
or withdrawal of the then current rating by that rating agency of any
outstanding series or class of transition bonds.
"required capital amount" means the amount of capital required to be
deposited by the issuer into the capital subaccount upon the issuance of a
series of transition bonds, which represents a capital contribution from PECO
Energy.
"reserve subaccount" means a subaccount of the collection account into
which will be deposited the excess, if any, of collections of intangible
transition charges over amounts then scheduled to be paid or due on a series of
transition bonds, plus related expenses, plus amounts needed to make required
deposits to the overcollateralization subaccount.
"Restructuring Order" means the Opinion and Order issued by the
Pennsylvania Public Utility Commission, revised in January and February 1998,
which deregulated PECO Energy's electric generation operations as described in
"PECO Energy's Electric Restructuring Plan."
"restructuring plan settlement" means the settlement filed by PECO Energy
and other parties with the Pennsylvania Public Utility Commission on April 29,
1998 and approved by the Pennsylvania Public Utility Commission In the final
order.
"sale agreement" means the Intangible Transition Property Sale Agreement
between the issuer and PECO Energy dated as of March 25, 1999, as amended and
restated as of the closing date for the issuance of the first series of
transition bonds under the 2000 QRO, as the same has been or may be further
amended and supplemented from time to time.
"SEC" means the Securities and Exchange Commission.
"series of transition bonds" means the Series 1999-A Bonds, the Series
2000-A Bonds, each series of transition bonds offered by this prospectus and
any other series of transition bonds which are issued under and are subject to
the terms of the indenture.
118
"series subaccount" means a subaccount of the collection account for each
series of transition bonds. On each monthly allocation date, the bond trustee
will deposit amounts to this account accruing for principal and interest for
each series, based on each series' percentage of the total allocated principal
and interest of all series.
"servicer default" means a default of the servicer under the master
servicing agreement, including the defaults described under the "The Master
Servicing Agreement--Servicer Defaults."
"Standard & Poor's" means Standard & Poor's Rating Services, or its
successor.
"transferred intangible transition property" means intangible transition
property which is transferred from PECO Energy to the issuer under the sale
agreement and the related bills of sale.
"U.S. Government Obligations" means direct obligations, or certificates
representing an ownership interest in those obligations, of the United States
of America, including any agency or instrumentality of the United States of
America, for the payment of which the full faith and credit of the United
States of America is pledged and which are not callable at the issuer's option.
119
PECO ENERGY TRANSITION TRUST
INDEX TO FINANCIAL STATEMENTS
Page
-----
Report of Independent Accountants ......................................... F-2
Statement of Net Assets Available for Trust Activities .................... F-3
Statement of Changes in Net Assets Available for Trust Activities ......... F-4
Notes to Financial Statements ............................................. F-5
F-1
Report of Independent Accountants
To the Trustees
PECO Energy Transition Trust
Wilmington, DE:
In our opinion, the accompanying statements of net assets available for trust
activities and the related statements of changes in net assets available for
trust activities present fairly, in all material respects, the net assets
available for trust activities of the PECO Energy Transition Trust (the "Trust")
as of December 31, 1999 and 1998, and the changes in net assets available for
trust activities for the year ended December 31, 1999 and for the period from
June 23, 1998 (date of Inception) to December 31, 1998, in conformity with
accounting principles generally accepted in the United States. These financial
statements are the responsibility of the Trust's management; our responsibility
is to express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
March 16, 2000
F-2
PECO ENERGY TRANSITION TRUST
STATEMENTS OF NET ASSETS AVAILABLE FOR TRUST ACTIVITIES
(in Millions)
December 31,
------------------
1999 1998
-------- ----
ASSETS
Current Assets:
Cash and Cash Equivalents $ 173.5 $ --
Interest Receivable 0.9 --
Due from Related Party 42.1 --
Current portion of Intangible Transition Property 134.7 --
-------- ----
Total Current Assets 351.2 --
======== ====
Noncurrent Assets:
Debt Issuance Costs, net of amortization 22.7 2.1
Intangible Transition Property, net of amortization 3,858.7 --
-------- ----
TOTAL ASSETS 4,232.6 2.1
======== ====
LIABILITIES
Current Liabilities:
Accrued Interest Expense 82.8 --
Current portion of Transition Bonds 120.0 --
-------- ----
Total Current Liabilities 202.8 --
======== ====
Due to Related Party 110.7 2.1
Long-Term Debt - Transition Bonds 3,832.6 --
-------- ----
TOTAL LIABILITIES 4,146.1 2.1
======== ====
NET ASSETS AVAILABLE FOR TRUST ACTIVITIES $ 86.5 $ --
======== ====
See Notes to Financial Statements.
