As filed with the Securities and Exchange Commission on September 18, 1998
Registration No. 333-58055
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------
AMENDMENT NO. 1
to
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-----------------------
PECO Energy Transition Trust
(Exact name as specified in registrant's Certificate of Trust)
<TABLE>
<S> <C>
Delaware 51-0382130
-------- ----------
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification Number)
</TABLE>
--------------------
c/o First Union Trust Company, National Association, One Rodney Square,
920 King Street, Wilmington, Delaware 19801
(302) 888-7532
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
Diana Moy Kelly
Beneficiary Trustee
P.O. Box 8699, 2301 Market Street, Philadelphia, PA 19101
(215) 841-4000
(Name, address including zip code, and telephone number
including area code, of agent for service)
Copies to:
<TABLE>
<S> <C> <C>
ROBERT C. GERLACH, ESQ. JAMES W. DURHAM, ESQ. GREGORY M. SHAW, ESQ.
Ballard Spahr Andrews & Ingersoll, LLP Senior Vice President and General Cravath, Swaine & Moore
1735 Market St., 51st Floor Counsel Worldwide Plaza
Philadelphia, PA 19103-7599 P.O. Box 8699 825 Eighth Ave.
2301 Market Street New York, NY 10019
Philadelphia, PA 19101
</TABLE>
Approximate date of commencement of proposed sale to the public: From
time to time after this Registration Statement becomes effective as determined
by market conditions.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. |_|
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, other than securities offered only in connection with
dividend or interest reinvestment plans, check the following box. |X|
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. |_|
The registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, as amended, or until the Registration Statement
shall become effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.
================================================================================
<PAGE>
SUBJECT TO COMPLETION, DATED ________, 1998
Prospectus Supplement $
(To Prospectus dated __________, 1998) _____[%] Transition Bonds, Series 199_-_
PECO Energy Transition Trust PECO Energy Company, Seller and Servicer
PECO Energy Transition Trust (the "Issuer"), a Delaware statutory business trust
established by PECO Energy Company ("PECO Energy"), is offering hereby
$______________ aggregate principal amount of Transition Bonds, Series 199_-_
(the "Series ___ Bonds") [in the following classes: ____________________________
______________________________]. The Series _____ Bonds are being issued under
the Indenture between the Issuer and The Bank of New York, as bond trustee
(together with any successor, the "Bond Trustee") and will rank on a parity with
all other Series of Transition Bonds. The Series ____ Bonds and all other Series
of Transition Bonds will be secured by the Intangible Transition Property sold
to the Issuer (the "Transferred Intangible Transition Property") pursuant to the
Intangible Transition Property Sale Agreement (the "Sale Agreement") and all
proceeds thereof, which will be pledged by the Issuer to the Bond Trustee. The
Issuer will also pledge to the Bond Trustee ITC Collections allocated to the
Issuer pursuant to the Master Servicing Agreement, among the Issuer, PECO Energy
(in such capacity, and along with any successors, the "Servicer") and any other
issuers of transition bonds (the "Master Servicing Agreement"), the Issuer's
rights under the Sale Agreement (except for certain provisions for
indemnification of the Issuer) and the Master Servicing Agreement (except for
certain provisions for indemnification of the Issuer), the Collection Account
and all amounts or investment property on deposit therein or credited thereto
from time to time (other than certain cash amounts described in the Prospectus),
all other property owned by the Issuer from time to time, if any, all present
and future claims, demands, causes and choses in action in respect of any of the
foregoing and all payments on or under and all proceeds in respect of any or all
of the foregoing (the Transferred Intangible Transition Property and all other
property pledged to the Bond Trustee, the "Collateral"), as described in this
Prospectus Supplement and the Prospectus. The Issuer was formed for the purpose
of purchasing and owning the 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 in order to secure the Transition Bonds.
See "The Issuer" in the Prospectus. "Intangible Transition Property" represents
the irrevocable right of PECO Energy or its successor or assignee to collect
nonbypassable charges (the "Intangible Transition Charges") from Customers to
recover through the issuance of transition bonds (i) a portion of PECO Energy's
Stranded Costs, which are the anticipated loss in value of generation-related
assets as a result of the transition from a regulated environment to competition
for electric generation services and (ii) the interest, fees, expenses, credit
enhancement and premiums, if any, associated with transition bonds. The
Intangible Transition Charges are nonbypassable in that applicable customers
cannot avoid paying them even if they purchase electricity from a supplier other
than PECO Energy. See "The Competition Act-Nonbypassability" in the Prospectus.
Intangible Transition Property was created pursuant to the Qualified Rate Order
issued on May 14, 1998 (the "QRO") by the Pennsylvania Public Utility Commission
(the "PUC"), in accordance with the Pennsylvania Electricity Generation Customer
Choice and Competition Act (the "Competition Act"). See "The Competition Act"
and "PECO Energy's Restructuring Plan" in the Prospectus.
Principal and interest on the Series ___ Bonds at the applicable Bond Rate [for
each Class] will be payable on the _____ day of __________ and __________ or, if
any such day is not a Business Day, the next succeeding Business Day, commencing
__________, 1999 and ending __________, 200_ (each a "Payment Date").
THE SERIES ___ BONDS ARE OBLIGATIONS OF THE ISSUER ONLY AND WILL BE SECURED ONLY
BY THE COLLATERAL AS DESCRIBED IN THIS PROSPECTUS SUPPLEMENT AND IN THE
PROSPECTUS. THE ISSUER IS A SPECIAL PURPOSE ENTITY THAT HAS NO PROPERTY OTHER
THAN THE COLLATERAL, AND THE COLLATERAL IS THE SOLE SOURCE OF PAYMENT FOR THE
SERIES ___ BONDS. THE SERIES ___ BONDS DO NOT REPRESENT OBLIGATIONS OF PECO
ENERGY OR ANY ENTITY OTHER THAN THE ISSUER.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
Prospective investors should consider, among other things, the information set
forth under "Risk Factors," which begins on page 24 in the Prospectus.
THERE CURRENTLY IS NO SECONDARY MARKET FOR THE SERIES ___ BONDS, AND THERE IS NO
ASSURANCE THAT ONE WILL DEVELOP.
All capitalized terms used in this Prospectus Supplement are defined in this
Prospectus Supplement or in the Prospectus. See the "Index of Principal
Definitions" which begins on page S-26 of this Prospectus Supplement and on page
115 of the Prospectus for the location of the definitions of capitalized terms
that appear in this Prospectus Supplement.
<TABLE>
<CAPTION>
===================================================================================================================================
Underwriting Discounts Proceeds to
Price To Public and Commissions Issuer (1)(2)
<S> <C> <C> <C>
Per Series [Class] ___ Bond.............. % __________% __________%
Total.................................... $ $ $
===================================================================================================================================
</TABLE>
(1) Plus accrued interest, if any, at the applicable Bond Rate from _________,
199__.
(2) Before deducting expenses payable by the Issuer, estimated at
$__________.
The Series ___ Bonds are offered by the Underwriters when, as and if issued by
the Issuer and accepted by the Underwriters and subject to the Underwriters'
right to reject orders in whole or in part. It is expected that the Series ___
Bonds will be delivered on or about ______________, 1998 in book-entry only form
through the facilities of The Depository Trust Company ("DTC") [, Cedel Bank,
societe anonyme, and the Euroclear System.]
[Underwriters]
The date of this Prospectus Supplement is __________, 1998.
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THE PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS SHALL NOT
CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL
THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER,
SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION
UNDER THE SECURITIES LAWS OF SUCH STATE.
<PAGE>
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE MARKET PRICE OF THE SERIES __ BONDS.
SUCH TRANSACTIONS MAY INCLUDE OVERALLOTMENT TRANSACTIONS, ENTERING STABILIZING
BIDS, EFFECTING SYNDICATE COVERING TRANSACTIONS AND IMPOSING PENALTY BIDS AND
OTHER TRANSACTIONS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING" IN
THIS PROSPECTUS SUPPLEMENT.
THIS PROSPECTUS SUPPLEMENT DOES NOT CONTAIN COMPLETE INFORMATION ABOUT THE
OFFERING OF THE SERIES __ BONDS. ADDITIONAL INFORMATION IS CONTAINED IN THE
PROSPECTUS. PROSPECTIVE INVESTORS ARE URGED TO READ BOTH THIS PROSPECTUS
SUPPLEMENT AND THE PROSPECTUS IN FULL. SALES OF THE SERIES __ BONDS MAY NOT BE
CONSUMMATED UNLESS THE PURCHASER HAS RECEIVED BOTH THIS PROSPECTUS SUPPLEMENT
AND THE PROSPECTUS.
REPORTS TO TRANSITION BONDHOLDERS
Pursuant to the Indenture, the Bond Trustee will prepare and provide to the
holders of record of the Series ___ Bonds regular reports concerning the Series
___ Bonds. Such reports may be available to the beneficial owners of the Series
___ Transition Bonds upon request to the Bond Trustee or the Servicer. The
financial information provided to Series ___ Bondholders will not be examined
and reported upon, nor will an opinion thereon be provided by, any independent
public accountant. See "The Indenture--Reports to Transition Bondholders" in the
Prospectus.
The Issuer will file with the Securities and Exchange Commission (the "SEC")
such periodic reports as are required by the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), and the rules, regulations or orders of the SEC
thereunder. Copies of the Registration Statement and exhibits thereto may be
obtained at the locations specified in the Prospectus under "Available
Information" at prescribed rates. Information filed with the SEC can also be
inspected at the SEC's site on the World Wide Web at http://www.sec.gov. The
Issuer may discontinue filing periodic reports under the Exchange Act at the
beginning of the fiscal year following the issuance of Transition Bonds of any
Series if there are fewer than 300 holders of Transition Bonds.
No dealer, salesperson or other person has been authorized to give any
information or to make any representations other than those contained in this
Prospectus Supplement and the Prospectus and, if given or made, such information
or representations must not be relied upon as having been authorized by the
Issuer, PECO Energy, the Underwriters or any dealer, salesperson or other
person. Neither the delivery of this Prospectus Supplement and the Prospectus
nor any sale made hereunder shall, under any circumstances, create an
implication that information herein or therein is correct as of any time since
the date of this Prospectus Supplement or the Prospectus. This Prospectus
Supplement and the Prospectus do not constitute an offer to sell, or a
solicitation of an offer to buy any security in any jurisdiction in which it is
unlawful to make any such offer or solicitation.
S-1
<PAGE>
SUMMARY OF TERMS
The following summary is qualified in its entirety by the more detailed
information appearing in this Prospectus Supplement and in the Prospectus.
Capitalized terms used in this Prospectus Supplement are defined in this
Prospectus Supplement or in the Prospectus, and prospective investors should
refer to the Index of Principal Definitions on page S-26 of this Prospectus
Supplement, or if not listed there, to the Index of Principal Definitions on
page 115 of the Prospectus, for the location of the definitions of such terms.
For a discussion of certain material risks associated with an investment in
the Series ___ Bonds and any other Transition Bonds, prospective investors
should review the discussion under "Risk Factors," which begins on page 24 of
the Prospectus.
Securities Offered: $_______________ aggregate principal amount (as such balance
may be reduced over time as payments of principal are made,
the "Series Principal Balance") of [___%] Transition Bonds,
Series 199_-_ are being offered hereby. The Series ___ Bonds
are comprised of the Classes listed below. See "The
Indenture" in the Prospectus.
Initial Class
Principal Class Ter- Expected
Class Balance mination Date Final Payment Date Bond Rate
- ----- ------------- ------------- ------------------ ---------
Series Issuance
Date: ______________, 199_.
Issuer: The Issuer is PECO Energy Transition Trust, a Delaware
statutory business trust.
Payment Dates: Payments of principal and interest will be made with respect
to the Series ___ Bonds on each __________, and __________
or, if any such date is not a Business Day, the next
succeeding Business Day, commencing __________, 1999 and
ending __________, 200_.
Record Date: The Record Date with respect to any Payment Date shall be
[the close of business on the last day of the calendar
month] preceding such Payment Date (each, a "Record Date").
Interest: Interest on the [Class ___] [Series ___ Bonds] will be paid
at the Bond Rate [listed above for such Class] [calculated
as follows: to be provided at issuance of a floating rate
Class/Series.] [Interest will be calculated on the basis of
a 360-day year of twelve 30-day months.] See "The Series ___
Bonds--Interest" in this Prospectus Supplement.
Principal: On each Payment Date, the Bond Trustee will pay to the
Transition Bondholders as of the related Record Date amounts
payable as principal,
S-2
<PAGE>
in the following order: [(i) to the holders of the Class ___
Bonds, until the Class Principal Balance thereof has been
reduced to zero; (ii) to the holders of the Class ___ Bonds,
until the Class Principal Balance thereof has been reduced
to zero etc., To Be Provided at Issuance]; provided,
however, that in no event shall the principal payment on any
Class on a Payment Date be greater than the amount necessary
to reduce the Class Principal Balance of such Class to the
amount specified in the Expected Amortization Schedule for
such Class and Payment Date. See "The Series ___
Bonds--Principal" in this Prospectus Supplement.
Credit Enhancement: Overcollateralization. The overcollateralization for the
Series ___ Bonds is $[ ] million (the "Overcollateralization
Amount"). The Calculated Overcollateralization Level for
each Payment Date and the Monthly Allocated
Overcollateralization Balance for each Monthly Allocation
Date, in each case as of the date of this Prospectus
Supplement, are set forth in this Prospectus Supplement
under "The Series ___ Bonds--Overcollateralization." See
also "The Transition Bonds--Credit Enhancement" and "The
Indenture--Allocations and Payments" in the Prospectus.
Capital Subaccount. Upon the issuance of the Series ___
Bonds, PECO Energy will make a capital contribution of
$_________ to the Issuer for deposit in the Capital
Subaccount (the "Required Capital Amount"). See "The
Transition Bonds--Credit Enhancement" and "The
Indenture--Allocations and Payments" in the Prospectus.
Additional credit enhancement in the form of [To Be Provided
at Issuance] will be provided for the Series ___ Bonds. See
"The Transition Bonds--Credit Enhancement" in the
Prospectus.
Optional
Redemption: [Redemption Provisions to Be Provided at Issuance]. See "The
Series ___ Bonds--Optional Redemption" in this Prospectus
Supplement.
Mandatory
Redemption: The Series ___ Bonds 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
the Seller is obligated to pay Liquidated Damages under the
Sale Agreement. PECO Energy, as Seller, will be required to
pay Liquidated Damages as a result of a breach by PECO
Energy of certain of its representations relating to the
Intangible Transition Property under the Sale Agreement if
such breach continues beyond a 90-day grace period and has a
material adverse effect on the Transition Bondholders. The
Bond Trustee, which may consult with the Servicer or other
third parties, will determine whether a breach by PECO
Energy of any such representation has a material adverse
effect on the Transition Bondholders. If the full amount of
certain indemnification payments is reasonably expected to
be incurred beyond a twelve-month period immediately
succeeding the breach of the representation giving rise
thereto, the Seller shall, except as provided below, pay
Liquidated Damages to the Bond Trustee, as assignee of the
Issuer, for deposit into the General Subaccount of the
Collection Account on the first Monthly Allocation Date
following the expiration of such twelve-month period. With
respect to any losses incurred as a result of a breach
described in the
S-3
<PAGE>
previous sentence the full amount of which is reasonably
expected not to exceed 1/12th of 1% of the then outstanding
balance of the Transition Bonds per Monthly Allocation Date
(the "De Minimis Loss Amount"), the Seller on the Monthly
Allocation Date immediately following the day which is 90
days after receipt of written notice from the Issuer or the
Bond Trustee of an event giving rise to an event requiring
indemnification by the Seller (the "Initial Loss Calculation
Date") shall pay to the Bond Trustee as assignee of the
Issuer, for deposit in the Loss Subaccount of the Collection
Account, the aggregate expected amount of such losses for
all Monthly Allocations Dates on which losses are expected
to be incurred, following which the Seller's obligation to
pay indemnification or Liquidated Damages, as applicable, as
a result of such 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 such
losses exceeds the amounts paid by the Seller to the Bond
Trustee as assignee of the Issuer, with respect thereto, the
Seller shall pay to the Bond Trustee, as assignee of the
Issuer, on the next Monthly Allocation Date the amount of
such excess for such Monthly Allocation Date and the
expected amount of excess for all subsequent Monthly
Allocation Dates. See "The Sale Agreement--Seller
Representations and Warranties" in the Prospectus and "The
Series ___ Bonds--Mandatory Redemption" in this Prospectus
Supplement.
[Others to be Provided at Issuance.]
Denominations: The [Class ___] Series ___ Bonds will be issued in minimum
initial denominations of $________ and in integral multiples
of $________ in excess thereof.
Intangible
Transition
Property: Intangible Transition Property is the property right created
under the Competition Act and the QRO. Intangible Transition
Property represents the irrevocable right of PECO Energy or
its successor or assignee to collect the Intangible
Transition Charges from Customers to recover through the
issuance of transition bonds (i) a portion of PECO Energy's
Stranded Costs, which are the anticipated loss in value of
generation- related assets as a result of the transition
from a regulated environment to competition for electric
generation services and (ii) the interest, fees, expenses,
credit enhancement and premiums, if any, associated with
transition bonds. In order to securitize a portion of its
Stranded Cost recovery, PECO Energy will sell Intangible
Transition Property to the Issuer. See "The QRO and the
Intangible Transition Charges" and "The Competition
Act--Recovery of Stranded Costs" in the Prospectus.
S-4
<PAGE>
Intangible
Transition
Charges: As more fully described under "The Competition Act--Recovery
of Stranded Costs" in the Prospectus, the Intangible
Transition Charges are nonbypassable charges billed to
Customers, the collections of which will be remitted by the
Servicer to the Bond Trustee to pay servicing fees and other
expenses related to the Transition Bonds, to make payments
of principal of and interest on the Transition Bonds and to
fund the Overcollateralization Subaccount. See "The QRO and
the Intangible Transition Charges--The QRO" in the
Prospectus.