F-3
PECO ENERGY TRANSITION TRUST
STATEMENTS OF CHANGES IN NET ASSETS AVAILABLE FOR TRUST ACTIVITIES
(in Millions)
For the Period
From Inception
For the (June 23, 1998)
Year Ended Through
December 31, 1999 December 31, 1998
----------------- -----------------
ADDITIONS
Contributions by Trust Grantor $ 20.0 $ --
ITC Collections 310.4 --
Debt Issuance Costs 22.9 2.1
Intangible Transition Property 4,080.2 --
Interest Income 3.9 --
-------- ----
TOTAL ADDITIONS 4,437.4 2.1
======== ====
DEDUCTIONS
Due to Related Party 66.5 2.1
Transition Bonds 3,994.6 --
Interest Expense 192.6 --
Amortization of Debt Issuance Costs 2.3 --
Amortization of Intangible Transition Property 86.8 --
Amortization of Debt Discount 0.6 --
Service Fee Expense 7.5 --
-------- ----
TOTAL DEDUCTIONS 4,350.9 2.1
-------- ----
CHANGES IN NET ASSETS AVAILABLE FOR
TRUST ACTIVITIES 86.5 --
-------- ----
NET ASSETS AVAILABLE FOR TRUST ACTIVITIES
AT BEGINNING OF PERIOD -- --
-------- ----
NET ASSETS AVAILABLE FOR TRUST ACTIVITIES
AT END OF PERIOD $ 86.5 $ --
======== ====
See Notes to Financial Statements.
F-4
PECO ENERGY TRANSITION TRUST
NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
PECO Energy Transition Trust (PETT), a statutory business trust established
by PECO Energy Company (PECO Energy) under the laws of the State of Delaware and
a wholly owned subsidiary of PECO Energy, was formed on June 23, 1998 pursuant
to a trust agreement between PECO Energy, as grantor, First Union Trust Company,
N.A., as issuer trustee, and two beneficiary trustees appointed by PECO Energy.
PECO Energy is principally engaged in the production, purchase, transmission,
distribution, and sale of electricity to residential, commercial, industrial and
wholesale customers in its franchised services territory in southeastern
Pennsylvania. PETT was organized by PECO Energy as a special purpose,
bankruptcy-remote entity to issue bonds to securitize a portion of PECO Energy's
stranded cost recovery authorized by the Pennsylvania Public Utility Commission
(PUC) pursuant to the Pennsylvania Electric Generation Customer Choice and
Competition Act (Pennsylvania Competition Act).
The Pennsylvania Competition Act, enacted in December 1996, allows
utilities to recover the anticipated loss in value of their generation-related
assets caused by the transition from regulated rates for generation to market
pricing.
Under its trust agreement, PETT is authorized to purchase and own
Intangible Transition Property (ITP), issue transition bonds, pledge its
interest in ITP and other collateral to the bond trustee to secure the
transition bonds, and perform activities that are necessary and suitable to
accomplish these purposes. ITP represents the irrevocable right of PECO Energy,
or its successor or assignee, to collect a non-bypassable Intangible Transition
Charge (ITC) from customers. The Pennsylvania Public Utility Commission (PUC)
authorized PETT to collect ITC in the PUC's Qualified Rate Order issued on May
14, 1998 (1998 QRO). The 1998 QRO authorizes the ITC to be sufficient to recover
up to $4 billion of PECO Energy's stranded costs and an amount sufficient to
recover the aggregate principal amount of the Series 1999-A Transition Bonds
(Transition 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 Transition Bonds which
are solely debt obligations of PETT. PETT used the proceeds of the Transition
Bonds to purchase ITP from PECO Energy for $4.080 billion which represented an
amount sufficient to recover the aggregate principal amount of the Transition
Bonds and related expenses including interest and servicing fees.
PECO Energy, as servicer, deposits ITC collections into a general
subaccount maintained by the bond trustee under the indenture. Each month, such
monies are used to make principal and interest payments on the Transition Bonds,
and to pay fees, costs, and charges specified in the indenture. The indenture
also includes a reserve subaccount that is
F-5
maintained for the purpose of retaining any ITC collections and investment
earnings that are in excess of specific fees and expenses and amounts allocable
to the payment of principal of and interest on the Transition Bonds and to the
overcollateralization subaccount. The indenture also provides for an
overcollateralization subaccount, which will be funded ratably, to a balance of
$80 million, over the life of the Transition Bonds. The balances of the reserve
and overcollateralization subaccounts as of December 31, 1999 were $15.0 million
and $7.1 million, respectively. Additionally, an amount of $20 million,
representing PECO Energy's initial capitalization of PETT, was deposited into
the capital subaccount under the indenture on the date of issuance. If amounts
available in the general, reserve, and overcollateralization subaccounts are not
sufficient on any payment date to make scheduled payments, the bond trustee will
draw on accounts in the capital subaccount. Any remaining amounts
collateralizing the Transition Bonds will be released to PETT upon payment of
the Transition Bonds.
PETT's organizational documents require it to operate in such a manner that
it should not be consolidated in the bankruptcy estate of PECO Energy in the
event PECO Energy becomes subject to such a proceeding, and both PECO Energy and
PETT have treated the transfer of ITP to PETT as a sale under the Pennsylvania
Competition Act.
On or before May 14th of each year, the anniversary date of the 1998 QRO, a
report to determine the adequacy of ITC collections for the annual period is
submitted to the PUC by PECO Energy. If adjustments are needed, the PUC is
required to adjust collection rates on a prospective basis within 90 days of May
14th.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, and
changes therein. Actual results could differ from those estimates.
Cash and Cash Equivalents
PETT considers all cash investments purchased with an original maturity of
three months or less to be cash equivalents. Financial instruments which
potentially subject PETT to concentrations of credit risk consist principally of
cash equivalents. PETT places its cash equivalents with high-credit quality
financial institutions. Generally, such investments are in excess of the Federal
Deposit Insurance Corporation limit.