ITC Adjustment
Process: The Servicer is required to seek adjustments to the
Intangible Transition Charges on each May 14, commencing May
14, 1999 and ending May 14, _____, and on __________ (each
such date, a "Calculation Date"). Such adjustments with
respect to the Series ___ Bonds are expected to be
implemented on August 14 for each Adjustment Request filed
on May 14, and __________ for the Adjustment Request filed
on __________ (each such date, an "Adjustment Date"). See
"The QRO and the Intangible Transition Charges--The
Intangible Transition Charges--The ITC Adjustment Process"
in the Prospectus. Such adjustments are designed to result
in the outstanding principal balance of the Series __ Bonds
equaling the amount provided for in the Expected
Amortization Schedule and the amount on deposit in the
Overcollateralization Subaccount equaling the Calculated
Overcollateralization Level by the Payment Date immediately
[preceding] the next Adjustment Date or the Expected Final
Payment Date, as applicable, taking into account any amounts
on deposit in the Reserve Subaccount.
Monthly Servicing
Fee: With respect to the Series __ Bonds, the Servicer will
receive on each Monthly Allocation Date a fee at the rate of
____% per annum of the Series ___ Bond balance outstanding
on the immediately preceding Monthly Allocation Date.
Tax Status: [In the opinion of Ballard Spahr Andrews & Ingersoll, LLP,
the following, together with the information contained in
"Material Tax Matters" in the Prospectus, is a summary of
the material tax consequences of the purchase, ownership and
disposition of the Series ___ Transition Bonds. In the event
a Class of Series ___ Bonds is issued at a price which is
lower than its stated principal amount by more than a de
minimis amount, the excess of a Series ___ Bond's stated
redemption price at expected maturity over its issue price
will give rise to "original issue discount" ("OID"), which
will be treated as additional interest income to the holder
of a Series ___ Bond.] See "Material Tax Matters" in the
Prospectus.
Ratings: The [Class ___] Series ___ Bonds are rated ____ by the
following Rating Agencies: ____ by __________, ____ by
__________ and ____ by __________ which, in each case, is in
one of the four highest rating categories of such Rating
Agency.
S-5
<PAGE>
A security rating is not a recommendation to buy, sell or
hold securities and may be subject to revision or withdrawal
at any time. Each security rating should be evaluated
independently of any other security rating. No person is
obligated to maintain any rating on any Series ___ Bond, and
accordingly, there can be no assurance that the ratings
assigned to any Class of Series ___ Bonds upon initial
issuance thereof will not be revised or withdrawn by a
Rating Agency at any time thereafter. If a rating of any
Class of Series ___ Bonds is revised or withdrawn, the
liquidity of such Class of Series ___ Bonds may be adversely
affected. In general, the ratings address credit risk and do
not represent any assessment of any particular rate of
principal payments on the Series ___ Bonds other than
payment in full of each Class of Series ___ Bonds by the
applicable Class Termination Date therefor. See "Risk
Factors--The Transition Bonds--Uncertain Weighted Average
Life" and "Ratings" in the Prospectus.
S-6
<PAGE>
THE SERIES ___ BONDS
The Series ___ Bonds will be issued under and secured pursuant to a
base indenture dated as of __________, 1998 between the Issuer and the Bond
Trustee, as supplemented by the Series ___ Supplemental Indenture thereto (as so
supplemented, the "Indenture"). The following summary does not purport to be
complete and is subject to, and qualified by reference to, the terms and
provisions of the Indenture and by reference to the terms and provisions of the
Series ___ Bonds.
General
The Series ___ Bonds will be issued on the Series Issuance Date and
will be comprised of the following Classes:
TABLE 1
<TABLE>
<CAPTION>
Initial Class Class Expected Final
Class Principal Balance Termination Date Payment Date Bond Rate*
----- ----------------- ---------------- -------------- ----------
<S> <C> <C> <C> <C>
________, 20__ ________, 20__ [__________%]
(___ years) (___ years)
________, 20__ ________, 20__ [__________%]
(___ years) (___ years)
________, 20__ ________, 20__ [__________%]
(___ years) (___ years)
</TABLE>
* Calculated as described below under "Interest."
Interest and principal relating to the Series ___ Bonds will be paid
through DTC or, if the Series ___ 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. Payment may be made by check mailed first-class, postage
prepaid to a Transition Bondholder's address as it appears on the transition
bond register on such Record Date, except that with respect to Transition 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 such nominee and except for the final installment of principal and
premium, if any, payable with respect to the Transition Bond. After prior notice
to the Transition Bondholder, the final installment of principal and premium, if
any, will be payable only upon presentation and surrender of the Transition Bond
at a place specified in such notice.
Interest
Interest on each Class of the Series ___ Bonds will accrue from the
Series Issuance Date at the respective Bond Rates indicated above, in each case
payable on each Payment Date, commencing __________, 199_, to the persons in
whose names the Transition Bonds of each Class are registered at the close of
business on the Record Date therefor.
S-7
<PAGE>
[Interest on the [Class ___] [Series ___] Bonds will be calculated as
follows: to be provided at Issuance of any Series with a floating rate Bond
Rate.]
The Record Date with respect to any Payment Date shall be [the close of
business on the last day of the calendar month] preceding such Payment Date.
The "Monthly Allocated Interest Balance" for the Series [Class] __
Bonds and each Monthly Allocation Date is shown below.
TABLE 2
Monthly Allocated Interest Balance
Monthly Allocated
Monthly Allocation Date Interest Balance
September __, 199_
October __, 199_
November __, 199_
December __, 199_
January __, 199_
February __, 199_
March __, 199_
April __, 199_
May __, 199_
June __, 199_
July __, 199_
August __, 199_
Principal
On each Payment Date, each Class of Transition Bonds will be entitled
to receive payments of principal as follows:
(i) to the holders of the Class ___ Bonds, until the Class Principal
Balance thereof has been reduced to zero;
(ii) to the holders of the Class ___ Bonds, until the Class Principal
Balance thereof has been reduced to zero;
[etc. To Be Provided at Issuance.]
provided, however, that in no event shall the principal payment on any Class on
a Payment Date be greater than the amount necessary to reduce the Class
Principal Balance of such Class to the amount specified in the Expected
Amortization Schedule for such Class and Payment Date.
S-8
<PAGE>
"Class Principal Balance" means the initial principal balance allocable
to such Class, reduced by principal distributed to such Class in accordance with
the terms of the Indenture.
The entire unpaid principal amount of the Series ___ Bonds will be due
and payable on ________, the Series [Class] Termination Date.
The following Expected Amortization Schedule sets forth the scheduled
outstanding Class Principal Balance for each Class of the Series ___ Bonds at
each Payment Date (after giving effect to the payments made on such date) from
the Series Issuance Date to the Expected Final Payment Date for such Class. In
preparing the following table, it has been assumed, among other things, that (i)
the Series ___ Bonds are issued on ________, (ii) payments on the Series ___
Bonds are made on each Payment Date, commencing on ________, (iii) the Monthly
Servicing Fee for the Series __ Bonds equals 1/12 of [ ] percent of the
outstanding principal amount of the Transition Bonds, (iv) there are no net
earnings on amounts on deposit in the Collection Account, (v) operating
expenses, including all fees, costs and expenses of the Issuer and amounts owed
by the Issuer to the Bond Trustee and the Issuer Trustee are paid (in the amount
of $33,000 per month in the aggregate for all Series on each Monthly Allocation
Date) and (vi) all ITC Collections allocated to the Issuer pursuant to the
Master Servicing Agreement are deposited in the Collection Account in accordance
with the Seller's forecasts.
TABLE 3
Expected Amortization Schedule
Payment Date Outstanding Class Principal Balance
------------ -----------------------------------
Class Class Class
----- ----- -----
Series Issuance Date
, 199_
, 199_
, 2000
, 2000
, 2001
, 2001
, 2002
[Etc.]
There can be no assurance that the Class Principal Balance of any Class
of the Series ___ Bonds will be reduced in the amounts indicated in the
foregoing table. The actual reductions in such Class Principal Balances may be
delayed from those indicated in the table. See "Risk Factors" in the Prospectus
for various factors which may, individually or in the aggregate, affect the
rates of reduction of the Class Principal Balances of any Class of the Series
___ Bonds.
S-9
<PAGE>
The "Monthly Allocated Principal Balance" for the Series __ Bonds and
each Monthly Allocation Date is shown below.
TABLE 4
Monthly Allocated Principal Balance
Monthly Allocated
Monthly Allocation Date Principal Balance
September __, 199_
October __, 199_
November __, 199_
December __, 199_
January __, 199_
February __, 199_
March __, 199_
April __, 199_
May __, 199_
June __, 199_
July __, 199_
August __, 199_
Optional Redemption
[Optional Redemption Provisions To Be Provided at Issuance.]
Mandatory Redemption
The Series ___ Bonds 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 the Seller is obligated to pay Liquidated
Damages under the Sale Agreement. PECO Energy, as Seller, will be required to
pay Liquidated Damages as a result of a breach by PECO Energy of certain of its
representations relating to the Intangible Transition Property under the Sale
Agreement if such breach continues beyond a 90-day grace period and has a
material adverse effect on the Transition Bondholders. The Bond Trustee, which
may consult with the Servicer and other third parties, will determine whether a
breach by PECO Energy of any such representation has a material adverse effect
on the Transition Bondholders. If the full amount of certain indemnification
payments is reasonably expected to be incurred beyond a twelve-month period
immediately succeeding the breach of the representation giving rise thereto, the
Seller shall, except as provided below, pay Liquidated Damages to the Bond
Trustee, as assignee of the Issuer, for deposit into the General Subaccount of
the Collection Account on the first Monthly Allocation Date following the
expiration of such twelve-month period. With respect to any losses incurred as a
result of a breach described in the previous sentence the full amount of which
is reasonably expected not to exceed 1/12th of 1% of the then outstanding
balance of the Transition Bonds per Monthly Allocation Date (the "De Minimis
Loss Amount"), the Seller on the Monthly Allocation Date immediately following
the Initial Loss Calculation Date shall pay to the Bond Trustee as assignee of
the Issuer, for deposit in the Loss Subaccount of the Collection Account, the
aggregate expected amount of such losses for all Monthly Allocations Dates on
which losses are expected to be incurred, following which the Seller's
obligation to pay indemnification or Liquidated
S-10
<PAGE>
Damages, as applicable, as a result of such 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 such losses exceeds the amounts
paid by the Seller to the Bond Trustee as assignee of the Issuer, with respect
thereto, the Seller shall pay to the Bond Trustee, as assignee of the Issuer, on
the next Monthly Allocation Date the amount of such excess for such Monthly
Allocation Date and the expected amount of excess for all subsequent Monthly
Allocation Dates. See "The Sale Agreement--Seller Representations and
Warranties" in the Prospectus and "The Series ___ Bonds--Mandatory Redemption"
in this Prospectus Supplement. See "The Sale Agreement" in the Prospectus.
Overcollateralization
The Overcollateralization Amount for the Series ___ Bonds is $_______
million. The Intangible Transition Charges related to the Series __ Bonds will
be calculated at and periodically adjusted to a level that is designed to
collect the Overcollateralization Amount ratably over the life of the Series ___
Bonds. The Calculated Overcollateralization Level for each Payment Date for all
Series of Transition Bonds and the Monthly Allocated Overcollateralization
Balance for each Monthly Allocation Date, in each case as of the date of this
Prospectus, are set forth below. See also "The Transition Bonds--Credit
Enhancement" and "The Indenture--Allocations and Payments" in the Prospectus.
TABLE 5
Payment Date Calculated Overcollateralization Level
[To be Provided at the time of Issuance.]
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<PAGE>
TABLE 5A
Monthly Allocated Overcollateralization Balance
Monthly Allocation Date Monthly Allocated Overcollateralization Balance
September __, 199_
October __, 199_
November __, 199_
December __, 199_
January __, 199_
February __, 199_
March __, 199_
April __, 199_
May __, 199_
June __, 199_
July __, 199_
August __, 199_
Other Credit Enhancement
Reserve Subaccount. ITC Collections allocated to the Issuer pursuant to
the Master Servicing Agreement available on any Monthly Allocation Date above
that amount necessary to pay the (i) amounts payable in respect of expenses of
the Issuer Trustee, the Bond Trustee and the Servicer and certain other fees and
expenses, (ii) amounts distributable to Series Subaccounts in respect of
principal of and interest on each Series of Transition Bonds payable on the next
Payment Date therefor and (iii) amounts allocable to the Overcollateralization
Subaccount (all as described under "The Indenture--Allocations and Payments" in
the Prospectus) will be allocated to the Reserve Subaccount. On each Monthly
Allocation Date, the Bond Trustee will draw on amounts in the Reserve
Subaccount, if any, to the extent amounts available in the General Subaccount,
the Interest Deposit Subaccount (with respect to payments of Interest) and the
Loss Subaccount are insufficient to make scheduled distributions to the Series
Subaccount and pay expenses of the Issuer, the Bond Trustee, the Servicer and
certain other fees and expenses.
Capital Subaccount. Upon the issuance of the Series ___ Bonds, PECO
Energy will deposit the Required Capital Amount of $________ in the Capital
Subaccount. On each Monthly Allocation Date, the Bond Trustee will draw on
amounts in the Capital Subaccount, if any (except for approximately $200,000 in
the aggregate for all Series of Transition Bonds, which will be segregated to
pay certain expenses), to the extent amounts available in the General
Subaccount, the Interest Deposit Subaccount (with respect to payments of
Interest), the Loss Subaccount, the Reserve Subaccount and the
Overcollateralization 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 certain other fees and expenses. See "The
Transition Bonds--Credit Enhancement" and "The Indenture--Allocations and
Payments" in the Prospectus. See "The Transition Bonds--Credit Enhancement" and
"The Indenture--Allocations and Payments" in the Prospectus.
[Other To Be Provided at the Time of Issuance.]
S-12
<PAGE>
DESCRIPTION OF INTANGIBLE TRANSITION PROPERTY
The Intangible Transition Charges
The Qualified Transition Expenses authorized in the QRO are to be
recovered from Customers in each of PECO Energy's separate Rate Classes that
have been assigned Stranded Cost responsibility based on the allocation of
generation-related charges borne by such Rate Classes through current electric
rates approved by the PUC. All Series and Classes of Transition Bonds will be
secured by the Collateral. The Intangible Transition Charges will be calculated
by determining the total amount of Intangible Transition Charges required to be
billed to each such Rate Class in order to generate ITC Collections sufficient
to ensure timely recovery of Qualified Transition Expenses among affected Rate
Classes. 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
(except in the case of Customers participating in the pilot program for
competition, where the percentage will be applied to the non-generation portion
of the 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 such Customer. 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, ITC Collections will vary. Variations in ITC
Collections will be addressed by recalculating the percentages applied to
Customers' bills on each Calculation Date. See Tables 7, 8, 9 and 10 under
"Description of the Seller's Business" in this Prospectus Supplement and "The
QRO and the Intangible Transition Charges--The Intangible Transition
Charges--The ITC Adjustment Process" in the Prospectus. Once Customer bills are
unbundled beginning January 1, 1999 and charges for generation, transmission and
distribution and other services are separately identified, the Intangible
Transition Charge percentage will be applied to total projected revenue per Rate
Class, exclusive of transmission, energy, capacity and fixed distribution
charges. This will be reflected in the calculation thereof. The cash flow from
Intangible Transition Charges (i.e. ITC Collections) will be allocated among the
Transferred Intangible Transition Property held by the Issuer and Intangible
Transition Property held by other entities, based on their respective
Percentages at the time such Intangible Transition Charges were billed.
"Percentages" means, with respect to any issuer of transition bonds, the
percentage equivalent of a fraction, the numerator of which is the aggregate
Intangible Transition Charges (as adjusted from time to time) applicable to each
Customer Class and all series of transition bonds issued by such issuer and the
denominator of which is the aggregate Intangible Transition Charges (as adjusted
from time to time) applicable to each Customer Class and all series of
transition bonds issued by all the issuers.
Initially, the Intangible Transition Charges billed will amount to
approximately $_________ per month for an average Residential Customer,
approximately $_________ per month for Small Commercial and Industrial Customers
and approximately $________ per month for Large Commercial and Industrial
Customers. The average monthly bill for each Customer Category of PECO Energy
Customers [during 1997] [for the period __________ to __________] was $______,
$____ and $______, respectively. The following projected average Intangible
Transition Charges (expressed as a percentage applied to each Customer's total
bill or non-generation portion of the bill, as applicable) will be imposed on
Customers in the following Customer Categories beginning on the Series Issuance
Date for the Series __ Bonds:
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<PAGE>
TABLE 6
Projected Average Intangible Transition Charges for the Period ___ to ____
Residential Customers
Rate Class ITC Percentage
---------- --------------
Rate R %
Rate R-H %
Rate OP %
Small Commercial and Industrial Customers
Rate Class ITC Percentage
---------- --------------
Rate GS %
Rate POL %
Rate SL-P %
Rate SL-S %
Rate SL-E %
Rate TL %
Rate BLI(1) %
Large Commercial and Industrial Customers
Rate Class ITC Percentage
---------- --------------
Rate PD %
Rate HT %
Rate EP %
- ---------------
(1) No Intangible Transition Charges will be imposed on Rate BLI Customers.
S-14
<PAGE>
Rate Class Descriptions:
Rate Classes are created by the PUC and are subject to change. Such
changes will be reflected in any Adjustment Request filed with the PUC
by the Servicer. The current Rate Classes have remained unchanged for
eight years. The Rate Classes indicated above are:
Residential Rate Classes:
Rate R - Residential Service: Single-phase Electric Delivery Service is
available in the entire territory of PECO Energy to the dwelling and
appurtenances of a single private family for the domestic requirements
of its members, which service is supplied through one meter. Also
includes Rate RS Customers receiving service under a solar rate and
payment-troubled low income Customers receiving discounted rates under
the Customer Assistance Program, Rate CAP.
Rate R-H - Residential Heating Service: Single-phase Electric Delivery
Service is available to the dwelling and appurtenances of a single
private family (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 Rates R, R-H
and with Residence Electric Delivery Service under Rate GS, for any
Customer receiving delivery at 120/240 volts, 3 wires, or 120/208
volts, 3 wires, for the operation of 240-volt or 208-volt domestic
equipment of a type approved by PECO Energy.