Intangible Transition Property
The ITP is being amortized in conjunction with the reduction of Transition
Bond principal on an accrual basis. As of December 31, 1999, accumulated ITP
amortization was $86.8 million.
F-6
Unamortized Debt Issuance Costs
The costs associated with the issuance of the Transition Bonds have been
capitalized and are being amortized on a straight line basis over the life of
the Transition Bonds. As of December 31, 1999, accumulated amortization of debt
issuance cost was $2.3 million.
Income Taxes
PETT is a wholly owned subsidiary of PECO Energy and has elected not to be
taxed as a corporation for federal income tax purposes. PETT is a special
purpose entity that is treated as a division of PECO Energy for federal income
tax purposes and has no separate income tax liability.
Derivative Financial Instruments
Hedge accounting is applied only if the derivative reduces the risk of the
underlying hedged item and is designed at inception as a hedge, with respect to
the hedged item. If a derivative instrument ceased to meet the criteria for
deferral, any gains or losses, would be currently recognized in income. PETT
does not hold or issue derivative financial instruments for trading purposes.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities," (SFAS
No. 133) to establish accounting and reporting standards for derivatives. The
new standard requires recognizing all derivatives as either assets or
liabilities on the balance sheet at their fair value and specifies the
accounting for changes in fair value depending upon the intended use of the
derivative. In June 1999, the FASB issued SFAS No. 137 "Accounting for
Derivative Instruments and Hedging Activities - Deferral of the Effective Date
of FASB Statement No. 133," (SFAS No. 137) which delayed the effective date for
SFAS No. 133 until fiscal years beginning after June 15, 2000. PETT expects to
adopt SFAS No. 133 in the first quarter of 2001. PETT is in the process of
evaluating the impact of SFAS No. 133 on its financial statements.
2. TRANSITION BONDS
On March 25, 1999, PETT issued $4 billion aggregate principal amount of
Transition Bonds to securitize a portion of PECO Energy's authorized stranded
cost recovery. The Transition Bonds are solely obligations of PETT, secured by
ITP sold by PECO Energy to
F-7
PETT concurrently with the issuance of the Transition Bonds and certain other
collateral related thereto. The following table summarizes the outstanding
principal balances of the Transition Bonds at December 31:
Expected
Final Payment Termination
Classes Rate Date(a) Date(a) 1999 1998
- -------------------------------------------------------------------------------
In Millions
A-1 5.48% 2001 2003 $ 202 $ --
A-2 5.63% 2003 2005 275 --
A-3 6.06%(b) 2004 2006 667 --
A-4 5.80% 2005 2007 459 --
A-5 6.14%(b) 2007 2009 465 --
A-6 6.05% 2007 2009 993 --
A-7 6.13% 2008 2009 897 --
- -------------------------------------------------------------------------------
Unamortized debt discount (5) --
------ ----
Total Long Term Debt 3,953 --
Due within one year 120 --
------ ----
Long Term Debt $3,833 $ --
====== ====
(a) The Expected Final Payment Date is the date when all principal and interest
of the related class of Transition Bonds is expected to be paid in full in
accordance with the expected amortization schedule for the applicable
class. The Termination Date is the date when all principal and interest of
the related class of Transition Bond must be paid in full. The current
portion of the Transition Bonds is based upon the expected maturity date.
(b) Floating rate, as of December 31, 1999, based upon the London Interbank
Offering Rate (LIBOR) plus 0.125% for the A-3 class and LIBOR plus 0.20%
for the A-5 class.
PETT makes semi-annual principal payments pursuant to an amortization
schedule in the Transition Bond indenture dated March 1, 1999. On September 1,
1999, the first principal payment was made in the amount of $42.5 million which
reduced the outstanding principal balance of the class A-1 Transition Bonds.
Long-term debt maturities, in the period 2000-2004 are as follows (in millions):
2000 - $120; 2001 - $188; 2002 - $277; 2003 - $470; 2004 - $518 and $2,380
thereafter.
Fair values of the Transition Bonds are estimated based on quoted market
prices. The carrying amounts and fair values of the Transition Bonds as of
December 31, 1999 were $3.953 billion and $3.700 billion, respectively.
PETT has entered into interest rate swaps to manage interest rate exposure
associated with the issuance of two floating rate classes of Transition Bonds.
The aggregate notional amount of these swaps was equal to the face values of
those two floating rate classes. At December 31, 1999, the fair value of these
instruments was $35.8 million based
F-8
on the present value difference between the contracted rate and the market rates
at that date. The fixed interest rates of classes A-3 and A-5 are 6.58% and
6.94%, respectively. A hypothetical 50 basis point increase or decrease in the
spot yield at December 31, 1999 would have resulted in an aggregate fair value
of these interest rate swaps of $52.0 million or $21.9 million, respectively. If
the derivative instruments had been terminated at December 31, 1999, these
estimated fair values represent the amount to be paid by the counterparties to
PETT.
PETT would be exposed to credit-related losses in the event of
non-performance by the counterparties that issued the derivative instruments.