Small 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.
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
S-15
<PAGE>
established hereunder 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.
Large Commercial and Industrial Rate Classes:
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 Servicer is required to seek adjustments to the Intangible
Transition Charges on each Calculation Date as described under "The QRO and the
Intangible Transition Charges" in the 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:
To Be Provided at Issuance of Subsequent Series.]
DESCRIPTION OF THE SELLER'S BUSINESS
The following is information which supplements that provided under the
heading "PECO Energy Company" in the Prospectus. For a more complete discussion
of the Seller and the Servicer, see "PECO Energy Company" and "The Seller and
Servicer" in the Prospectus.
General
PECO Energy reported net income of $________ on earned revenues for
retail electricity of $_________ for the [quarter][year] ended __________, 199_
as compared with net income of $________ on earned revenues for retail
electricity of $________ for the [quarter][year] ended _________, 199_.
S-16
<PAGE>
Customers and Collections
The Intangible Transition Charges will be assessed on the bills of each
person (each, a "Customer") that (i) was a Customer of PECO Energy located
within PECO Energy's retail electric service territory on January 1, 1997 or
that became a Customer of electric services within such territory after January
1, 1997, (ii) is still located within such territory and (iii) is in a Rate
Class that has been assigned Stranded Cost responsibility. The Rate Classes that
have been assigned Stranded Cost recovery are Rate Classes R, R-H, OP, GS, POL,
SL-P, SL-S, SL-E, TL, PD, HT, and EP. For a description of such Rate Classes,
see "Description of Intangible Transition Property--The Intangible Transition
Charges" in this Prospectus Supplement.
The following tables show the number of retail electric Customers by
Rate Class and the percentage of all retail electric Customers in all Rate
Classes (Table 7), retail electric usage by Rate Class (Table 8), and retail
electric revenues by Rate Class (Table 9) for the periods indicated below. Not
all Customers in all Rate Classes will be billed Intangible Transition Charges.
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 on the following tables.
S-17
<PAGE>
TABLE 7
Retail Electric Customers For the Period Ended __/__/__
Number of
Customers % of Total
--------- ----------
Residential
Rate R(1) %
Rate R-H %
Rate OP(2) %
Total %
Small Commercial
and Industrial
Rate GS %
Rate POL(3) %
Rate SL-P %
Rate SL-S %
Rate SL-E %
Rate TL %
Rate BLI(4) %
Total %
Large Commercial
and Industrial
Rate PD %
Rate HT %
Rate EP %
Total %
Total 100%
========= ====
- ---------------
(1) For description of the meanings of rate class abbreviations, see Table
6 in "Description of Intangible Transition Property" in this
Prospectus Supplement.
(2) Rate OP is available in conjunction with Residential Rate Classes R,
R-H and with Small Commercial and Industrial Rate Class GS for those
Customers in Rate Class GS who use Residence Electric Delivery
Service.
(3) Rate POL is available in conjunction with Small Commercial and
Industrial Rate Class GS.
(4) No Intangible Transition Charges will be imposed on Rate BLI Customers.
[As of _____, _____ electric generation suppliers provide consolidated
billing for ____ Residential Customers (__% of total Customers), ___ electric
generation suppliers provide consolidated billing for __ Small Commercial and
Industrial Customers (__% of total Customers) and _____ electric generation
suppliers provide consolidated billing for _____ Large Commercial and Industrial
Customers (__% of total Customers). Electric generation suppliers are
responsible for __% of PECO Energy's retail electric sales revenues and __% of
Intangible Transition Charges. There can be no assurance that current electric
generation suppliers will remain electric generation suppliers or that they will
provide consolidated billing to the same number of Customers.]
S-18
<PAGE>
TABLE 8
Retail Electric Usage for the period ended __/__/__
kWh % of Total
--- ----------
Residential
Rate R(1) %
Rate R-H %
Rate OP(2) %
Total %
Small Commercial
and Industrial
Rate GS %
Rate POL(3) %
Rate SL-P %
Rate SL-S %
Rate SL-E %
Rate TL %
Rate BLI(4) %
Total %
Large Commercial
and Industrial
Rate PD %
Rate HT %
Rate EP %
Total %
Total 100%
--- ====
- ---------------
(1) For description of the meanings of rate class abbreviations, see Table
6 in "Description of Intangible Transition Property" in this
Prospectus Supplement.
(2) Rate OP is available in conjunction with Residential Rate Classes R,
R-H and with Small Commercial and Industrial Rate Class GS for those
Customers in Rate Class GS who use Residence Electric Delivery
Service.
(3) Rate POL is available in conjunction with Small Commercial and
Industrial Rate Class GS.
(4) No Intangible Transition Charges will be imposed on Rate BLI
Customers.
Actual usage fluctuations are highly dependent on weather conditions.
See "Risk Factors--Servicing--Inaccurate Projections" in the Prospectus. The
total annual usage adjusted for weather effects has decreased for the past two
years. The compounded annual growth rate in the usage, adjusted for weather
effects, by all Customer classes from 1987 through 1997 was .75%. There can be
no assurance that future usage growth rates for PECO Energy will be similar to
historical experience.
S-19
<PAGE>
TABLE 9
Retail Electric Revenues (dollars in thousands) for the Period Ended __/__/__
$000's % of Total
------ ----------
Residential
Rate R(1) %
Rate R-H %
Rate OP(2) %
Small Commercial
and Industrial
Rate GS %
Rate POL(3) %
Rate SL-P %
Rate SL-S %
Rate SL-E %
Rate TL %
Rate BLI(4) %
Large Commercial
and Industrial
Rate PD %
Rate HT %
Rate EP %
Total $ 100%
========== ====
- ---------------
(1) For description of the meanings of rate class abbreviations, see Table
6 in "Description of Intangible Transition Property" in this
Prospectus Supplement.
(2) Rate OP is available in conjunction with Residential Rate Classes R,
R-H and with Small Commercial and Industrial Rate Class GS for those
Customers in Rate Class GS who use Residence Electric Delivery
Service.
(3) Rate POL is available in conjunction with Small Commercial and
Industrial Rate Class GS.
(4) No Intangible Transition Charges will be imposed on Rate BLI
Customers.
Concentrations. For the period ended __________, the largest Customer
represented approximately ____% of PECO Energy's revenues, and the ten largest
Customers represented approximately ____% of PECO Energy's revenues. 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.
Delinquency and Write-Off Experience. The following table sets forth
the delinquency and write-off experience with respect to payments to PECO Energy
by Customer Category for the period indicated below. Changes in the retail
electric market, including but not limited to the introduction of electric
generation suppliers who provide consolidated billing to PECO Energy's Customers
could mean
S-20
<PAGE>
that historical delinquency and write-off ratios will not be indicative of the
future rates. 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 10
Delinquency and Loss
Delinquencies as Percentage of Total Billed Revenues
for the Period Ended __/__/__
Residential %
30+ days
60+ days
90+ days
Small Commercial
and Industrial %
30+ days
60+ days
90+ days
Large Commercial
and Industrial %
30+ days
60+ days
90+ days
Net Write-Offs as Percentage of Total Billed Revenues
for the Period Ended __/__/__
Residential %
Small Commercial
and Industrial %
Large Commercial
and Industrial %
During the last ___ months, the delinquency and write-off expenses for
all Customer Categories has remained relatively constant with no discernable
trend upwards or downwards. PECO Energy does not expect the delinquency or
write-off experience with respect to ITC Collections will differ substantially
from the rates indicated above.
S-21
<PAGE>
SERVICING
Servicer Advances
[To Be Provided at Issuance.]
MATERIAL TAX MATTERS
[In the event a Class of Series ___ Bonds is issued at a price which is
lower than its stated principal amount by more than a de minimis amount, the
excess of a Series ___ Bond's stated redemption price at expected maturity over
its issue price will give rise to OID, which will be treated as additional
interest income to the holder of a Series ___ Bond. Accordingly, a Series ___
Transition Bondholder will be subject to the following tax consequences in
addition to the tax consequences described in the Prospectus.
In general, the issue price of a Class of Series ___ Bonds is the first
price at which a substantial amount of Series ___ Bonds of such Class is sold to
the public. In general, if the principal amount of a Series ___ Bond exceeds its
issue price by an amount that is less than 0.25% of the Series ___ Bond's
principal amount payable at expected maturity multiplied by the number of
complete years to maturity (the "de minimis amount"), then the excess is treated
as de minimis OID and the Series ___ Bond is not treated as having been issued
with OID. Unless a Series ___ Transition Bondholder makes an election to accrue
all interest on a constant-yield basis, the Series ___ Transition Bondholder
must include de minimis OID in income proportionately as stated principal
payments on the Series ___ Bond are made.
A Series ___ Transition Bondholder that is a United States Person will
be required to include in taxable income any OID income as it accrues on a
constant-yield method based on the compounding of interest before the receipt of
cash payments attributable to such income. A Series ___ Transition Bondholder
must take such OID income into account currently, regardless of the Series ___
Transition Bondholder's general method of accounting for other items. In
general, a Series ___ Transition Bondholder will be required to include in gross
income the sum of the daily portions of OID with respect to the Series ___ Bond
for each day during the taxable year in which the Series ___ Transition
Bondholder holds the Series ___ Bond. The daily portion is determined by
allocating to each day in any "accrual period" a pro rata portion of the OID
allocable to that accrual period. Accrual periods with respect to a Series ___
Bond may be of any length selected by the Series ___ Transition Bondholder and
may vary in length over the term of the Series ___ Bond, so long as (i) no
accrual period is longer than one year and (ii) each scheduled payment of
interest or principal on the Series ___ Bond occurs on either the final day or
the first day of the accrual period. The amount of OID on a Series ___ Bond that
is allocable to the accrual period is equal to the excess of (x) the product of
the adjusted issue price of the Series ___ Bond at the beginning of the accrual
period and the yield to maturity of the Series ___ Bond (determined on the basis
of compounding at the close of each accrual period and properly adjusted for the
length of the accrual period) over (y) the sum of the payments of interest on
the Series ___ Bond that are allocable to the accrual period. The adjusted issue
price of a Series ___ Bond at the beginning of any accrual period is the issue
price of the Series ___ Bond, increased by the amount of accrued OID for each
prior accrual period and decreased by the amount of any payments of principal
previously made on the Series ___ Bond. A Series ___ Transition Bondholder that
is a United States Person will have a tax basis in a Series ___ Bond equal to
the Series ___ Transition Bondholder's purchase price (exclusive of any portion
thereof representing accrued but unpaid interest), decreased by any principal
repayments and increased by the amount of any OID previously taken into income.
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<PAGE>
A Series ___ Transition Bondholder that is a Foreign Person will be
subject to a United States withholding tax of 30% upon the actual payment of OID
income, except as described in the Prospectus in the context of (1) a Foreign
Person that (i) does not own directly or constructively 10% or more of the total
combined voting power of all classes of stock of PECO Energy entitled to vote,
(ii) is not a controlled foreign corporation that is related to PECO Energy
through stock ownership and (iii) meets the withholding documentation
requirements discussed in the Prospectus, and (2) where an applicable tax treaty
provides for the reduction or elimination of such withholding tax. In the
context of backup withholding and information reporting requirements, the
discussion in the Prospectus regarding interest income would be similarly
applicable to OID income. A Series ___ Transition Bondholder that is a Foreign
Person generally will be taxable in the same manner as a United States
corporation or resident with respect to OID income if such income is effectively
connected with the conduct of a trade or business in the United States.]
ERISA CONSIDERATIONS
ERISA and/or Section 4975 of the Code impose certain requirements on
employee benefit plans and certain other plans and arrangements, including
individual retirement accounts and annuities, Keogh plans and certain collective
investment funds or insurance company general or separate accounts in which such
plans, accounts or arrangements are invested, that are subject to the fiduciary
responsibility and prohibited transaction provisions of ERISA and/or Section
4975 of the Code (collectively, "Plans"), and on persons who are fiduciaries
with respect to Plans, in connection with the investment of assets that are
treated as "plan assets" of any Plan for purposes of applying Title I of ERISA
and Section 4975 of the Code ("Plan Assets"). ERISA imposes on Plan fiduciaries
certain general fiduciary requirements, including those of investment prudence
and diversification and the requirement that a Plan's investments be made in
accordance with the documents governing the Plan. Generally, any person who has
discretionary authority or control respecting the management or disposition of
Plan Assets, and any person who provides investment advice with respect to Plan
Assets for a fee or other consideration, is a fiduciary with respect to such
Plan Assets.
ERISA and Section 4975 of the Code prohibit a broad range of
transactions involving Plan Assets and persons who have certain specified
relationships to a Plan or its Plan Assets ("parties in interest" under ERISA
and "disqualified persons" under the Code (collectively, "Parties in
Interest")), unless a statutory or administrative exemption is available.
Parties in Interest and Plan fiduciaries that participate in a prohibited
transaction may be subject to penalties imposed under ERISA and/or excise taxes
imposed pursuant to Section 4975 of the Code, unless a statutory or
administrative exemption is available. These prohibited transactions generally
are set forth in Section 406 of ERISA and Section 4975 of the Code.
Any fiduciary or other Plan investor considering whether to purchase
the Series ___ Bonds on behalf of or with Plan Assets of any Plan should consult
with its legal advisors for guidance regarding the ERISA Considerations
applicable to the Series ___ Bonds offered thereby.
[Certain employee benefit plans, such as governmental plans (as defined
in Section 3(32) of ERISA) and certain church plans (as defined in Section 3(33)
of ERISA), are not subject to the requirements of ERISA or Section 4975 of the
Code. Accordingly, assets of such plans may be invested in the Series ___ Bonds
of any Class without regard to the ERISA considerations described in this
Section, subject to the provisions of other applicable federal and state law.
However, any such plan that is qualified and exempt from taxation under Sections
401(a) and 501(a) of the Code is subject to the prohibited transaction rules set
forth in Section 503 of the Code.]
S-23
<PAGE>
UNDERWRITING
Subject to the terms and conditions set forth in the underwriting
agreement (the "Underwriting Agreement") among the Issuer, PECO Energy, and the
underwriters named below (the "Underwriters") for whom____________________,
____________________ and ____________________ are acting as representatives, the
Issuer has agreed to sell to the Underwriters, and the Underwriters have
severally agreed to purchase, the principal amount of Series ___ Bonds set forth
opposite each Underwriter's name below:
Principal Amount of
Transition Bonds to Be Purchased
[Class ___] [Class ___] [Class ___]
Series Series Series
Underwriters Bonds Bonds Bonds
------------ ------ ------ ------
$ $ $
-------------------- --------- ---------- ---------
Total $ $ $
========= ========== =========
Under the terms and conditions of the Underwriting Agreement, the
Underwriters are committed to take and to pay for all of the Series ___ Bonds
offered hereby, if any are taken.
The Underwriters propose to offer the Series ___ 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 certain securities
dealers at such price less a concession not in excess of _____ percent of the
principal amount of the [Class] ___ Series ___ Bonds, ____ percent of the
principal amount of the [Class] ___ Series ___ Bonds and _____ percent of the
principal amount of the [Class] ___ Series ___ Bonds. The Underwriters may allow
and such dealers may reallow a concession to certain brokers and dealers not in
excess of ____ percent of the principal amount of the [Class] ___ Series ___
Bonds, ____ percent of the principal amount of the [Class] ___ Series ___ Bonds
and ____ percent of the principal amount of the [Class] ___ Series ___ Bonds.
After the Series ___ 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.
The Series ___ Bonds are a new issue of securities with no established
trading market. The Series ___ Bonds 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 ___ 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 ___ Bonds.
The Underwriters may engage in overallotment transactions, stabilizing
transactions, syndicate covering transactions and penalty bids with respect to
the Series ___ Bonds in accordance with Regulation M under the Securities
Exchange Act of 1934. Overallotment transactions involve syndicate sales in
excess
S-24
<PAGE>
of the offering size, which creates a syndicate short position. Stabilizing
transactions permit bids to purchase the Series ___ Bonds so long as the
stabilizing bids do not exceed a specified maximum. Syndicate covering
transactions involve purchases of the Series ___ 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 ___ Bonds originally sold by such syndicate
member are purchased in a syndicate covering transaction. Such overallotment
transactions, stabilizing transactions, syndicate covering transactions and
penalty bids may cause the prices of the Series ___ Bonds to be higher than they
would otherwise be in the absence of such transactions. None of the Seller, the
Issuer, the Issuer Trustee or the Bond Trustee or any of the Underwriters
represent that the Underwriters will engage in any such transactions or that
such transactions, once commenced, will not be discontinued without notice at
any time.
Under the terms of the Underwriting Agreement, the Issuer and PECO
Energy have agreed to reimburse the Underwriters for certain expenses.
The Issuer and the Seller have agreed to indemnify the several
Underwriters against certain liabilities, including liabilities under the
Securities Act.
RATINGS
It is a condition of any Underwriter's obligation to purchase the
[Series] [Class] ___ Bonds that the [Series] [Class] ___ Bonds be rated " " by
________, " " by __________, " " by __________ and " " by __________ (each of
_________, __________, __________ and __________, a "Rating Agency") which, in
each case, is in one of the four highest rating categories of such 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
Series ___ Bond, and, accordingly, there can be no assurance that the ratings
assigned to any Class of Series ___ Bonds upon initial issuance will not be
revised or withdrawn by a Rating Agency at any time thereafter. If a rating of
any Class of Series ___ Bonds is revised or withdrawn, the liquidity of such
Class of Series ___ 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 ___ Bonds other than payment in full of each
Class of Series ___ Bonds by the applicable Class Termination Date.
S-25
<PAGE>
INDEX OF PRINCIPAL DEFINITIONS
Set forth below is a list of the defined terms used in this Prospectus
Supplement and defined herein and the pages on which the definition may be
found. Certain defined terms used in this Prospectus Supplement are defined in
the Prospectus. See "Index of Principal Definitions" on page 122 of the
Prospectus.
TERM PAGE
---- ----
Adjustment Date...........................................................S-5
Bond Trustee............................................................Cover
Calculation Date..........................................................S-5
Class Principal Balance...................................................S-9
Collateral..............................................................Cover
Competition Act.........................................................Cover
Customer.................................................................S-17
De Minimis Loss Amount....................................................S-4
DTC.....................................................................Cover
Exchange Act..............................................................S-1
Indenture.................................................................S-7
Initial Loss Calculation Date.............................................S-4
Intangible Transition Charges...........................................Cover
Intangible Transition Property..........................................Cover
Issuer..................................................................Cover
Master Servicing Agreement..............................................Cover
Monthly Allocated Interest Balance........................................S-8
Monthly Allocated Principal Balance......................................S-10
OID.......................................................................S-5
Overcollateralization Amount..............................................S-3
Parties in Interest......................................................S-23
Payment Date............................................................Cover
PECO Energy.............................................................Cover
Percentages..............................................................S-13
Plan Assets..............................................................S-23
Plans....................................................................S-23
PUC.....................................................................Cover
QRO.....................................................................Cover
Rate BLI.................................................................S-16
Rate EP..................................................................S-16
Rate GS..................................................................S-15
Rate HT..................................................................S-16
Rate OP..................................................................S-15
Rate PD..................................................................S-16
Rate POL.................................................................S-15
Rate R...................................................................S-15
Rate R-H.................................................................S-15
S-26
<PAGE>
TERM PAGE
---- ----
Rate SL-E................................................................S-15
Rate SL-P................................................................S-15
Rate SL-S................................................................S-15
Rate TL..................................................................S-16
Rating Agency............................................................S-25
Record Date...............................................................S-2
Required Capital Amount...................................................S-3
Sale Agreement..........................................................Cover
SEC.......................................................................S-1
Series ___ Bonds........................................................Cover
Series Principal Balance..................................................S-2
Servicer................................................................Cover
Transferred Intangible Transition Property..............................Cover
Underwriters.............................................................S-24
Underwriting Agreement...................................................S-24
S-27
<PAGE>
SUBJECT TO COMPLETION, DATED ____________, 1998
Prospectus
PECO Energy Transition Trust, Issuer
Transition Bonds Issuable in Series
PECO Energy Company, Seller and Servicer
PECO Energy Transition Trust (the "Issuer") proposes to offer up to $________ of
transition bonds in one or more series (each, a "Series"), each of which may be
comprised of one or more classes (each, a "Class"), in amounts, at prices and on
terms to be determined at the time of sale and to be set forth in a supplement
to this Prospectus (each, a "Prospectus Supplement"). The transition bonds will
be issued under an indenture and supplemental indentures thereto (collectively,
the "Indenture") between the Issuer and The Bank of New York, as bond trustee
(together with any successor, the "Bond Trustee"). All transition bonds issued
under the Indenture are referred to in this Prospectus and the Prospectus
Supplement as "Transition Bonds." The Transition Bonds of each Series will be
secured by Intangible Transition Property sold to the Issuer (the "Transferred
Intangible Transition Property") and the proceeds thereof, which will be pledged
by the Issuer to the Bond Trustee. The Issuer will also pledge to the Bond
Trustee ITC Collections allocated to the Issuer pursuant to the Master Servicing
Agreement, the Issuer's rights under the Sale Agreement (except for certain
provisions for indemnification of the Issuer) and the Master Servicing Agreement
(except for certain provisions for indemnification of the Issuer), the
Collection Account, and all amounts or investment property on deposit therein or
credited thereto from time to time (other than cash or other property
distributed to the Issuer from the Collection Account in accordance with the
provisions of the Indenture as described in this Prospectus), all other property
owned by the Issuer from time to time, if any, all present and future claims,
demands, causes and choses in action in respect of any of the foregoing and all
payments on or under and all proceeds in respect of any or all of the foregoing
(the Transferred Intangible Transition Property and all other property pledged
to the Bond Trustee, the "Collateral"). Each Series of Transition Bonds will
rank on a parity with all other Series of Transition Bonds. See "The
Indenture--Security" and "--Issuance in Series or Classes" in this Prospectus.
"Intangible Transition Property" represents the irrevocable right of PECO Energy
Company ("PECO Energy") or its successor or assignee to collect nonbypassable
charges (the "Intangible Transition Charges") from Customers to recover through
the issuance of transition bonds (i) a portion of PECO Energy's Stranded Costs,
which are the anticipated loss in value of generation-related assets as a result
of the transition from a regulated environment to competition for electric
generation services and (ii) the interest, fees, expenses, credit enhancement
and premiums, if any, associated with the transition bonds. These Intangible
Transition Charges are nonbypassable in that applicable customers cannot avoid
paying them even if they purchase electricity from a supplier other than PECO
Energy. See "The Competition Act--Nonbypassability" in this Prospectus.
Intangible Transition Property was created pursuant to the Qualified Rate Order
issued on May 14, 1998 (the "QRO") by the Pennsylvania Public Utility Commission
(the "PUC"), in accordance with the Pennsylvania Electricity Generation Customer
Choice and Competition Act (the "Competition Act"). See "The Competition Act"
and "PECO Energy's Restructuring Plan" in this Prospectus.
The Issuer, a Delaware statutory business trust established by PECO Energy, was
formed for the purpose of purchasing and owning the 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 in order to
secure the Transition Bonds. On the issuance date for each Series (each, a
"Series Issuance Date"), except in the event of a refunding of outstanding
Transition Bonds, PECO Energy will sell Intangible Transition Property to the
Issuer pursuant to an Intangible Transition Property Sale Agreement (the "Sale
Agreement") between PECO Energy, (in such capacity, the "Seller") and the
Issuer. The Transferred Intangible Transition Property and Intangible Transition
Property, if any, sold by PECO Energy to other issuers (collectively, the
"Serviced Intangible Transition Property") will be serviced by PECO Energy
(in such capacity and along with any successors, the "Servicer") pursuant
to a Master Servicing Agreement (the "Master Servicing Agreement") among the
Issuer, the Servicer and any other such issuers financed with Transition Bonds.
THE TRANSITION BONDS ARE OBLIGATIONS OF THE ISSUER ONLY AND WILL BE SECURED ONLY
BY THE COLLATERAL. THE ISSUER IS A SPECIAL PURPOSE ENTITY THAT HAS NO PROPERTY
OTHER THAN THE COLLATERAL, AND THE COLLATERAL IS THE SOLE SOURCE OF PAYMENT FOR
THE TRANSITION BONDS. THE TRANSITION BONDS DO NOT REPRESENT OBLIGATIONS OF PECO
ENERGY OR ANY ENTITY OTHER THAN THE ISSUER.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
Prospective investors should consider, among other things, the information set
forth under "Risk Factors," which begins on page 24 in this Prospectus.
The Transition Bonds may be offered through one or more different methods,
including offerings through underwriters, as described under "Plan of
Distribution" in this Prospectus and "Underwriting" in the related Prospectus
Supplement. It is not anticipated that any of the Transition Bonds will be
listed on any securities exchange. There can be no assurance that a secondary
market for any Series of Transition Bonds will develop or, if one does develop,
that it will continue. _______________, 1998
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THE PROSPECTUS AND THE ACCOMPANYING PROSPECTUS SUPPLEMENT SHALL NOT
CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL
THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER,
SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION
UNDER THE SECURITIES LAWS OF SUCH STATE.
<PAGE>
PARTIES TO TRANSACTION
PECO ENERGY
(Seller, Servicer
Grantor and Owner)
Sells ITP* for cash pursuant Services Serviced Intangible
to Sale Agreement Transition Property and
(Transferred Intangible receives Monthly Servicing
Transition Property) Fee pursuant to Master
Servicing Agreement
ISSUER TRUSTEE ISSUER PROVIDER OF
(manages Issuer with (PECO Energy CREDIT
Beneficiary Trustees pursuant to Transition Trust) ENHANCEMENT
Trust Agreement) (To be named, if any)
Sale of Transition Bonds for
cash, pursuant to Underwriting
Agreement
BOND TRUSTEE
(acts for and on behalf of
Transition Bondholders
pursuant to Indenture)
UNDERWRITERS
Sale of Transition
Bonds for cash
TRANSITION
BONDHOLDERS
* Intangible Transition Property, created by the PUC implementing the
Competition Act through approving PECO Energy's Restructuring Plan and issuing
the Qualified Rate Order. The PUC will also approve periodic adjustments of
Intangible Transition Charges as described in this Prospectus.
1
<PAGE>
No dealer, salesperson, or any other person has been authorized to give
any information, or to make any representations, other than those contained in
this Prospectus and, if given or made, such information or representations must
not be relied upon as having been authorized by the Issuer or PECO Energy or any
dealer, salesperson, or any other person. Neither the delivery of this
Prospectus or any related Prospectus Supplement nor any sale made hereunder or
thereunder shall under any circumstances create an implication that there has
been no change in the information herein or therein since the date hereof. This
Prospectus and any related Prospectus Supplement do not constitute an offer to
sell or a solicitation of an offer to buy any security in any jurisdiction in
which it is unlawful to make such offer or solicitation.
Until 90 days after the date of each Prospectus Supplement, all dealers
effecting transactions in the related Series of Transition Bonds, whether or not
participating in the distribution thereof, may be required to deliver this
Prospectus and the related Prospectus Supplement. This delivery requirement is
in addition to the obligation of dealers to deliver a Prospectus Supplement and
Prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
AVAILABLE INFORMATION
The Issuer has filed with the Securities and Exchange Commission (the
"SEC") a registration statement (as amended, the "Registration Statement") under
the Securities Act of 1933, as amended (the "Securities Act"), with respect to
the Transition Bonds. This Prospectus, which forms a part of the Registration
Statement, and any Prospectus Supplement describe the material terms of certain
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 such document so filed. Each such statement is
qualified in its entirety by such reference. For further information, reference
is made to the Registration Statement and the exhibits thereto, which are
available for inspection without charge at the public reference facilities
maintained by the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549, and at
its regional offices located as follows: Chicago Regional Office, Citicorp
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511; and
New York Regional Office, 7 World Trade Center, 13th Floor, New York, New York
10048. Copies of the Registration Statement and exhibits thereto may be obtained
at the above locations at prescribed rates. Information filed with the SEC can
also be inspected at the SEC site on the World Wide Web at http://www.sec.gov.
The Issuer will file with the SEC such periodic reports as are required
by the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the
rules, regulations or orders of the SEC thereunder. The Issuer may discontinue
filing periodic reports under the Exchange Act at the beginning of the fiscal
year following the issuance of the Transition Bonds of any Series if there are
fewer than 300 holders of the Transition Bonds.
2
<PAGE>
REPORTS TO TRANSITION BONDHOLDERS
Pursuant to the Indenture, the Bond Trustee will prepare and provide to
the holders of record of the Transition Bonds regular reports containing
information concerning, among other things, the Issuer and the Collateral.
Unless and until Transition Bonds are issued in definitive form, such reports
will be provided to Cede & Co. ("Cede"), as the nominee for The Depository Trust
Company ("DTC"). Such reports will be available to beneficial owners of the
Transition Bonds (each, a "Transition Bondholder") upon request to the Bond
Trustee or the Servicer. The financial information provided to Transition
Bondholders will not be examined and reported upon, nor will an opinion thereon
be provided, by an independent public accountant. See "The Indenture--Reports to
Transition Bondholders" in this Prospectus.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All reports and other documents filed by the Issuer pursuant to Section
13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date of this
Prospectus and prior to the termination of the offering of the Transition Bonds
will be deemed to be incorporated by reference into this Prospectus and to be a
part hereof. Any statement contained in this Prospectus, in a Prospectus
Supplement or in a document incorporated or deemed to be incorporated by
reference in this Prospectus will be deemed to be modified or superseded for
purposes of this Prospectus and any Prospectus Supplement to the extent that a
statement contained in this Prospectus, in a Prospectus Supplement or in any
separately filed document which also is or is deemed to be incorporated by
reference herein modifies or supersedes such statement. Any such statement so
modified or superseded will not be deemed, except as so modified or superseded,
to constitute part of this Prospectus or any Prospectus Supplement.
The Issuer will provide without charge to each person to whom a copy of
this Prospectus is delivered, on the written or oral request of any such person,
a copy of any or all of the documents incorporated herein by reference, except
the exhibits to such documents (unless such exhibits are specifically
incorporated by reference in such documents). Written requests for such 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 such copies should be directed to the Issuer at
302-888-7532.
PROSPECTUS SUPPLEMENT
The Prospectus Supplement for a Series of Transition Bonds will
describe the following terms of such Series and, if applicable, the Classes
thereof: (i) the designation of the Series and, if applicable, the Classes
thereof, (ii) the aggregate principal amount of the Transition Bonds of the
Series and, if applicable, each Class thereof, (iii) the Bond Rate of the Series
or, if applicable, each Class thereof, or the formula, if any, used to calculate
the applicable Bond Rate or Bond Rates for the Series, (iv) the Monthly
Allocated Interest Balances for the Series, (v) the Monthly Allocated Principal
Balances for the Series, (vi) the date or dates on which interest and principal
will be payable (each, a "Payment Date"), (vii) the Expected Final Payment Date
of the Series and, if applicable, each Class thereof, (viii) the termination
date for the Series (the "Series Termination Date") and, if applicable, each
Class thereof (each, a "Class Termination Date"), (ix) the Series Issuance Date
for the Series, (x) the place or places for payments with respect to the Series,
(xi) the authorized initial denominations for the Series, (xii) the redemption
provisions, if any, of the Series, (xiii) the Expected Amortization Schedule for
the Series, (xiv) the Overcollateralization Amount with respect to the Series
and the Monthly Allocated Overcollateralization Balance for each Monthly
Allocation Date, (xv) the Calculation Dates and Adjustment Dates for the Series,
(xvi) the terms of any credit enhancement applicable to the Series and (xvii)
any other terms of the Series or Class that are not inconsistent with the
provisions of the Indenture. The Indenture requires, as a condition to the
issuance of each Series of Transition Bonds, that such issuance will not result
in any rating agency which has rated the Transition Bonds of any Class or Series
at the time of issuance thereof at the request of the Issuer (each, a "Rating
Agency") reducing or withdrawing its then current rating of any such outstanding
Series or Class of Transition Bonds (the notification in writing by each Rating
Agency to the Seller, 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"). If no such Rating Agency is in
existence any longer, "Rating Agency" shall be a nationally recognized
statistical rating organization or other comparable person designated by the
Issuer.
3
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
AVAILABLE INFORMATION..................................................................2
REPORTS TO TRANSITION BONDHOLDERS......................................................3
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE........................................3
PROSPECTUS SUPPLEMENT..................................................................3
PROSPECTUS SUMMARY.....................................................................7
RISK FACTORS..........................................................................24
Unusual Nature of Intangible Transition Property.............................24
Servicing....................................................................29
The Electric Industry Generally..............................................33
Bankruptcy; Creditors' Rights................................................34
The Transition Bonds.........................................................37
PECO ENERGY COMPANY...................................................................38
THE COMPETITION ACT...................................................................39
General ....................................................................39
Recovery of Stranded Costs...................................................39
Securitization of Stranded Costs.............................................40
Jurisdiction Over Disputes; Standing.........................................41
PECO ENERGY'S RESTRUCTURING PLAN......................................................41
General ....................................................................41
The Settlement...............................................................42
Provider of Last Resort......................................................46
THE QRO AND THE INTANGIBLE TRANSITION CHARGES.........................................47
The QRO ....................................................................47
The Intangible Transition Charges............................................49
Competitive Billing..........................................................51
LITIGATION............................................................................52
THE SELLER AND SERVICER...............................................................54
Retail Electric Service Territory............................................54
Customers and Operating Revenues.............................................54
Forecasting Customers and Usage..............................................61
Billing Process..............................................................65
Limited Information on Customers' Creditworthiness...........................65
Electric Generation Suppliers and Other Third Party Billers..................68
Year 2000 Compliance.........................................................68
4
<PAGE>
THE ISSUER............................................................................69
USE OF PROCEEDS.......................................................................71
THE TRANSITION BONDS..................................................................71
General ....................................................................71
Interest and Principal.......................................................72
Redemption...................................................................73
Credit Enhancement...........................................................74
Book-Entry Registration......................................................74
Definitive Transition Bonds..................................................77
CERTAIN WEIGHTED AVERAGE LIFE
AND YIELD CONSIDERATIONS..............................................................79
THE SALE AGREEMENT....................................................................79
Sale and Assignment of Intangible Transition Property........................79
Seller Representations and Warranties........................................81
Certain Matters Regarding the Seller.........................................86
Governing Law................................................................86
THE MASTER SERVICING AGREEMENT........................................................87
Servicing Procedures.........................................................87
Servicer Advances............................................................88
Servicing Compensation; Releases.............................................88
Servicer Duties..............................................................89
Servicer Representations and Warranties......................................89
Servicer Indemnification.....................................................90
Statements to Issuer and Bond Trustee........................................90
Evidence as to Compliance....................................................91
Certain Matters Regarding the Servicer.......................................91
Servicer Defaults............................................................92
Rights Upon Servicer Default.................................................93
Successor Servicer...........................................................93
Addition of Other Issuers....................................................94
Governing Law................................................................94
THE INDENTURE.........................................................................94
Security ....................................................................94
Issuance in Series or Classes................................................95
Collection Account...........................................................95
Allocations and Payments.....................................................98
Liquidated Damages..........................................................100
Reports to Transition Bondholders...........................................100
Modification of Indenture...................................................101
Enforcement of the Sale Agreement and Master Servicing Agreement............103
Modifications to the Sale Agreement and the Master Servicing Agreement......104
Events of Default; Rights Upon Event of Default.............................104
5
<PAGE>
Certain Covenants...........................................................106
List of Transition Bondholders..............................................108
Annual Compliance Statement.................................................108
Bond Trustee's Annual Report................................................108
Satisfaction and Discharge of Indenture.....................................108
Legal Defeasance and Covenant Defeasance....................................108
The Bond Trustee............................................................110
Governing Law...............................................................111
MATERIAL TAX MATTERS.................................................................111
Material U.S. Federal Income Tax Considerations.............................111
Tax Status of the Trust and of the Transition Bonds.........................111
Taxation of United States Transition Bondholders............................112
Information Reporting and Backup Withholding................................112
Taxation of Foreign Transition Bondholders..................................113
Material State Tax Matters..................................................114
ERISA CONSIDERATIONS.................................................................114
PLAN OF DISTRIBUTION.................................................................115
RATINGS..............................................................................116
LEGAL MATTERS........................................................................116
INDEX OF PRINCIPAL DEFINITIONS.......................................................117
</TABLE>
6
<PAGE>
PROSPECTUS SUMMARY
Prospective investors should consider the risks associated with an
investment in the Transition Bonds. For a discussion of certain material risks
associated with such an investment, prospective investors should review the
discussion under "Risk Factors," which begins on page 24 in this Prospectus.