PETT does not expect that the counterparties to the interest rate swaps will
fail to meet these obligations, given their high credit ratings. The credit
exposure of derivatives contracts is represented by the fair value of the
contracts at the reporting date. PETT interest rate swaps are documented under
master agreements. Among other things, these agreements provide for a maximum
credit exposure for both parties. Payments are required by the appropriate party
when the maximum limit is reached.
3. SIGNIFICANT AGREEMENTS AND RELATED PARTY TRANSACTIONS
PETT purchased ITP from PECO Energy pursuant to the Intangible Transition
Property Sale Agreement dated March 25, 1999 (Sale Agreement). Under the Sale
Agreement, PECO Energy makes certain representations and warranties about the
ITP and indemnifies PETT for losses caused by the breach of such representations
and warranties. To the extent a breach concerns the existence of the ITP or the
ability to charge ITC in the amounts sufficient to meet a pre-set amortization
schedule, PECO Energy must pay liquidated damages equal to the lost principal
and interest of the amortization schedule.
For financial reporting purposes and Federal and Commonwealth of
Pennsylvania income and franchise tax purposes the transfer of ITP to PETT will
be treated as a financing arrangement and not a sale.
Transition Bonds were issued pursuant to the Indenture dated as of March 1,
1999 (Indenture). Under the Indenture, PETT has pledged all of its property,
including the ITP to secure the Transition Bonds. The Indenture prohibits PETT
from selling, transferring, exchanging, or otherwise disposing of any of the
collateral unless directed to do so by the Trustee; from claiming any credit or
making any deduction from the principal, premium, if any, or interest on
Transition Bonds or against any Transition Bond holder; permitting the validity
of effectiveness of the Indenture to be impaired or permitting the lien of the
Indenture to be amended, hypothecated, subordinated, terminated, of discharged;
permitting any person to be released from any of the covenants or obligations
with respect to Transition Bonds as expressly permitted by the Indenture;
permitting any liens, charges, or claims, security interest or mortgage (other
than the lien created by the Indenture) to be created in or extend to or
otherwise arise upon or burden the collateral or any part thereof; or permitting
the lien of the Indenture not to constitute a valid, first priority security
interest in the collateral.
F-9
Under the Master Servicing Agreement entered into by PETT and PECO Energy
dated as of March 25, 1999, PECO Energy, as servicer, manages and administers
the ITP sold to PETT and collects the ITC related thereto on behalf of PETT.
In 1999, PETT recorded $353.3 million of ITC collections, of which $42.9
million have not yet been remitted from PECO Energy to PETT, and $7.5 million in
servicing fees based upon the outstanding principal amount of the Transition
Bonds, of which $0.8 million have not yet been remitted from PETT to PECO
Energy.
As of December 31, 1999, the Due to Related Party balance represents an
advance of $110.7 million for initial working capital requirements and operating
expenses and is not considered to be currently due by PECO Energy. As of
December 31, 1998, the Due to Related Party balance primarily represents legal
costs.
4. LITIGATION
Indianapolis Power and Light Company (IPL) filed an action which sought to
invalidate the Competition Act and thereby preclude PECO Energy from recovering
and securitizing stranded costs. IPL asserted that the Pennsylvania Competition
Act discriminates against interstate commerce in violation of the Commerce
Clause of the United States Constitution. The Commonwealth Court of Pennsylvania
dismissed this action. IPL sought review of this dismissal by the United States
Supreme Court which denied certiorari on March 8, 1999. All appeals of the PUC's
Final Order dated May 14, 1998 that were being pursued have been resolved and
all other appeals that were being held in abeyance have been withdrawn with
prejudice from the Commonwealth Court of Pennsylvania and the United States
District Court.
On February 7, 2000, the Mid-Atlantic Power Supply Association filed an
intervention to the PUC's proceedings on PECO Energy's January 7, 2000
application for a QRO (the 2000 QRO) to ensure that the proposed securitization
does not have an adverse effect on competition in the retail electrical services
market in Pennsylvania. Specifically, this association expressed concern that
the 2000 QRO would cause a reduction in the shopping credit established in the
1998 QRO and would enable PECO Energy to use the proposed rate reduction in 2001
to promote its provider of last resort service.
The Mid-Atlantic Power Supply Association subsequently agreed to join with
several of the parties who participated in PECO Energy's restructuring
proceeding in a second settlement, which was filed with the PUC on March 8,
2000. On March 16, 2000, the PUC issued an order approving a Joint Petition for
Full Settlement of PECO Energy Company's Application for Issuance of a QRO
authorizing PECO Energy to securitize up to an additional $1.0 billion of its
authorized recoverable stranded costs. In accordance with the terms of the Joint
Petition for Full Settlement, when the 2000 QRO becomes final and
non-appealable, PECO Energy, through its distribution business unit, will
provide its retail customers with rate reductions in the total amount of $60
million beginning on January 1, 2001. This rate reduction will be effective for
calendar year 2001 only and will not be contingent upon the issuance of
additional transition bonds pursuant to the 2000 QRO.