The following summary is qualified by the more detailed information
appearing elsewhere in this Prospectus and the related Prospectus Supplement.
Capitalized terms used in this Prospectus are defined in this Prospectus, and
prospective investors should refer to the Index of Principal Definitions which
begins on page 117 for the location of the definitions of such terms.
Transaction Overview: The Competition Act, enacted in 1996, provides for
the restructuring of the electric industry in
Pennsylvania, including retail competition for
generation beginning in 1999. Deregulation of the
Pennsylvania electric industry under the
Competition Act requires the unbundling of
generation, transmission and distribution
services. While transmission and distribution
services will continue to be provided by electric
utilities ("electric distribution companies"), the
Competition Act authorizes electric generation
suppliers licensed by the PUC ("electric
generation suppliers") to provide generation and
related services, including billing and metering.
The Competition Act provides for the recovery by
electric utilities of the anticipated loss in
value of generation-related assets as a result of
the transition from a regulated environment to
competition for electric generation services
("stranded costs"), as authorized by the PUC.
Examples of generation-related assets include
electric generation facilities (such as nuclear
power plants), power purchase contracts with third
party generators of electricity and amounts
recoverable in electric rates (such as certain
deferred expenses declared by the PUC to be
regulatory assets). The investments in these
assets were recoverable in rates established by
the PUC but may not be recoverable in rates
established by market forces in a competitive
environment. Under the Competition Act, the PUC
may authorize an electric utility or its designee
to issue transition bonds to securitize all or a
portion of the allowed recovery of stranded costs.
Pursuant to the Competition Act, the PUC has
authorized PECO Energy to recover $5.26 billion of
stranded costs (referred to in this Prospectus as
PECO Energy's "Stranded Costs"). The PUC has also
issued the QRO authorizing PECO Energy to
securitize up to $4 billion of such Stranded Cost
recovery through the issuance of transition bonds.
See "PECO Energy's Restructuring Plan--The
Settlement" in this Prospectus. In order to
securitize a portion of its Stranded Cost
recovery, PECO Energy will sell to the Issuer the
Transferred Intangible Transition Property,
comprised of the irrevocable right to receive
Intangible Transition Charges with respect to the
Transferred Intangible Transition Property in an
amount sufficient to recover the aggregate
principal amount of 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 (collectively, the "Qualified Transition
Expenses").
7
<PAGE>
To fund each of its purchases of Intangible
Transition Property, the Issuer will sell
Transition Bonds offered hereby and, under the
Indenture, pledge its interest in the Collateral
to the Bond Trustee to secure the Transition
Bonds. The Issuer may also issue Transition Bonds
to refund outstanding Transition Bonds. See "The
Indenture--Issuance in Series or Classes." Under
the Competition Act, as implemented by the QRO,
the right to collect Intangible Transition Charges
is irrevocable, and these charges are subject to
periodic adjustments designed to increase or
decrease future estimated collections to pay
certain fees, expenses, premiums, if any, and
interest on the Transition Bonds when due and
principal of each Series of Transition Bonds in
accordance with the Expected Amortization Schedule
therefor. See "The Competition Act--Securitization
of Stranded Costs" in this Prospectus.
The Issuer will issue the Transition Bonds from
time to time in one or more Series, each of which
may be comprised of one or more Classes. The
Transition Bonds will be secured by the
Collateral. See "The Indenture--Security" in this
Prospectus.
Issuer: The Issuer is PECO Energy Transition Trust, a
Delaware statutory business trust formed by PECO
Energy on June 23, 1998, for the purpose of
purchasing and owning the 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
expected to be the Collateral and whose only
revenues are expected to be ITC Collections
allocated to the Issuer pursuant to the Master
Servicing Agreement. The Collateral is the sole
source of payment for the Transition Bonds. See
"The Issuer" in this Prospectus.
Issuer Trustee: First Union Trust Company, National Association
will serve as a trustee of the Issuer (together
with any successor, the "Issuer Trustee"). The
corporate trust office of the Issuer Trustee is
located at One Rodney Square, 920 King Street, 1st
Floor, Wilmington, Delaware 19801 and its
telephone number is 302-888-7532. Two additional
trustees have been appointed by PECO Energy. See
"The Issuer" in this Prospectus.
Bond Trustee: The Bank of New York will serve as the Bond
Trustee. The corporate trust office of the Bond
Trustee is located at 101 Barclay Street, Floor 12
East, New York, New York 10286 and its telephone
number is 800-524-4458.
PECO Energy, Seller
and Servicer: PECO Energy, as Seller, will sell Intangible
Transition Property from time to time to the
Issuer under the terms of the Sale Agreement. See
also "Risk Factors--Bankruptcy; Creditors'
Rights--Bankruptcy of Seller--True Sale or
Financing." Pursuant to the Master Servicing
Agreement, PECO Energy, as Servicer, will service
the Serviced Intangible Transition Property.
8
<PAGE>
Incorporated in Pennsylvania in 1929, PECO Energy
provides retail electric and gas service in
Southeastern Pennsylvania, including the City of
Philadelphia. See "PECO Energy Company" and "The
Seller and Servicer" in this Prospectus.
Risk Factors: Prospective investors should consider, among other
things, the following risks associated with an
investment in the Transition Bonds. Such 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.
The existence of Intangible Transition Property
and the adequacy of the Transferred Intangible
Transition Property as a source of payments for
the Transition Bonds are dependent on relevant
provisions of the Competition Act and the QRO. The
ability of the Issuer to receive collections of
the Intangible Transition Charges ("ITC
Collections") and make payments on the Transition
Bonds could be affected adversely by: limitations
on the availability of Liquidated Damages for
breaches of representations and warranties; the
limited rights and remedies available to
Transition Bondholders due to a change in law;
federal preemption of the Competition Act
adversely affecting Intangible Transition
Property; any attempted limitation or alteration
of the Competition Act, the QRO, Intangible
Transition Property or related matters by legal
challenge or amendment or repeal of the
Competition Act by the Pennsylvania General
Assembly; adverse effects arising from litigation
in other jurisdictions; regulatory changes ordered
by the PUC; the limitation of adjustments to the
Intangible Transition Charges or the failure of
the PUC to implement timely adjustments to the
Intangible Transition Charges; the resignation or
removal of the Servicer; inaccurate forecasts of
the aggregate electricity usage of Customers or
delinquencies and write-offs relating to ITC
Collections; problems in billing and metering by,
and collections by and from, electric generation
suppliers or other third parties providing
metering and billing services; economic and
technological factors and weather patterns
affecting electricity consumption; the bankruptcy
or insolvency of the Seller or the Servicer; any
alteration by the Servicer or any successor
thereto of its billing and collection practices;
changes in the electricity industry, in
electricity usage or in the Customer base; the
impact of the Year 2000 issue; or any of the
factors described below potentially affecting the
price and liquidity of the Transition Bonds.
The price and liquidity of the Transition Bonds
and the amortization thereof and, accordingly, the
weighted average lives thereof may be affected by
any delay in adjustments to the Intangible
Transition Charges, the limitation of adjustments
to the Intangible Transition Charges, a delay or
failure by the Servicer or an electric generation
supplier or other third parties providing metering
and billing services to remit ITC Collections, or
an incorrect evaluation by the Servicer of the
creditworthiness of a significant number of
Customers.
There are no historical performance data for
Intangible Transition Property, and the Servicer
does not have any experience administering this
specific type of asset. Additionally, because of
the unique nature of Intangible Transition
Property, foreclosure may not be a realistic or
practical remedy for the Bond Trustee.
9
<PAGE>
The Transition Bonds will not be obligations of
any entity other than the Issuer, will be issuable
in Series, will have ratings which are limited in
nature, will have uncertain payments of interest
and principal and weighted average lives, will be
subject to mandatory redemption and may be subject
to optional redemption, as specified in the
related Prospectus Supplement.
For a more detailed discussion of certain material
risks associated with an investment in Transition
Bonds, prospective investors should review the
discussion under "Risk Factors" which begins on
page 25.
Source of Payment;
Intangible Transition
Charge: The Transition Bonds will be payable solely from
the Collateral, including ITC Collections
allocated to the Issuer pursuant to the Master
Servicing Agreement, whether paid by Customers
directly to the Servicer or indirectly through
electric generation suppliers or other third
parties which may or may not supply generation
services to such Customers. The Intangible
Transition Charges will be nonbypassable charges
and will be payable by designated existing and
future Customers. As described in "Risk Factors,"
the Servicer's receipt of ITC Collections is
dependent on the remittance of such amounts by
third party electric generation suppliers to the
extent applicable Customers are supplied by such
third parties. See "The QRO and the Intangible
Transition Charges--The Intangible Transition
Charges--Calculation of the Intangible Transition
Charges" in this Prospectus and "Description of
Intangible Transition Property--The Intangible
Transition Charges" in the related Prospectus
Supplement.
ITC Adjustment Process: The Master Servicing Agreement requires the
Servicer to seek, and the Competition Act and the
QRO require the PUC to approve, adjustments to the
Intangible Transition Charges charged to each Rate
Class within any Customer Category based on actual
ITC Collections attributable to such Customer
Category and updated assumptions by the Servicer
as to projected future usage of electricity by
Customers within such Customer Category, expected
delinquencies and write-offs within such Customer
Category, and future payments and expenses
relating to the Intangible Transition Property and
the Transition Bonds. Additionally, the QRO
provides that adjustments during the final
calendar year during which any series of
transition bonds secured by Intangible Transition
Property is outstanding may be implemented
quarterly or monthly. With respect to the
Transition Bonds, such adjustments are designed to
result in the aggregate outstanding principal
balance of all outstanding Series (the "Transition
Bond Balance") equaling the amount provided for in
the Expected Amortization Schedule therefor (the
"Projected Transition Bond Balance"), and the
amount on deposit in the Overcollateralization
Subaccount equaling the Calculated
Overcollateralization Level, by (i) the Payment
Date immediately [preceding] the next Adjustment
Date or (ii) the Expected Final Payment Date, as
applicable, taking into account any amounts on
deposit in the Reserve Subaccount. The Servicer is
required to file requests with the PUC for such
adjustments (each, an "Adjustment Request") on May
14 of each year and on such additional
10
<PAGE>
date or dates specified in the Prospectus
Supplement for any Series of Transition Bonds
(each, a "Calculation Date"). In accordance with
the Competition Act and the QRO, the PUC has 90
days to approve such adjustments. The adjustments
to the Intangible Transition Charges are expected
to be implemented on August 14 of each year and,
with respect to Transition Bonds, on the date or
dates in the final calendar year of ITC
Collections for a Series of Transition Bonds
specified in the related Prospectus Supplement
(each, an "Adjustment Date"). Such adjustments
will cease with respect to a Series on the final
Adjustment Date specified in the related
Prospectus Supplement for that Series. See "The
QRO and the Intangible Transition Charges--The
Intangible Transition Charges."
Irrevocability of Intangible
Transition Charges: Intangible Transition Property has been created by
the PUC's issuance of the QRO and the declaration
by the PUC that the relevant paragraphs of the QRO
are irrevocable. See "The Competition
Act--Securitization of Stranded
Costs--Irrevocability of Intangible Transition
Property" in this Prospectus. The Competition Act
provides that, to the extent that the PUC declares
all or a portion of a qualified rate order
irrevocable, the PUC may not, by subsequent
action, reduce, postpone, impair or terminate
either the qualified rate order or the intangible
transition charges authorized therein. The
Intangible Transition Charges are nonbypassable in
that Customers on whom such charges are imposed
cannot avoid paying them, even if they purchase
electricity from a supplier other than PECO
Energy.
Under Section 2812(c)(2) of the Competition Act,
the Commonwealth of Pennsylvania (the
"Commonwealth") "pledges to and agrees with
holders of any transition bonds and with any
assignee or financing party who may enter into
contracts with an electric utility ... that the
Commonwealth of Pennsylvania will not limit or
alter or in any way impair or reduce the value of
the intangible transition property or intangible
transition charges approved by a qualified rate
order until the transition bonds and interest on
the transition bonds are fully paid and discharged
or the contracts are fully performed on the part
of the electric utility ... or adequate
compensation is made by law for the full
protection of the intangible transition charges
collected pursuant to a qualified rate order and
of the holder of [a] transition bond and any
assignee or financing party entering into [a]
contract with the electric utility." See "Risk
Factors--Unusual Nature of Intangible Transition
Property," "The Competition Act" and "The QRO and
the Intangible Transition Charges" in this
Prospectus.
Customers: The Intangible Transition Charges will be assessed
on the bills of each person (each, a "Customer")
that (i) was a Customer of PECO Energy located
within PECO Energy's retail electric service
territory on January 1, 1997 or that became a
Customer of electric services within such
territory after January 1, 1997, (ii) is still
located within such territory and (iii) is in a
rate class (each, a "Rate Class") that has been
assigned Stranded Cost responsibility. For a
description of the Rate Classes, see "The Seller
and Servicer--Customers and Operating Revenues" in
this Prospectus. The Rate Classes are grouped into
three broad categories: Residential; Small
Commercial and Industrial; and Large Commercial
11
<PAGE>
and Industrial (each, a "Customer Category"). In
1998, 44% of PECO Energy's retail electric
revenues are expected to be collected from
Residential Customers, 24% from Small Commercial
and Industrial Customers and 32% from Large
Commercial and Industrial Customers.
As of January 1, 1999, Customers who purchase
generation from an electric generation supplier
may elect to continue to receive a single bill
from their electric distribution company, to
receive separate bills for services provided by
their electric generation supplier and their
electric distribution company or to have an
electric generation supplier or another third
party render a consolidated bill including
generation charges and the charges of the electric
distribution company (including Intangible
Transition Charges). To the extent Customers
choose to take service from an electric generation
supplier that provides consolidated billing and
elect to receive consolidated billing, or elect to
receive consolidated billing from a third party,
whether or not such third party also provides
electric service, the payments in respect of the
Intangible Transition Charges owing by such
Customers will be owed by the electric generation
supplier or third party rather than by the
Customer. See "The QRO and the Intangible
Transition Charges--Competitive Billing" and "Risk
Factors--Servicing--Credit Concerns Arising Out of
Third Party Billing" in this Prospectus.
The Transition Bonds;
Issuance of New Series: The Issuer may issue Transition Bonds in one or
more Series, each comprised of one or more
Classes. Each Series of Transition Bonds will be
issued under the Indenture. The aggregate
principal amount of Transition Bonds that may be
issued under the Indenture is $_________, plus the
amount of any Refunding Issuance. See "The
Indenture" in this Prospectus. Any Series of
Transition Bonds may include one or more Classes
which differ, among other things, as to the Bond
Rate and amortization of principal. The terms of
all Transition Bonds of the same Series will be
identical, unless such 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
thereof, will be described in the related
Prospectus Supplement. The terms of such Series
and any Classes thereof 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 pursuant to the Indenture
only upon satisfaction of the conditions described
in this Prospectus under "The Indenture--Issuance
in Series or Classes," including the Rating Agency
Condition. See "Risk Factors--The Transition
Bonds--Effect of Additional Series and Other
Financings on Outstanding Transition Bonds" and
"The Transition Bonds" in this Prospectus.
Payment Dates: The Payment Dates with respect to any Series of
Transition Bonds will be the days specified in the
related Prospectus Supplement.
Record Dates: With respect to any Payment Date, the record date
shall be the day designated in the Prospectus
Supplement (each, a "Record Date").
12
<PAGE>
Interest and Principal: Interest will accrue on the principal balance of
Transition Bonds of a Series or Class at the
applicable rate of interest (the "Bond Rate")
specified in or determined in the manner specified
in the applicable Prospectus Supplement.
On any Payment Date with respect to any Series,
the Issuer will make principal payments on such
Series only until the outstanding principal
balance thereof has been reduced to the amount
specified for such Payment Date in the
amortization schedule (the "Expected Amortization
Schedule") set forth in the Prospectus Supplement
for such Series, but only to the extent funds are
available therefor as described in this
Prospectus. Accordingly, principal of such Series
or Class of Transition Bonds may be paid later
than reflected in the Expected Amortization
Schedule therefor. Failure to make a principal
payment in accordance with the Expected
Amortization Schedule (except on the Class or
Series Termination Date) will not be an Event of
Default under the Indenture. See "Risk
Factors--The Transition Bonds--Uncertain Weighted
Average Life" and "Certain Weighted Average Life
and Yield Considerations" in this Prospectus.
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" in this Prospectus.
Overcollateralization: The QRO permits the Servicer to set the Intangible
Transition Charges at levels that are expected to
produce ITC Collections allocated to the Issuer
pursuant to the Master Servicing Agreement above
that necessary to pay interest and principal in
accordance with the Expected Amortization Schedule
for each Series and to pay fees and expenses. Each
Prospectus Supplement will set forth the
"Overcollateralization Amount" for the Series of
Transition Bonds offered thereby which amount will
be deposited in the Overcollateralization
Subaccount as described under "--Allocations and
Payments" below after all such payments having a
higher priority have been made and will equal (i)
0.50% of the initial principal amount of such
Series of Transition Bonds or (ii) such greater
amount as may be specified in the Prospectus
Supplement for such Series of Transition 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 life
of the related Transition Bonds. The amount
anticipated to be on deposit in the
Overcollateralization Subaccount for all Series of
Transition Bonds as of each Payment Date is
referred to in this Prospectus as the "Calculated
Overcollateralization Level." The amount on
deposit at any time in the Overcollateralization
Subaccount will be available to pay any shortfalls
in amounts available to pay or make provision for
interest on each Series of Transition Bonds when
due and to pay or make provision for scheduled
payments of principal on each such Series in
accordance with the Expected Amortization Schedule
therefor. See "The Indenture--Collection
Account--Overcollateralization Subaccount" in this
Prospectus. "Monthly Allocation Date" means the
13
<PAGE>
20th day of each calendar month, or if such day is
not a Business Day, the next succeeding Business
Day. A "Business Day" shall mean 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.
Collection Account
and Subaccounts: Under the Indenture, the Issuer will establish the
Collection Account, which will be held by the Bond
Trustee under the Indenture. The Collection
Account will consist of: a general subaccount (the
"General Subaccount"); one or more subaccounts for
each Series (each, a "Series Subaccount"); a
reserve subaccount (the "Reserve Subaccount"); an
overcollateralization subaccount (the
"Overcollateralization Subaccount"); a capital
subaccount (the "Capital Subaccount"); a
defeasance subaccount for each Series of
Transition Bonds, if any, that are to be defeased
(each, a "Defeasance Subaccount"), if applicable;
an interest subaccount (the "Interest Deposit
Subaccount"), if applicable; and a loss subaccount
(the "Loss Subaccount"), if applicable. Unless the
context indicates otherwise, references in this
Prospectus to the Collection Account include each
of the subaccounts contained therein. Deposits to
and withdrawals from these subaccounts will be
made as described under "The Indenture--Collection
Account" and "Allocations and Payments" in this
Prospectus.
General Subaccount: ITC Collections remitted by the Servicer to the
Bond Trustee, as well as Liquidated Damages and
Indemnity Amounts remitted by the Seller or the
Servicer or otherwise received by the Bond Trustee
or the Issuer, shall be deposited in the General
Subaccount. "Indemnity Amounts" means any amounts
paid by the Seller or the Servicer to the Bond
Trustee, for itself or on behalf of the Transition
Bondholders, in respect of certain indemnification
obligations pursuant to the Sale Agreement and the
Master Servicing Agreement. Indemnity Amounts
exclude certain Liquidated Damages paid pursuant
to the Sale Agreement. See "The Indenture--
Allocations and Payments" and "The Sale Agreement"
in this Prospectus.
Series Subaccount: Upon issuance of each Series of Transition Bonds,
a Series Subaccount will be established with
respect to such Series. On each Monthly Allocation
Date, deposits will be made to each Series
Subaccount as described under "The
Indenture--Allocations and Payments" in this
Prospectus. Amounts on deposit in the Series
Subaccount for any Series will be applied to make
payments with respect to such Series as described
under "The Transition Bonds--Interest and
Principal."
Reserve Subaccount: ITC Collections allocated to the Issuer pursuant
to the Master Servicing Agreement available on any
Monthly Allocation Date in excess of (i) amounts
payable in respect of fees and expenses of the
Bond Trustee and the Servicer and certain other
fees and expenses, (ii) amounts distributable to
Series Subaccounts in respect of principal of and
interest on each Series of Transition Bonds
payable on the next Payment Date therefor and
(iii) amounts allocable to the
Overcollateralization Subaccount (all as described
under "The Indenture--Allocations and Payments" in
this Prospectus) will be allocated to the Reserve
14
<PAGE>
Subaccount. Deposits to and withdrawals from the
Reserve Subaccount will be made as described under
"The Indenture--Allocations and Payments" in this
Prospectus.
Overcollateralization
Subaccount: Collections with respect to the
Overcollateralization Amount, up to the Calculated
Overcollateralization Level, will be held in the
Overcollateralization Subaccount. Deposits to and
withdrawals from the Overcollateralization
Subaccount will be made as described under "The
Indenture--Allocations and Payments" in this
Prospectus.
Capital Subaccount: Upon the issuance of each Series of Transition
Bonds, the Issuer will deposit an amount equal to
0.50% of the initial principal amount of such
Series of Transition Bonds, representing a capital
contribution from PECO Energy, into the Capital
Subaccount (with respect to each Series, the
"Required Capital Amount"). Except for amounts
necessary to pay certain expenses, such amounts
will be available to make payments of principal
and interest on the Transition Bonds. Deposits to
and withdrawals from the Capital Subaccount will
be made as described under "The
Indenture--Allocations and Payments" in this
Prospectus.
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 under the Indenture, the Issuer shall
establish a Defeasance Subaccount for each Series
to be defeased. The funds required to fund such
defeasance will be deposited into such account.
Deposits to and withdrawals from the applicable
Defeasance Subaccount will be made as described
under the "The Indenture--Allocations and
Payments" in this Prospectus.
Interest Deposit Subaccount: In the event amounts are remitted by the Seller to
the Bond Trustee pursuant to the Sale Agreement in
respect of interest payable in connection with the
Seller's breach of certain of its representations
therein, the Issuer shall establish the Interest
Deposit Subaccount. Deposits to and withdrawals
from the Interest Deposit Subaccount will be made
as described under the "The Indenture--Allocations
and Payments" in this Prospectus. See also "The
Sale Agreement" in this Prospectus.
Loss Subaccount: The Issuer shall establish the Loss Subaccount if
the Seller is required to pay any Loss Amounts
pursuant to the Sale Agreement. Deposits to and
withdrawals from the Loss Subaccount will be made
as described under the "The Indenture--Allocations
and Payments" in this Prospectus. See also "The
Sale Agreement" in this Prospectus for a
discussion of Loss Amounts and the Seller's
indemnification obligations under the
Sale Agreement.
Allocations and Payments: On each Monthly Allocation Date, the Bond Trustee
shall apply all amounts on deposit in the General
Subaccount of the Collection Account and any
investment earnings thereon in the following
priority: (i) all amounts owed to the Bond Trustee
(including
15
<PAGE>
legal fees and expenses, Indemnity Amounts and
Loss Amounts) will be paid to the Bond Trustee;
(ii) all amounts owed to the Issuer Trustee
(including legal fees and expenses, Indemnity
Amounts and Loss Amounts) will be paid to the
Issuer Trustee; (iii) the Monthly Servicing Fee
and all unpaid Monthly Servicing Fees from prior
Monthly Allocation Dates will be paid to the
Servicer; (iv) so long as no Event of Default has
occurred and is continuing or would be caused by
such payment, all Operating Expenses other than
(i), (ii) and (iii) above will be paid to the
Persons entitled thereto, provided that the amount
paid on any Monthly Allocation Date pursuant to
this clause (iv) may not exceed $33,000 in the
aggregate for all Series; (v) an amount equal to
Interest with respect to each Series of Transition
Bonds for such Monthly Allocation Date will be
transferred on a Pro Rata Basis to the Series
Subaccount for such Series; (vi) an amount equal
to any Principal of any Series or Class of
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 will be transferred to the Series
Subaccount for such Series, taking into account
amounts on deposit therein in respect of Principal
as of such Monthly Allocation Date; (vii) an
amount equal to Principal with respect to each
Series of Transition Bonds for such Monthly
Allocation Date not provided for pursuant to
clause (vi) above will be transferred on a Pro
Rata basis to the Series Subaccount for such
Series; (viii) all unpaid Operating Expenses,
Indemnity Amounts and Loss Amounts will be paid to
the Persons entitled thereto; (ix)
Overcollateralization with respect to all Series
of Transition Bonds for such Monthly Allocation
Date will be transferred to the
Overcollateralization Subaccount; (x) 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, (xi) the balance, if any, will be
allocated to the Reserve Subaccount; and (xii)
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. See "The Indenture--Allocations and
Payments" in this Prospectus.
The following diagram depicts the basic flow of
ITC Collections from Customers or Electric
Generation Suppliers or other third parties to the
Servicer and, subsequently, to the various
accounts listed above.
16
<PAGE>
<TABLE>
BASIC ALLOCATIONS AND DISTRIBUTIONS
-----------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
CUSTOMERS --------------------------------------- PECO ENERGY ------------------------------------ COLLECTION
AND Monthly payment of (SERVICER) Monthly remittance ACCOUNT
EGSs* Intangible Transition of ITC Collections**
Charges to Servicer allocated to the
Issuer
Application of amounts
in Collection Account
(including net
earnings therein), as
follows:
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
| | | | | | | |
| | | | | | | |
(1) (2) (3) (4) (5) (6) (7) (8)
- ------------------------------------------------------------------------------------------------------------------------------------
Bond Servicer: Issuer: Transition Issuer: Overcollateralization Issuer: Reserve
Trustee/ Monthly Operating Bondholders: all unpaid Subaccount: Subaccount:
Issuer Servicing expenses operating Overcollateralization o Net earnings on All
Trustee: Fee (up to an o Interest for expenses, amounts in General remaining
Fees and aggregate applicable Indemnity Subaccount of the amounts
expenses $33,000 Monthly Amounts Collection Account
(including for all Allocation Date and Loss
Indemnity Series for Amounts
Amounts each Monthly o Principal payable
and Loss Allocation as a result of
Amounts) Date) acceleration or
payable on a
Series or Class
Termination Date
or payable on a
Redemption Date
o Principal for
applicable
Monthly
Allocation Date
o Principal for such
Monthly
Allocation Date
not provided for
above
</TABLE>
* electric generation suppliers or other third parties providing billing
and metering services
** collections of Intangible Transition Charges
17
<PAGE>
"Interest" means, with respect to any Monthly
Allocation Date for any Series of Transition
Bonds, the sum of without duplication, (i) an
amount that would cause the amount on deposit in
each Series Subaccount, without regard to
investment income, in respect of interest to equal
the Monthly Allocated Interest Balance for such
Series and such Monthly Allocation Date, (ii) if
the Transition Bonds have been declared due and
payable, all accrued and unpaid interest thereon,
(iii) with respect to a Series to be redeemed
prior to the next Monthly Allocation Date, the
amount of interest that will be payable as
interest on such Series on the Redemption Date
therefor and (iv) any interest due on such Series
on a Payment Date therefor or other date for the
payment of interest and not paid and, to the
extent permitted by law, interest thereon.
"Principal" means, with respect to any Monthly
Allocation Date and any Series of Transition
Bonds, an amount that (i) would cause the amount
on deposit in the Series Subaccount, without
regard to investment income, for such Series in
respect of principal to equal the Monthly
Allocated Principal Balance for such Series and
such Monthly Allocation Date, (ii) would be
payable as principal as a result of the occurrence
and continuance of an Event of Default, (iii) with
respect to a Series that is subject to redemption,
would be payable as principal as a result of a
redemption thereof pursuant to the Indenture or
(iv) any principal thereof due on a Payment Date
or other date for the payment of principal and not
paid.
"Pro Rata" means, with respect to any Series of
Transition Bonds, a ratio, (i) in the case the
case of clause (v) in the first paragraph in this
subsection, the numerator of which is the Monthly
Allocated Interest Balance with respect to such
Series for such Monthly Allocation Date and the
denominator of which is the sum of Monthly
Interest Balances with respect to all Series for
such Monthly Allocation Date and (ii) in the case
of clause (vii) in the first paragraph of this
subsection, the numerator of which is the Monthly
Allocated Principal Balance with respect to such
Series for such Monthly Allocation Date and the
denominator of which is the sum of Monthly
Allocated Principal Balances with respect to all
Series for such Monthly Allocation Date.
"Overcollateralization" means, with respect to any
Monthly Allocation Date, an amount that would
cause the balance in the Overcollateralization
Subaccount to equal the Monthly Allocated
Overcollateralization Balance for such Monthly
Allocation Date, without regard to investment
earnings.
The "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 such Series and will be
calculated such that amounts
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scheduled to be paid on each Payment Date will be
expected to be on deposit in the applicable Series
Subaccount as of the Monthly Allocation Date prior
to such Payment Date.
The "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 such
Payment Date.
If on any Monthly Allocation Date funds on deposit
in the General Subaccount are insufficient to make
the allocations contemplated by clauses (i)
through (viii) 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 such payments and transfers: (i)
from the Interest Deposit Subaccount, with respect
to the payments or transfers contemplated by
clause (v) above only, (ii) then from the Loss
Subaccount, with respect to the payments or
transfers contemplated by clauses (i) through
(vii) above only, and (iii) thereafter, from the
Reserve Subaccount, then from the
Overcollateralization Subaccount and finally from
the Capital Subaccount. See "The
Indenture--Allocations and Payments."
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, shall be released to the Issuer free
of the lien of the Indenture) will be applied to
pay the following (in the priority indicated): (i)
interest due and payable on the Transition Bonds
of such Series, together with any overdue interest
and, to the extent permitted by law, interest
thereon, will be paid to the Transition
Bondholders of such Series and (ii) the balance,
if any, up to the principal amount of the
Transition Bonds of such Series that is scheduled
to be paid by such Payment Date in accordance with
the Expected Amortization Schedule for such Series
or, with respect to any Series of Transition Bonds
payable as a result of acceleration pursuant to
the Indenture or to be redeemed pursuant to the
Indenture, the outstanding principal amount of
such Series and premium, if any, will be paid to
the Transition Bondholders of such Series in
respect of principal and premium, if any, on the
Transition Bonds of such Series and (iii) the
balance, if any, will be transferred to the
General Subaccount for allocation on the next
Monthly Allocation Date. See "The
Indenture--Allocations and Payments" in this
Prospectus.
Expected Final Payment
Dates and Series
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Termination Dates: For each Series or Class of Transition Bonds, the
related Prospectus Supplement will specify an
Expected Final Payment Date. The "Expected Final
Payment Date" will be the date when all principal
and interest of the related Series or Class of
Transition Bonds is expected to be paid in full in
accordance with the Expected Amortization Schedule
for the applicable Series. For each Series of
Transition Bonds, the related Prospectus
Supplement will also specify a Series Termination
Date and, if applicable, Class Termination Dates.
The Series Termination Date or Class Termination
Date shall be on or after the related Expected
Final Payment Date. Failure to make a principal
payment in accordance with the Expected
Amortization Schedule (except on the Class or
Series Termination Date) will not be an Event of
Default under the Indenture. Failure to pay unpaid
principal of any Series or Class of Transition
Bonds in full by the applicable Series Termination
Date or Class Termination Date shall constitute an
Event of Default under the Indenture, and the Bond
Trustee or the holders of a majority in principal
amount of all Transition Bonds of all Series then
outstanding may declare the principal amount of
all Series then outstanding to be immediately due
and payable. See "The Indenture--Events of
Default; Rights Upon Event of Default" and
"Ratings" in this Prospectus.
Redemption: Each Series of Transition Bonds 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 the
Seller is obligated to pay Liquidated Damages
under the Sale Agreement. PECO Energy, as Seller,
will be required to pay an amount sufficient to
pay the principal of the outstanding Transition
Bonds, plus accrued interest thereon to the date
of redemption ("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 certain of its representations
relating to Intangible Transition Property under
the Sale Agreement if such breach continues beyond
a 90-day grace period and has a material adverse
effect on the Transition Bondholders. The Bond
Trustee, which may consult with the Servicer and
other third parties, will determine whether a
breach by PECO Energy of any such representation
has a material adverse effect on the Transition
Bondholders. If the full amount of certain
indemnification payments is reasonably expected to
be incurred beyond a twelve-month period
immediately succeeding the breach of the
representation giving rise thereto, the Seller
shall, except as provided below, pay Liquidated
Damages to the Bond Trustee, as assignee of the
Issuer, for deposit into the General Subaccount of
the Collection Account on the first Monthly
Allocation Date following the expiration of such
twelve-month period. With respect to any losses
incurred as a result of a breach described in the
previous sentence the full amount of which is
reasonably expected not to exceed 1/12th of 1% of
the annual outstanding balance of the Transition
Bonds per Monthly Allocation Date (the "De Minimis
Loss Amount"), the Seller on the Monthly
Allocation Date immediately following the day
which is 90 days after receipt of written notice
from the Issuer or the Bond Trustee of an event
giving rise to an event requiring indemnification
by the Seller (the "Initial Loss Calculation
Date") shall pay to the Bond Trustee as assignee
of the Issuer, for deposit in the Loss Subaccount
of the Collection Account, the
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aggregate expected amount of such losses for all
Monthly Allocations Dates on which losses are
expected to be incurred, following which the
Seller's obligation to pay indemnification or
Liquidated Damages, as applicable, as a result of
such 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 such losses exceeds the
amounts paid by the Seller to the Bond Trustee as
assignee of the Issuer, with respect thereto, the
Seller shall pay to the Bond Trustee, as assignee
of the Issuer, on the next Monthly Allocation Date
the amount of such excess for such Monthly
Allocation Date and the expected amount of excess
for all subsequent Monthly Allocation Dates.
Additional redemption provisions, if any, for each
Series of Transition Bonds will be specified in
the related Prospectus Supplement. See "The
Transition Bonds--Redemption" and "The Sale
Agreement--Seller Representations and Warranties"
in this Prospectus.
Other Credit Enhancement: The Issuer, at its option, may provide additional
credit enhancement with respect to a Series in the
form of other reserve accounts, a financial
guaranty insurance policy, a letter of credit, a
credit or liquidity facility, a repurchase
obligation, third party payment or other support,
a cash deposit or such other arrangement as is
described in the applicable Prospectus Supplement.
See "The Transition Bonds--Credit Enhancement" in
this Prospectus.
Denominations: Each Class of Transition Bonds 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 will
initially be issued either only in book-entry form
through DTC or in another form as specified in the
applicable Prospectus Supplement. See "The
Transition Bonds--Book- Entry Registration" in
this Prospectus.
Servicing: The Servicer (initially PECO Energy) is
responsible for servicing, managing and making
collections of the Intangible Transition Charges
in accordance with its customary and usual billing
and collection practices and for filing Adjustment
Requests. The Servicer will remit to the Bond
Trustee for deposit into the Collection Account
all ITC Collections allocated to the Issuer
pursuant to the Master Servicing Agreement and all
proceeds of other Collateral under the Indenture
(from whatever source) received by the Servicer on
or before 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 18th day of each month (or
if the 18th is not a Business Day, the immediately
succeeding Business Day), provided that, among
other things, (i) PECO Energy or its successor
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maintains a short-term rating of at least "A-2" by
Standard & Poor's Rating Group ("S&P") and "P-2"
by Moody's Investor Service ("Moody's") (and for
five Business Days following a reduction in either
such rating) or (ii) the Rating Agency Condition
will have been satisfied (and any conditions or
limitations imposed by the Rating Agencies in
connection therewith are complied with).