F-10
ITEM 1. FINANCIAL STATEMENTS
PECO ENERGY TRANSITION TRUST
STATEMENTS OF NET ASSETS AVAILABLE FOR TRUST ACTIVITIES
(in Millions)
September 30, December 31,
2000 1999
----------------------------
(Unaudited)
ASSETS
Current Assets:
Cash and Cash Equivalents $ 110.8 $ 173.5
Interest Receivable -- 0.9
Due from Related Party 79.8 42.1
Current portion of Intangible Transition Property 315.6 134.7
---------- ----------
Total Current Assets 506.2 351.2
Noncurrent Assets:
Debt Issuance Costs, net of amortization 27.0 22.7
Intangible Transition Property, net of amortization 4,585.7 3,858.7
---------- ----------
TOTAL ASSETS 5,118.9 4,232.6
---------- ----------
LIABILITIES
Current Liabilities:
Accrued Interest Expense 29.7 82.8
Current portion of Transition Bonds 297.2 120.0
---------- ----------
Total Current Liabilities 326.9 202.8
Noncurrent Liabilities:
Due to Related Party 128.9 110.7
Long-Term Debt - Transition Bonds 4,534.0 3,832.6
---------- ----------
TOTAL LIABILITIES 4,989.8 4,146.1
---------- ----------
NET ASSETS AVAILABLE FOR TRUST ACTIVITIES $ 129.1 $ 86.5
========== ==========
See Notes to Financial Statements.
F-11
PECO ENERGY TRANSITION TRUST
STATEMENT OF CHANGES IN NET ASSETS AVAILABLE FOR TRUST ACTIVITIES
(Unaudited)
(in Millions)
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- -------------------------
2000 1999 2000 1999
-------- -------- ---------- ----------
ADDITIONS
Contributions by Trust Grantor $ -- $ -- $ 5.0 $ 20.0
ITC Collections 140.9 145.9 318.0 222.2
Due From Related Party 22.2 11.9 37.7 53.0
Deferred Debt Issuance Costs -- -- 7.4 23.1
Intangible Transition Property -- -- 1,008.9 4,080.2
Interest Income 4.0 1.7 9.4 1.7
Other -- -- -- 0.3
-------- -------- ---------- ----------
TOTAL ADDITIONS 167.1 159.5 1,386.4 4,400.5
-------- -------- ---------- ----------
DEDUCTIONS
Due to Related Party -- -- 18.2 111.4
Transition Bonds -- -- 998.1 3,994.6
Interest Expense 81.0 66.1 214.5 130.0
Amortization of Debt Issuance Costs 1.2 0.8 3.1 1.6
Amortization of Intangible Transition Property 41.1 41.0 101.0 62.3
Amortization of Debt Discount 0.2 0.1 0.5 0.7
Service Fee Expense 3.0 3.0 8.4 6.0
-------- -------- ---------- ----------
TOTAL DEDUCTIONS 126.5 111.0 1,343.8 4,306.6
-------- -------- ---------- ----------
CHANGES IN NET ASSETS AVAILABLE FOR TRUST ACTIVITIES 40.6 48.5 42.6 93.9
-------- -------- ---------- ----------
NET ASSETS AVAILABLE FOR TRUST ACTIVITES
AT BEGINNING OF PERIOD 88.5 45.4 86.5 --
-------- -------- ---------- ----------
NET ASSETS AVAILABLE FOR TRUST ACTIVITIES
AT END OF PERIOD $ 129.1 $ 93.9 $ 129.1 $ 93.9
======== ======== ========== ==========
See Notes to Financial Statements.
F-12
PECO ENERGY TRANSITION TRUST
NOTES TO FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying financial statements as of September 30, 2000 and for
the three and nine months then ended are unaudited, but include all adjustments
that PECO Energy Transition Trust (PETT) considers necessary for a fair
presentation of such financial statements. All adjustments are of a normal,
recurring nature. Certain prior year amounts have been reclassified for
comparative purposes.
2. SERIES 2000-A TRANSITION BONDS
The Pennsylvania Public Utility Commission (PUC) authorized PETT to
collect an Intangible Transition Charge (ITC) in the PUC's Qualified Rate Order
issued on March 16, 2000 (2000 QRO). The 2000 QRO authorizes the ITC to be
sufficient to recover up to $1 billion of PECO Energy Company's (PECO Energy)
stranded costs and an amount sufficient to recover the aggregate principal
amount of the Series 2000-A Transition Bonds (Series 2000-A Transition 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 Series 2000-A Transition Bonds.
On May 2, 2000, PETT issued $1 billion aggregate principal amount of
Series 2000-A Transition Bonds to securitize a portion of PECO Energy's
authorized stranded cost recovery. The Series 2000-A Transition Bonds are solely
obligations of PETT, secured by Intangible Transition Property (ITP) sold by
PECO Energy to PETT concurrently with the issuance of the 2000-A Transition
Bonds and certain other collateral related thereto. The following table
summarizes the terms of the Series 2000-A Transition Bonds at September 30,
2000:
Approximate Expected
Series 2000-A Face Interest Final Payment Termination
Classes Amount Rate Date(a) Date(a)
- --------------------------------------------------------------------------------------------------
(millions)
A-1 $110.0 7.18 % September 1, 2001 September 1, 2003
A-2 $140.0 7.30 % September 1, 2002 September 1, 2004
A-3 $398.8 7.63 % March 1, 2009 March 1, 2010
A-4 $351.2 7.65 % September 1, 2009 March 1, 2010
(a) The Expected Final Payment Date is the date when all principal and interest
of the related class of the Series 2000-A Transition Bonds is expected to
be paid in full in accordance with the expected amortization schedule for
the applicable class. The Termination Date is the date when all principal
and interest of the related class of the Series 2000-A Transition Bonds
must be paid in full. The current portion of the Series 2000-A Transition
Bonds is based upon the expected maturity date.