Otherwise, the Remittance Date is two Business
Days after any ITC Collections or proceeds of
other Collateral are received by the Servicer. The
period from the 18th day of the month to but
excluding the 18th day of the next month is
referred to in this Prospectus as the "Collection
Period." Pending deposit into the Collection
Account, ITC Collections allocated to the Issuer
pursuant to the Master Servicing Agreement may be
invested by the Servicer at its own risk and for
its own benefit and will not be segregated from
the general funds of the Servicer. See "Risk
Factors--Bankruptcy; Creditors' Rights."
Servicing Compensation: To the extent amounts are available therefor in
accordance with the Indenture, the Servicer will
be entitled to receive a servicing fee on each
Monthly Allocation Date with respect to each
Series of Transition Bonds in an amount equal to
1/12 of the percent specified in the related
Prospectus Supplement of the outstanding principal
amount of the Transition Bonds of such Series as
of such Monthly Allocation Date (the "Monthly
Servicing Fee"). The Monthly Servicing Fee will be
paid prior to the payment of any amounts in
respect of interest on and premium and principal
of the Transition Bonds. See "The Master Servicing
Agreement--Servicing Compensation; Releases" in
this Prospectus.
Servicer Advances: If so specified in the related Prospectus
Supplement, the Servicer will make advances of
interest or principal on the related Series of
Transition Bonds. If no advances are specified in
a particular Prospectus Supplement, the Servicer
will make no advances for the related Series.
ERISA Considerations: 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 ("ERISA"), or Section 4975 of the
Internal Revenue Code of 1986, as amended (the
"Code"), 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 Code. See "ERISA
Considerations" in this Prospectus and in the
related Prospectus Supplement.
Tax Status: In the opinion of Ballard Spahr Andrews &
Ingersoll, LLP, (i) the Issuer will be treated as
a division of PECO Energy for United States
federal income tax purposes and therefore will not
be treated as a separate taxable entity for such
purposes and (ii) consequently, interest paid on
the Transition Bonds will be treated as interest
expense incurred by PECO Energy. Transition
Bondholders who are United States taxpayers will
be required to include the interest received on
the Transition Bonds in gross income. Investors
should consult their income tax advisers with
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<PAGE>
respect to their own individual tax situations to
determine the federal, state, local and other tax
consequences of the purchase of Transition Bonds.
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
"Material Tax Matters" in this Prospectus.
Ratings: It is a condition of any underwriter's obligation
to purchase each Series or Class of Transition
Bonds that, at the time of issuance, such 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 specified therein.
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 thereof
will not be revised or withdrawn by a Rating
Agency at any time thereafter. If a rating of any
Series or Class of Transition Bonds is revised
downward or withdrawn, the liquidity and the price
of such Series or Class of Transition Bonds may be
adversely affected. In general, the 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. See
"Risk Factors--The Transition Bonds--Uncertain
Weighted Average Life" and "Ratings" in this
Prospectus.
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RISK FACTORS
Prospective investors in any Series of Transition Bonds should consider,
among other things, the following factors in connection with the purchase of
Transition Bonds:
Unusual Nature of Intangible Transition Property
Dependence on the Competition Act and the QRO. The existence of Intangible
Transition Property and the adequacy of the Transferred Intangible Transition
Property as a source of payment of principal of and interest on the Transition
Bonds are dependent on the relevant provisions of the Competition Act and the
QRO. If the provisions of the Competition Act or the QRO relating to recovery or
securitization of Stranded Costs were overturned as a result of existing or
future legal challenges, the Issuer's sole remedy would be to seek Liquidated
Damages from the Seller under the Sale Agreement. If the Competition Act were
amended or repealed by the Commonwealth or preempted by Federal legislation, the
Seller would not be obligated to pay Liquidated Damages, and Transition
Bondholders would be limited to rights under law. There is no assurance that the
exercise of such rights would result in principal and interest on the Transition
Bonds being paid in full, and as a result Transition Bondholders could suffer a
loss of their investment. Further, the time and expense of pursuing such rights
could result in a loss to Transition Bondholders, or delay the expected payments
on the Transition Bonds.
The Competition Act also provides that the recovery of stranded costs
associated with existing generating facilities is contingent on continued
operation at reasonable availability levels of the generation facilities for
which recovery has been approved, except when the generating facility is
uneconomic on a production cost basis because of the transition to a competitive
market. (See "The Competition Act--Recovery of Stranded Costs"). While the
Competition Act and the QRO state that the relevant portions of the QRO are
irrevocable, notwithstanding any other provisions of the Competition Act, it is
possible that a challenge could be made to the collection of Intangible
Transition Charges in the event that certain generating facilities of the Seller
ceased to operate at reasonable levels. A determination by a court that all or a
portion of the Intangible Transition Charges were not chargeable to Customers as
a result of generating facilities of the Seller not operating at reasonable
levels could adversely affect the ability of the Issuer to make payments on the
Transition Bonds, and Transition Bondholders could suffer a loss of their
investment. Further, in this instance, Transition Bondholders would not be
entitled to Liquidated Damages.
Limited Availability of Liquidated Damages. Under the terms of the Sale
Agreement, PECO Energy, as the Seller, will be required to pay the Bond Trustee
Liquidated Damages if there has been a breach by PECO Energy of certain of its
representations relating to the Intangible Transition Property, but only if such
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 certain other representations is
reasonably expected to continue beyond a twelve-month period immediately
succeeding such breach and such amounts are reasonably expected to exceed the
De Minimis Loss Amount. See "The Sale Agreement--Seller Representations and
Warranties" in this Prospectus. A determination by a court in an existing or
future action (as described below in "--Legal Challenges Which Could Adversely
Affect Transition Bondholders") that, based on laws in effect on the date any
Intangible Transition Property is sold to the Issuer, the Transferred Intangible
Transition Property or the QRO violated any such laws, or is otherwise invalid
or unenforceable, would be considered to be a breach of the Seller's
representation. There is no assurance
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<PAGE>
that the Seller would be able to pay such Liquidated Damages. See also
"--Dependence on the Competition Act and the QRO" above and "-Bankruptcy;
Creditors' Rights-Challenge to Liquidated Damages Claims by Bankruptcy Trustee"
below.
No Liquidated Damages for Change in Law. The Seller will not be in breach
of any representations and warranties (or be required to pay Liquidated Damages)
for a change in law by legislative enactment or constitutional amendment,
including an enactment or amendment that breaches the pledge and agreement of
the Commonwealth in the Competition Act not to limit, alter or impair Intangible
Transition Property or Intangible Transition Charges. A repeal of the
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 are examples of changes in law.
The Seller will not be in breach of any representations and warranties
under the Sale Agreement or be required to pay Liquidated Damages as a result of
a breach of the pledge and agreement of the Commonwealth that constitutes an
impairment of the Transition Bondholders' rights. Furthermore, under current
law, a substantial impairment would be permitted if the impairment can be shown
to be a reasonable and appropriate exercise of the Commonwealth's sovereign
power. A reasonable and appropriate exercise of the Commonwealth's sovereign
power is generally considered valid under both the United States and
Commonwealth Constitutions if the action is deemed to serve a significant public
purpose. An example of a significant public purpose would be certain actions to
protect the public's health and safety or the exercise of the state's power of
eminent domain. If, for example, competition in electricity generation reduced
the safety and reliability of electric service and the legislature decided
competition was injurious to the public health and safety and repealed the
Competition Act to protect consumers, the protection of consumers could be
considered to be an important public purpose and, therefore, the repeal of the
statute a reasonable and appropriate exercise of the Commonwealth's sovereign
power. An exercise of the Commonwealth's sovereign power could, at the least,
delay payments on Transition Bonds and, if upheld, even if the Commonwealth
afforded Transition Bondholders "adequate compensation . . . by law" or "just
compensation" for a taking, as described above under "--Possible Commonwealth
Amendment or Repeal of the Competition Act," cause Transition Bondholders to
suffer a loss of their investment.
Legal Challenges Which Could Adversely Affect Transition Bondholders. If
the relevant provisions of the Competition Act and the QRO were challenged in a
lawsuit and determined to be invalid or unenforceable in whole or in part, such
determination could adversely affect the ability of the Issuer to make payments
on the Transition Bonds, and Transition Bondholders could suffer a loss of their
investment. As of the date of this Prospectus, the Competition Act and the QRO
are in full force and effect. The PUC issued its Final Order dated May 14, 1998
(the "Final Order"), of which the QRO is a part, approving the settlement (the
"Settlement") concerning PECO Energy's restructuring plan as modified by
subsequent PUC orders (the "Restructuring Plan"). The period for appealing the
QRO has expired, and one petition challenging the Final Order, including the
QRO, has been filed by Indianapolis Power & Light Company ("IP&L") before the
Commonwealth Court. As of the date of this Prospectus, excluding cases that have
been suspended because of the Settlement, there are three pending Pennsylvania
court actions challenging the constitutionality of the Competition Act. See
"--Limited Availability of Liquidated Damages" above and "Litigation" in this
Prospectus. If any of the challenges are successful, the Seller could be in
breach of its representations and warranties concerning the Intangible
Transition Property and, if such breach continued beyond a 90-day grace period
and had a material adverse affect on the Transition Bondholders, the Seller
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<PAGE>
would be required to pay the Issuer Liquidated Damages. The Issuer would then be
required by the Indenture to redeem the Transition Bonds. See "--Limited
Availability of Liquidated Damages" above.
As mentioned above, however, as of the date of this Prospectus, excluding
cases that have been suspended because of the Settlement, there are three
ongoing actions, which if successful, could adversely affect Transition
Bondholders. The first two actions allege that the Competition Act was not
validly adopted under the Pennsylvania Constitution, while the third action
asserts that the Competition Act's provision allowing PECO Energy to recover
Stranded Costs violates the Commerce Clause of the United States Constitution.
For a more complete description of relevant litigation, see "Litigation" in this
Prospectus.
Future court actions, including any resulting from other restructuring
cases in Pennsylvania could challenge the constitutionality of the Competition
Act under the U.S. Constitution or the Pennsylvania Constitution. To the extent
that a future court action successfully challenged the validity of the
Competition Act, such an action would cause a breach of the Seller's
representations concerning the Competition Act and Intangible Transition
Property, and if such breach continued beyond a 90-day grace period and had a
material adverse effect on the Transition Bondholders, the Seller would have to
pay Liquidated Damages pursuant to the Sale Agreement, resulting in the
redemption of the Transition Bonds. See "The Sale Agreement" and "The Indenture"
in this Prospectus.
To the extent, however, that a court action, in Pennsylvania or elsewhere,
leads the legislature to amend or repeal the Competition Act, Transition
Bondholders would not be entitled to Liquidated Damages and would be entitled
only to rights under law. See "--No Liquidated Damages for Change in Law" above.
Possible Federal Preemption of the Competition Act. At least one bill was
introduced in the 105th Congress, First Session, prohibiting the recovery of
stranded costs such as the Qualified Transition Expenses, which could negate the
existence of Intangible Transition Property. That bill, H.R. 1230 (The Consumers
Electric Power Act of 1997, "H.R. 1230"), was introduced on April 8, 1997 and
referred to the House Commerce Committee, which referred it to the Subcommittee
on Energy and Power. On October 21, 1997, the Subcommittee on Energy and Power
held hearings, but since those hearings, no further action has been taken. No
prediction can be made as to whether H.R. 1230, or any future bills that
prohibit the recovery of stranded costs, will become law or, if they become law,
what their final form or effect will be. There is no assurance that the courts
would consider such a preemption a "taking." Moreover, even if such a preemption
of the Competition Act and/or the QRO 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 such compensation would be sufficient to pay the full
amount of principal of and interest on the Transition Bonds, and Transition
Bondholders could suffer a loss of their investment. See "--Possible
Commonwealth Amendment or Repeal of the Competition Act" below.
Possible Commonwealth Amendment or Repeal of the Competition Act. Under the
Competition Act, the Commonwealth 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 Competition Act also provides,
however, that subject to the requirements
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of law, nothing contained in the Competition Act precludes such limitation or
alteration by the Commonwealth if "adequate compensation is made by law" for the
full protection of the intangible transition charges collected pursuant to 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 if it attempts to limit or alter Intangible Transition Property or
Intangible Transition Charges. Accordingly, no assurance can be given that any
such 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 also "--The
Electric Industry Generally--Uncertainties Created by the Changing Regulatory
Environment" below.
In the opinion of Ballard Spahr Andrews & Ingersoll, LLP ("Ballard Spahr"),
counsel to PECO Energy, under the Contract Clauses of the United States and
Pennsylvania Constitutions, the Commonwealth could not repeal or amend the
Competition Act (by way of legislative process) or take any other action that
substantially impairs the rights of the Transition Bondholders, unless such
action is a reasonable exercise of the Commonwealth's sovereign powers and of a
character appropriate to the public purpose justifying such 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
which supported bonds issued by public instrumentalities, or otherwise reducing
or eliminating the security for such bonds. Based upon such case law, in the
opinion of Ballard Spahr it would appear unlikely that the Commonwealth 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 Clauses of the United
States and Pennsylvania Constitutions, the Commonwealth could not repeal or
amend the Competition Act (by way of legislative process) or take any action in
contravention of its pledge and agreement (described above) 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 such
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 Competition Act will not be sought or
adopted or that any action by the Commonwealth may not occur, any of which might
constitute a violation of the Commonwealth's pledge and agreement with the
transition bondholders. In any such event, costly and time-consuming litigation
might ensue. Any such litigation might adversely affect the price and liquidity
of the Transition Bonds and the dates of payments of principal thereof and,
accordingly, the weighted average lives thereof. Moreover, given the lack of
judicial precedent directly on point, and the novelty of the security for the
Transition Bondholders, the outcome of any such litigation cannot be predicted
with certainty, and accordingly, Transition Bondholders could incur a loss of
their investment. See "--Limited Availability of Liquidated Damages" and "No
Liquidated Damages for Change in Law" above.
Litigation in Other Jurisdictions Which Could Adversely Affect Transition
Bondholders. A legal action successfully challenging under the U.S. Constitution
or other federal law a state deregulation statute similar to the Competition Act
adopted by a jurisdiction other than Pennsylvania could establish legal
principles that would serve as a basis to challenge the Competition Act. Whether
or not a subsequent challenge to the Competition Act would be successful would
depend on the similarity of the other statute and the applicability of the legal
precedent to the Competition Act. While the Competition Act would not become
invalid automatically as a result of a court decision invalidating
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<PAGE>
another state's statute, such a decision could establish a legal precedent
for a successful challenge to the Competition Act that could adversely affect
Transition Bondholders. Accordingly, Transition Bondholders could suffer a loss
of their investment. Legal challenges brought in jurisdictions other than
Pennsylvania that assert claims that are based on state laws other than the laws
of Pennsylvania would not, however, have a direct effect on the Competition Act
or the interests of the Transition Bondholders.
Unexpected Regulation by the PUC. Even with the enactment of the
Competition Act, the PUC will continue to regulate certain aspects of the
electric industry in Pennsylvania, including full regulation of electric
distribution companies, the establishment of financial and other qualifications
of electric generation suppliers and other third parties, guidelines governing
customer billing and collection, metering and disclosure requirements applicable
to electric generation suppliers or other entities participating in the new
market in Pennsylvania. See "--The Electric Industry Generally" below. In
addition, the PUC could revise or rescind any of its regulations. Furthermore,
the parties to the Settlement of PECO Energy's Restructuring Plan 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 Seller cannot
predict whether the PUC will make such regulations or the timing or content of
any such PUC regulations. In the Sale Agreement, the Seller agrees to take legal
or administrative actions, including instituting and provoking legal actions as
may be reasonably necessary to block or overturn any attempts to cause a repeal,
modification or supplement to the Competition Act or the QRO or the Intangible
Transition Property by legislative enactment or constitutional amendment
materially adverse to the holders of Transition Bonds, or proceedings of third
parties, which, if successful, would result in a breach of representations
concerning the Intangible Transition Property, the QRO or the Competition Act.
See "The Sale Agreement" in this Prospectus. There is no assurance that the
Seller would be able to take such action or that any action the Seller is able
to take would be successful. Future PUC regulations may affect the rating of the
Transition Bonds, their price or the rate of ITC Collections and, accordingly,
the amortization of Transition Bonds and their weighted average lives. As a
result, Transition Bondholders could suffer a loss of their investment.
Payments on Transition Bonds Rely on Adjustments of the Intangible
Transition Charges. The actual rate of ITC Collections may vary from projections
upon which the Intangible Transition Charges were based, primarily as a result
of variations in electricity usage by Customers from projected electricity usage
and delinquencies and write-offs. Under the Master Servicing Agreement, the
Servicer is obligated to submit Adjustment Requests to the PUC on each
Calculation Date to reflect the actual rate of ITC Collections allocated to the
Issuer pursuant to the Master Servicing Agreement and changes in projections
regarding such rate. See "The Master Servicing Agreement--Servicing
Procedures--ITC Adjustment Process" in this Prospectus. The adjustments to the
related Intangible Transition Charges are designed to result in the Transition
Bond Balance of each Series equaling the Projected Transition Bond Balance
therefor, and the amount on deposit in the Overcollateralization Subaccount
equaling the Calculated Overcollateralization Level, by the Payment Date
immediately [preceding] the next Adjustment Date or the Expected Final Payment
Date, as applicable, taking into account any amounts on deposit in the Reserve
Subaccount. Since the adjustments will be based on forecasted usage,
delinquencies and write-offs, there can be no assurance that any such
adjustments to the Intangible Transition Charges will result in ITC Collections
allocated to the Issuer pursuant to the Master Servicing Agreement sufficient to
pay expenses, interest on the Transition Bonds when due and principal of the
Transition Bonds in accordance with the Expected Amortization Schedules
therefor. The Competition Act and the QRO require the PUC to approve the
Adjustment Request within 90 days of the Calculation Date. There can be no
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assurance that the PUC will approve any Adjustment Request in accordance with
the QRO. Any failure to approve in accordance with the QRO or any litigation
challenging the approval thereof could adversely affect the price and liquidity
of the Transition Bonds and the dates of the payment of the principal thereof
and, accordingly, the weighted average lives thereof.