PETT used the proceeds of the Series 2000-A Transition Bonds to
purchase $1.009 billion of ITP from PECO Energy which represented an amount
sufficient to recover the aggregate principal amount of the Series 2000-A
Transition Bonds and related expenses including interest and servicing fees.
F-13
PETT makes semi-annual principal payments pursuant to an amortization
schedule in the Series 2000-A Supplemental Indenture dated May 2, 2000. On March
1, 2000 and September 1, 2000, principal payments were made for $63.9 million
and $56.1 million, respectively, which reduced the outstanding principal balance
of the previously issued Series 1999-A Transition Bonds (Series 1999-A
Transition Bonds).
PETT has entered into interest rate swaps to manage interest rate
exposure associated with the issuance in March 1999, of two floating rate
classes of Series 1999-A Transition Bonds. The aggregate notional amount of
these swaps was equal to the face values of those two floating rate classes. At
September 30, 2000, the fair value of these instruments was $25.8 million based
on the present value difference between the contracted rates and the market
rates at that date. The fixed interest rates of Series 1999-A Transition Bonds,
Classes A-3 and A-5 are 6.58% and 6.94%, respectively. A hypothetical 50 basis
point increase or decrease in the spot yield at September 30, 2000 would have
resulted in an aggregate fair value of these interest rate swaps of $37.3
million or $18.9 million, respectively. If the derivative instruments had been
terminated at September 30, 2000, these estimated fair values represent the
amount to be paid by the counterparties to PETT.
PETT would be exposed to credit-related losses in the event of
non-performance by the counterparties that issued the derivative instruments.
PETT does not expect that the counterparties to the interest rate swaps will
fail to meet these obligations, given their high credit ratings. The credit
exposure of derivatives contracts is represented by the fair value of the
contracts at the reporting date. PETT interest rate swaps are documented under
master agreements. Among other things, these agreements provide for a maximum
credit exposure for both parties. Payments are required by the appropriate party
when the maximum limit is reached.
3. SIGNIFICANT AGREEMENTS AND RELATED PARTY TRANSACTIONS
PETT purchased ITP from PECO Energy pursuant to the Amended and
Restated Intangible Transition Property Sale Agreement, dated May 2, 2000 (Sale
Agreement). Under the Sale Agreement, PECO Energy makes certain representations
and warranties about the ITP and indemnifies PETT for losses caused by the
breach of such representations and warranties. To the extent a breach concerns
the existence of the ITP or the ability to charge ITC in the amounts sufficient
to meet a pre-set amortization schedule, PECO Energy must pay liquidated damages
equal to the lost principal and interest of the amortization schedule.
For financial reporting purposes and Federal and Commonwealth of
Pennsylvania income and franchise tax purposes the transfer of ITP to PETT will
be treated as a financing arrangement and not a sale.
The Series 2000-A Transition Bonds were issued pursuant to the
Indenture dated March 1, 1999 (Indenture) and the Series 2000-A Indenture
Supplement dated May 2, 2000. Under the Indenture, PETT has pledged all of its
property, including the ITP, to secure the Transition Bonds. The Indenture
prohibits PETT from selling, transferring, exchanging, or otherwise disposing of
any of the collateral unless directed to do so by the Trustee; from claiming any
credit or making any deduction from the principal, premium, if any, or interest
on Transition Bonds or against any Transition Bond holder; permitting the
validity of effectiveness of the Indenture to be impaired or permitting the lien
of the Indenture to be amended, hypothecated, subordinated, terminated, or
discharged; permitting any person to be released from any of the covenants or
obligations with respect to Transition Bonds as expressly permitted by the
F-14
Indenture; permitting any liens, charges, or claims, security interest or
mortgage (other than the lien created by the Indenture) to be created in or
extended to or otherwise arise upon or burden the collateral or any part
thereof; or permitting the lien of the Indenture not to constitute a valid,
first priority security interest in the collateral.
Under the Amended and Restated Master Servicing Agreement entered into
by PETT and PECO Energy dated May 2, 2000, PECO Energy, as servicer, manages and
administers the ITP sold to PETT and collects the ITC related thereto on behalf
of PETT.
In the nine months ended September 30, 2000 and 1999, PETT recorded
$318.0 million and $222.2 million, respectively, of ITC collections. In the nine
months ended September 30, 2000 and 1999, PETT recorded $8.4 million and $6.0
million, respectively, in servicing fees based upon the outstanding principal
amount of the Transition Bonds.
As of September 30, 2000, the Due from Related Party balance represents
ITC billings by PECO Energy that have not yet been collected (ITC billings) of
$75.7 million and ITC collections by PECO Energy that have not yet been remitted
to PETT (ITC collections) of $5.1 million, partially offset by servicing fees
that have not been paid by PETT (servicing fees) of $1.0 million. As of December
31, 1999, the Due from Related Party balance represents ITC billings of $40.3
million and ITC collections of $2.6 million, partially offset by servicing fees
of $0.8 million.
As of September 30, 2000 and December 31, 1999, the Due to Related
Party balance of $128.9 million and $110.7 million, respectively, represents
cumulative advances from PECO Energy for initial working capital requirements
and operating expenses that are not considered to be currently due and payable
by PECO Energy.
4. LITIGATION
On February 7, 2000, the Mid-Atlantic Power Supply Association (the
Association) filed an intervention to the PUC's proceedings on PECO Energy's
January 7, 2000 application for a QRO to ensure that the proposed securitization
does not have an adverse effect on competition in the retail electrical services
market in Pennsylvania. Specifically, the Association expressed concern that the
2000 QRO would cause a reduction in the shopping credit established in the 1998
QRO and would enable PECO Energy to use the proposed rate reduction in 2001 to
promote its provider of last resort service.
The Association subsequently agreed to join with several of the parties
who participated in PECO Energy's restructuring proceeding in a second
settlement, which was filed with the PUC on March 8, 2000. On March 16, 2000,
the PUC issued an order approving the Joint Petition for Full Settlement of PECO
Energy's Application for Issuance of a QRO authorizing PECO Energy to securitize
up to an additional $1.0 billion of its authorized recoverable stranded costs.
In accordance with the terms of the Joint Petition for Full Settlement, when the
2000 QRO became final and non-appealable, PECO Energy provided its retail
customers with rate reductions in the total amount of $60 million beginning on
January 1, 2001. This rate reduction will be effective for calendar year 2001
only and will not be contingent upon the issuance of additional transition bonds
pursuant to the 2000 QRO.
F-15
5. NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities," (SFAS No. 133) to establish
accounting and reporting standards for derivatives. The new standard requires
recognizing all derivatives as either assets or liabilities on the balance sheet
at their fair value and specifies the accounting for changes in fair value
depending upon the intended use of the derivative.
In June 2000, the FASB issued SFAS No. 138 "Accounting for Certain
Derivative Instruments and Certain Hedging Activities, an amendment of FASB
Statement No. 133" (SFAS No. 138). This standard amends the accounting and
reporting standards of SFAS No. 133. PETT expects to adopt SFAS No. 133 and SFAS
No. 138 on January 1, 2001. PETT initiated a process to implement SFAS No. 133
and SFAS No. 138 by evaluating all of the derivatives of PETT for SFAS No. 133
and SFAS No. 138 implications. This phase of implementation has been completed
and PETT is in the process of evaluating the impact of SFAS No. 133 and SFAS No.
138 on its financial statements.
6. SUBSEQUENT EVENTS
On October 20, 2000, pursuant to a Second Amended and Restated
Agreement and Plan of Exchange and Merger dated as of September 22, 1999 as
amended and restated as of October 10, 2000, among PECO Energy, a Pennsylvania
corporation, Exelon Corporation, a Pennsylvania corporation (Exelon) and Unicom
Corporation, an Illinois corporation (Unicom), PECO Energy, Exelon and Unicom
consummated the merger and exchange. Pursuant to the merger, PECO Energy became
a wholly owned subsidiary of Exelon.
F-16
ANNEX A
The following summary is provided only for your information. The prospectus to
which this annex is attached applies only to bonds issued under that prospectus
and not to the Series 1999-A Bonds.
SERIES 1999-A TRANSITION BONDS
$4,000,000,000
- --------------------------------------------------------------------------------
Issuer: PECO Energy Transition Trust
Seller: PECO Energy Company
Servicer: PECO Energy Company
Swap Counterparty for the
Class A-3 Bonds: Goldman Sachs Mitsui Marine Derivative Products, L.P.
Swap Counterparty for the
Class A-5 Bonds: Citibank, N.A., New York
Bond Trustee: The Bank of New York
Pricing Date: March 18, 1999
Series Issuance Date: March 25, 1999
Clearance and Settlement: DTC/Cedel/Euroclear
- --------------------------------------------------------------------------------
Initial Class Principal Balance Bond Rate % of Total Series Principal
--------------------------------- ----------- ----------------------------
Class A-1 $244,470,272 5.48 % 6.11%
Class A-2 $275,371,325 5.63 % 6.88%
Class A-3 $667,000,000 LIBOR+0.125%* 16.68%
Class A-4 $458,518,647 5.80 % 11.46%
Class A-5 $464,600,000 LIBOR+0.200%* 11.62%
Class A-6 $993,386,331 6.05 % 24.83%
Class A-7 $896,653,425 6.13 % 22.42%
* Calculated as described under "The Series 1999-A Bonds--Interest" in the
prospectus supplement for the Series 1999-A Bonds.
Monthly Servicing Fee: Either 1/12 of 0.25% of the outstanding principal balance of the Series 1999-A
Bonds as long as Intangible Transition Charges are included in electric bills sent
to customers or 1/12 of 1.50% of the outstanding principal balance of the Series
1999-A Bonds if Intangible Transition Charges are not included in electric bills
sent to customers.
Ratings: S&P/Fitch IBCA/Duff & Phelps AAA
Moody's Aaa
Credit Enhancement: ITC adjustments; overcollateralization, funded over the life of the Series 1999-A
Bonds and expected to be $80 million by the Expected Final Payment Date of the
Class A-7 Bonds; capital of the Issuer, funded upon the issuance of each Series
and expected to be $20 million.
Payment Dates: March 1 and September 1 of each year or, if not a business day, the next business
day.
First Payment Date: September 1, 1999.
Class A-1 Class A-2 Class A-3 Class A-4 Class A-5 Class A-6 Class A-7
----------- ----------- --------------- ----------- -------------- ----------- -------------
Expected Final
Payment Date .............. March 1, March 1, March 1, March 1, September 1, March 1, September 1,
2001 2003 2004 2005 2007 2007 2008
Termination Date: ......... March 1, March 1, March 1, March 1, March 1, March 1, March 1,
2003 2005 2006 2007 2009 2009 2009
Optional Redemption:* ..... No No On or After No On or After No No
March 1, 2000 March 1, 2000
* All Series 1999-A Bonds are subject to optional redemption in whole once the
outstanding principal balance of the Series 1999-A Bonds has been reduced to
less than 5% of the initial principal balance.
Record Date: Close of business on the day prior to any Payment Date.
Class A-1 Class A-2 Class A-3 Class A-4 Class A-5 Class A-6 Class A-7
----------- ----------- --------------- ----------- -------------- ----------- -------------
CUSIP Numbers: 705220 AA9 705220 AB7 705220 AC5 705220 AD3 705220 AE1 705220 AF8 705220 AG6
A-1
[THIS PAGE INTENTIONALLY LEFT BLANK]
SERIES 2000-A TRANSITION BONDS
$1,000,000,000
- --------------------------------------------------------------------------------
Issuer: PECO Energy Transition Trust
Seller: PECO Energy Company
Servicer: PECO Energy Company
Bond Trustee: The Bank of New York
Pricing Date: April 27, 2000
Series Issuance Date May 2, 2000
Clearance and Settlement: DTC/Cedel/Euroclear
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Initial Class Principal Balance Bond Rate % of Total Series Principal
--------------------------------- ----------- ----------------------------
Class A-1 $110,000,000 7.180% 11.00%
Class A-2 $140,000,000 7.300% 14.00%
Class A-3 $398,838,452 7.625% 39.88%
Class A-4 $351,161,548 7.650% 35.12%
* Calculated as described under "The Series 2000-A Bonds--Interest" in the
prospectus supplement for the Series 2000-A Bonds.
Monthly Servicing Fee: Either 1/12 of 0.25% of the outstanding principal balance of the Series 2000-A
Bonds as long as intangible transition charges are included in electric bills sent to
customers or 1/12 of 1.50% of the outstanding principal balance of the Series
2000-A Bonds if intangible transition charges are not included in electric bills
sent to customers.
Ratings: S&P/Fitch IBCA AAA
Moody's Aaa
Credit Enhancement: ITC adjustments; overcollateralization, funded over the life of the Series 2000-A
Bonds and expected to be 2% of the initial principal balance of all series of tran-
sition bonds by the expected final payment date of the Class A-4 Bonds; capital
of the issuer, with an additional amount funded upon the issuance of this series
equal to $5 million, for a total of $25 million available to all series of transition
bonds.
Payment Dates: March 1 and September 1 of each year or, if not a business day, the next business
day.
First Payment Date: September 1, 2000.
Class A-1 Class A-2 Class A-3 Class A-4
------------------- ------------------- --------------- ------------------
Expected Final
Payment Date .................. September 1, 2001 September 1, 2002 March 1, 2009 September 1, 2009
Termination Date: ............. September 1, 2003 September 1, 2004 March 1, 2010 March 1, 2010
Optional Redemption:* ......... No No No No
* All Series 2000-A Bonds are subject to optional redemption in whole once the
outstanding principal balance of the Series 2000-A Bonds has been reduced to
less than 5% of the initial principal balance.
Mandatory Redemption: All Series 2000-A Bonds are subject to mandatory redemption in whole if the
seller is obligated to pay liquidated damages for the breach of specified represen-
tations and warranties under the sale agreement.
Record Date: Close of business on the day prior to any Payment Date.
Class A-1 Class A-2 Class A-3 Class A-4
------------ ------------ ------------ -----------
CUSIP Numbers: 705220 AH4 705220 AJ0 705220 AK7 705220 AL5
A-2
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$ Transition Bonds
PECO Energy Transition Trust
Issuer
PECO Energy Company
Seller and Servicer
SERIES 2001-A
Issued to Refinance Series 1999-A Bonds
Class A-3 and Class A-5 in Part
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P R O S P E C T U S S U P P L E M E N T
, 2001
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Salomon Smith Barney
Banc One Capital Markets, Inc. Credit Suisse First Boston First Union Securities Inc.
ABN AMRO Incorporated Barclays Capital
JP Morgan Janney Montgomery Scott LLC Lehman Brothers
Mellon Financial Markets, LLC Merrill Lynch & Co. TD Securities
Commerce Capital Investments, Inc. Loop Capital Markets, LLC Pryor, Counts & Co., Inc.
The date of this prospectus supplement is , 2001.
Dealers will deliver a prospectus supplement and prospectus when acting as
underwriters of these securities and with respect to their unsold allotments or
subscriptions. In addition, all dealers selling these securities will deliver a
prospectus supplement and prospectus until 90 days after the date of this
prospectus supplement.
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