Limitations on the Intangible Transition Charges. After December 31, 2010,
PECO Energy must cease billing Customers the Intangible Transition Charges, and,
after the final Adjustment Date specified for each Series in the related
Prospectus Supplement, there will be no further adjustments of the Intangible
Transition Charges with respect to such Series. Thereafter, any shortfalls in
ITC Collections available to make payments with respect to such Series are
expected to be covered through amounts, if any, on deposit in the Reserve
Subaccount, the Overcollateralization Subaccount and the Capital Subaccount. To
the extent such amounts are insufficient to cover any such 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.
Uncertainties Associated with New Asset Type. PECO Energy has no historical
performance data for Intangible Transition Property, although customer and
energy usage records are available. Such customer and energy usage records,
however, do not reflect customers' payment patterns or energy usage in a
competitive market and do not reflect consolidated billing by electric
generation suppliers or other third parties, so these records may have limited
predictive value with respect to the Intangible Transition Charges. See
"--Servicing--Credit Concerns Arising Out of Third Party Billing" below.
Furthermore, the Servicer does not have any experience administering this type
of asset. In addition, in the event of a foreclosure, there is likely to be a
limited market, if any, for the Transferred Intangible Transition Property, and,
therefore, foreclosure may not be a realistic or practical remedy. See
"--Bankruptcy; Creditors' Rights" below.
Servicing
Issuer's Reliance on Servicer. The Issuer will rely on the Servicer for the
calculation of any adjustments to the Intangible Transition Charges and
submission of Adjustment Requests to the PUC and for billing and collection of
the Intangible Transition Charges. If, as a result of its insolvency or
liquidation or otherwise, PECO Energy were to cease servicing Intangible
Transition Property, it may be difficult to obtain a Successor Servicer under
the Competition Act to fulfill the obligations of PECO Energy as Servicer. In
addition, a transfer of servicing functions will require regulatory cooperation.
A Successor Servicer may also experience difficulties in collecting Intangible
Transition Charges and determining appropriate adjustments to Intangible
Transition Charges. Further, under current law, it is possible that the remedy
of shutting off service to a Customer for nonpayment of the Intangible
Transition Charges would not be available to a Successor Servicer. If PECO
Energy were to be replaced as Servicer, any of these factors, and others, could
delay the timing of payments on the Intangible Transition Property, and
Transition Bondholders could incur a loss of their investment. See "The Master
Servicing Agreement" in this Prospectus.
Inaccurate Projections. The failure of the Servicer to forecast accurately
the electricity usage of Customers and the delinquency and write-off experience
relating to Intangible Transition Charges could adversely affect the timely
receipt of ITC Collections. Projections are inherently subject to a variety of
risks and uncertainties that could cause actual results to differ materially
from those projected. Such risks and uncertainties include, among others,
changes in political, social and economic conditions, weather, unexpected
demographic trends, catastrophes, regulatory initiatives, compliance with
governmental regulations, litigation and various other events, conditions and
circumstances, all of which are beyond the
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control of the Servicer. While adjustments to the Intangible Transition Charges
are required under the Competition Act to be made as described in this
Prospectus, to the extent actual results differ from projections, payments on
Transition Bonds could be delayed, and Transition Bondholders could suffer a
loss of their investment.
For calendar year 1997, PECO Energy overestimated overall usage by 2.7%,
because of unusually cool summer weather in PECO Energy's retail service area.
See "The Seller and Servicer--Forecasting Customers and Usage" in this
Prospectus. The accuracy of PECO Energy's historical forecasts is not
necessarily indicative of the accuracy of the Servicer's future forecasts,
particularly in light of the impact of weather patterns on usage and changes
that are expected to occur as a result of the introduction of competition for
electric generation services. Competition could affect usage in ways that cannot
now be predicted and that would make past projections useless in making future
projections. Similarly, the introduction of electric generation suppliers and
other third parties providing consolidated bills to customers and being
responsible for paying amounts owed in respect of transmission and distribution
charges and the intangible transition charges to electric distribution
companies, including PECO Energy, could make past projections meaningless as a
tool in predicting delinquencies and write-offs. Such changes to the electricity
market could also substantially affect the methodology by which the Servicer
produces forecasts and the types of information used by the Servicer to produce
them. There can be no assurance that the accuracy of past projections will be
replicated in any future predictions made by the Servicer.
While under the Master Servicing Agreement the Servicer is obligated to
make all reasonable efforts to make accurate forecasts of usage, write-offs and
delinquencies and incorporate assumptions relating thereto into its calculation
of the Intangible Transition Charges and adjustments thereto, there can be no
assurance that actual usage, delinquencies and write-offs will not be
significantly different from future forecasts thereof or that the calculation of
Intangible Transition Charges will not result in a shortfall in ITC Collections.
In addition, there can be no assurance that any Successor Servicer will be
successful in making such forecasts. Shortfalls may be recovered through
adjustments to the Intangible Transition Charges, but the frequency of such
adjustments is limited, and, accordingly, delays in payments to Transition
Bondholders or losses might result. See "--Unusual Nature of Intangible
Transition Property--Payments on Transition Bonds Rely on Adjustments of the
Intangible Transition Charges" above. In addition, there can be no assurance
that the PUC will approve any Adjustment Request in accordance with the QRO. Any
failure by the PUC to approve any Adjustment Request in accordance with the QRO
or any litigation challenging the approval thereof could adversely affect the
price and liquidity of the Transition Bonds and the dates of the payment of the
principal thereof and, accordingly, the weighted average lives thereof.
Delays in Payments 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. Although the Servicer does not have the right to
change the amount of a Customer's individual Intangible Transition Charges, it
does have the right to take actions that in its judgment will maximize actual
collections from Customers with respect to any utility bill. In addition, the
Servicer has the right to write-off outstanding bills that it deems
uncollectible in accordance with its customary and usual billing and collection
practices. Such actions might include, for example, agreeing to an extended
payment schedule or agreeing to write-off the remaining portion of an
outstanding bill in order to recover a portion thereof. While PECO Energy has no
current intention of taking actions that would change the billing and collection
arrangements in a manner that would adversely affect the collection of payments
of the Intangible Transition Charges, there can be no assurance that PECO Energy
will not change its customary and usual billing and collection practices,
including its requirements regarding Customer deposits, in such a manner or that
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a Successor Servicer may not make such a change or that such a change may not be
required by the PUC or new legislation. Such changes could delay or reduce ITC
Collections and, accordingly, could 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 Schedules or in
full by the applicable Expected Final Payment Date or Series Termination Date
or, if applicable, Class Termination Date. See "Certain Weighted Average Life
and Yield Considerations" in this Prospectus; see also "The Seller and
Servicer--Customers and Operating Revenues," "--Billing Process" and "--Limited
Information on Customers' Creditworthiness" in this Prospectus.
Limited Information on Customers' Creditworthiness. The Servicer's ability
to collect amounts billed to Customers for the Intangible Transition Charges
will depend in part on the creditworthiness of the Customers. Under Pennsylvania
law, PECO Energy generally is obligated to provide service to new Customers in
its retail electric service territory. 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 evaluates the creditworthiness of a
significant number of its Customers, significant increases in delinquencies and
write-offs may result, and delays in payments to Transition Bondholders may
occur. See "--Credit Concerns Arising out of Third Party Billing" below.
Credit Concerns Arising Out of Third Party Billing. The Restructuring Plan
and future orders of the PUC will set forth guidelines governing customer
billing and collection by electric generation suppliers and other third parties
providing billing and metering services. Any electric generation supplier or
other third party that provides consolidated billing is required to pay the
Servicer periodic amounts billed by the Servicer to the electric generation
supplier or other third party, including the Intangible Transition Charges,
regardless of the ability of the electric generation supplier or other third
party to collect such amounts from Customers. In such event, the electric
generation supplier or other third party will replace Customers as the obligor
with respect to such Intangible Transition Charges, and the Servicer, on behalf
of the Issuer, will have no right to collect such Intangible Transition Charges
from Customers. See also "--The Electric Industry Generally--Adverse Effects of
Shrinking Base of Customers on ITC Collections" below. There can be no assurance
that any electric generation supplier or other third party will use the same
customer credit standards as the Servicer or that the Servicer will be able to
mitigate credit risks relating to electric generation suppliers or other third
parties in the same manner in, or to the same extent to, which it mitigates such
risks relating to its Customers. The Servicer, on behalf of the Issuer, will
pursue any electric generation supplier or other third party that fails to remit
applicable Intangible Transition Charges in a manner similar to that by which
the Servicer will pursue any failure by a Customer to remit Intangible
Transition Charges. See "The Master Servicing Agreement" in this Prospectus. The
Servicer will not generally have the right to pursue Customers of an electric
generation supplier or other third party who defaults in the payment of
Intangible Transition Charges. The Servicer will have the right to bill and
collect Intangible Transition Charges and other amounts payable to the Issuer or
the Servicer directly from all Customers receiving consolidated bills from
electric generation suppliers or other third parties following certain payment
defaults by an electric generation supplier or other third party and applicable
grace periods. See "The QRO and the Intangible Transition Charges--Competitive
Billing" in this Prospectus.
Changes in Customer billing and payment arrangements may result in Customer
confusion and the misdirection or delay of payments, which could have the effect
of causing shortfalls in ITC Collections. Any problems arising from new and
untested systems or any lack of experience on the part of the electric
generation suppliers or other third parties with Customer billing and
collections could cause delays in
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billing and collecting the Intangible Transition Charges resulting in shortfalls
in ITC Collections. Such ITC Collections shortfalls 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 Schedules
therefor or in full by the applicable Expected Final Payment Date or Series
Termination Date or, if applicable, Class Termination Date. For a discussion of
the future market share of electric generation suppliers, see "PECO Energy's
Restructuring Plan--The Settlement--Customer Choice" in this Prospectus. Neither
the Seller nor the Servicer will pay any shortfalls resulting from the failure
of any electric generation supplier or other third party to forward ITC
Collections to the Servicer. The adjustment mechanism for the Intangible
Transition Charges, as well as the Overcollateralization Amount and the amounts
on deposit in the Capital Subaccount and the Reserve Subaccount, are designed to
mitigate this risk relating to the timing of collections and payments. However,
delays in payments to Transition Bondholders might occur as a result of delays
in implementation of the adjustment mechanism or any lack of funds in the
Reserve Subaccount, the Overcollateralization Subaccount, and the Capital
Subaccount after the final Adjustment Date. See also "The Electric Industry
Generally--Adverse Effects of Shrinking Base of Customers on ITC Collections"
below.
In addition, 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 remit ITC Collections. In
this circumstance, a default in the payment of Intangible Transition Charges by
a single electric generation supplier or other 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.
Possible Payment Delays Created by the Commingling of ITC Collections with
Servicer's Other Funds. Until ITC Collections are remitted to the Collection
Account on a Remittance Date, the Servicer will not segregate them from its
general funds. A failure or inability of the Servicer to remit the full amount
of the ITC Collections, whether voluntary or involuntary, might result in delays
or reductions in payments to Transition Bondholders. The adjustments to the
Intangible Transition Charges described in this Prospectus as well as the
amounts, if any, on deposit in the Reserve Subaccount, the Overcollateralization
Subaccount and the Capital Subaccount are designed to mitigate this risk.
However, delays in payments to Transition Bondholders may occur as a result of
delays in implementation of the adjustment mechanism or any lack of funds in the
Reserve Subaccount, the Overcollateralization Subaccount and the Capital
Subaccount after the final Adjustment Date.
Potential Impact of the Year 2000 Issue on Transition Bondholders. PECO
Energy is faced with the task of addressing the Year 2000 issue. See "The Seller
and Servicer--Year 2000 Compliance" in this Prospectus. The Year 2000 issue
could affect, among other things, the ability of PECO Energy as Servicer or any
Successor Servicer and electric generation suppliers or other third parties to
bill and collect the Intangible Transition Charges, both because of problems
with their own systems and that Customers may have in processing bills, and the
ability of the Servicer and electric generation suppliers to meter usage. The
Year 2000 issue could also affect usage if there are problems with the
generation or distribution of electricity. There is no way to predict the impact
of the Year 2000 issue, but if there are significant interruptions of service to
Customers or significant business interruptions in general caused by Year 2000
issues, there could be significant delays in ITC Collections and, therefore, in
payments to Transition Bondholders could be delayed.
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The Electric Industry Generally
Uncertainties Created by the Changing Regulatory Environment. The
Restructuring Plan and subsequent orders of the PUC provide certain standards
for metering, billing and other activities by electric generation suppliers and
other third parties participating in the new market in Pennsylvania. While the
Restructuring Plan provides that an electric generation supplier that bills
customers must comply with all billing, financial and disclosure requirements
applicable to electric generation suppliers, the PUC may waive any of those
requirements at any time in the future. Further, the parties to the Settlement
agreed to review and, as appropriate, to recommend changes to PUC regulations
and procedures "in order to facilitate the efficient and full recovery of
revenues from customers, while at the same time protecting customers." In an
order adopted on July 1, 1998, the PUC ordered that third parties that are
neither electric distribution companies nor electric generation suppliers and
have no relationship with end users could provide billing and collection
services for electric distribution charges, including Intangible Transition
Charges and electric generation charges. Such third parties will be subject to
the same requirements as electric generation suppliers, and, except in limited
circumstances, the Servicer, on behalf of the Issuer, will have no rights to
collect Intangible Transition Charges from the Customer electing consolidated
billing from such a third party. As with electric generation suppliers providing
consolidated billing, there can be no assurance that such third parties will use
the same customer credit standards as the Servicer or that the Servicer will be
able to mitigate credit risks relating to such third parties in the same manner
in, or to the same extent to, which it mitigates such risks relating to its
Customers. The Servicer, on behalf of the Issuer, will pursue any such third
party that fails to remit applicable Intangible Transition Charges in a manner
similar to that by which the Servicer will pursue any Customer that fails to
remit Intangible Transition Charges. By affecting billing terms and the terms of
remittances by electric generation suppliers and other third parties to the
Servicer or by making it more difficult for the Servicer to collect Intangible
Transition Charges, any changes in billing and collection regulation might
adversely affect the price and liquidity of the Transition Bonds and their
amortization and, accordingly, their weighted average lives. Transition
Bondholders may suffer a loss of their investment as a result of any such
changes. See "--Unusual Nature of Intangible Transition Property" above.
Uncertainties Created by Changes in General Economic Conditions and
Electricity Usage. General economic conditions and technological changes that
significantly alter power consumption or reduce the Customer base in the
Seller's historical service area may affect payments on the Transition Bonds.
Additionally, changes in business cycles, departures of Customers from the
Seller's historical service area, weather, occurrence of natural disasters,
dramatic changes in energy prices, implementation of energy conservation efforts
and increased efficiency of equipment, among other things, affect energy usage.
If a sufficient number of Customers self-generate, significantly reduce their
electricity consumption or cease consuming electricity altogether, the
Intangible Transition Charges, as adjusted from time to time, required to be
paid by remaining Customers may become burdensome and result in greater
delinquencies and write-offs or petitions to the PUC to reduce Intangible
Transition Changes, which could have an adverse effect on Transition
Bondholders. See "--Unusual Nature of Intangible Transition Property--Payments
on Transition Bonds Rely on Adjustments of the Intangible Transition Charges"
above and "--Adverse Effects of Shrinking Base of Customers on ITC Collections"
below.
Adverse Effects of Shrinking Base of Customers on ITC Collections. The
Intangible Transition Charges are a relatively modest amount on an individual
Customer basis when imposed on the Seller's current base of Customers. However,
if one or more of the risks described under the subsection "--The Electric
Industry Generally" or an unforeseen catastrophe were to occur, the number of
Customers on whom the Intangible Transition Charges would be levied might be
reduced significantly. Although
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the Issuer believes that the likelihood of this occurring is remote, its
occurrence might cause Transition Bondholders to fail to receive the full amount
to which they are entitled. The Servicer's current forecasts of future
electricity demand do not include any shift by Customers to self-generation,
because self-generation of electricity by Customers is not expected to be
economically viable during the period in which the Transition Bonds will be
outstanding. While the Issuer expects that the applicable Intangible Transition
Charges will be imposed on Customers who only partially self-generate, the
ability of the Servicer to collect such Intangible Transition Charges may be
reduced because the Servicer may not have ready access to data about which
consumers are self-generating and will not be able to exercise shut-off rights
as an enforcement tool against a self-generator. But see "--Servicing--Credit
Concerns Arising Out of Third Party Billing" above.
Bankruptcy; Creditors' Rights
Bankruptcy of Seller. General. The bankruptcy of the Seller could have
several adverse consequences, the most important of which are briefly described
in this subsection.
True Sale or Financing. The Seller will represent and warrant in the Sale
Agreement that the transfer of the Transferred Intangible Transition Property in
accordance with that agreement constitutes a valid sale and assignment by the
Seller to the Issuer of the Transferred Intangible Transition Property. The
Seller will also represent and warrant in the Sale Agreement, and it is a
condition of closing for the sale of Intangible Transition Property, that it
will take the appropriate actions under the Competition Act, including filing an
intangible transition property notice, to perfect this sale. The Competition Act
provides that a transfer of intangible transition property by an electric
utility to an assignee which the parties have in the governing documentation
expressly stated to be a sale or other absolute transfer, in a transaction
approved in a qualified rate order, shall be treated as an absolute transfer of
all the transferor's right, title and interest, as in a true sale, and not as a
pledge or other financing, of such intangible transition property. The Seller
and the Issuer will treat the transactions as a sale under applicable law,
although for financial reporting and federal and Commonwealth income and
franchise tax purposes the Transition Bonds will be treated as a financing and
not a sale. See "The Competition Act--Securitization of Stranded
Costs--Characterization of Transfer of the Transferred Intangible Transition
Property as True Sale" in this Prospectus. If the Seller were to become a debtor
in a bankruptcy case and a bankruptcy trustee of the Seller, the Seller itself
as debtor in possession or another party in interest were to take the position
that the sale of the Transferred Intangible Transition Property to the Issuer
was a financing transaction and not a "true sale," there can be no assurance
that a court would not adopt such a position. If a court adopted this position,
then delays or reductions in payments on the Transition Bonds could result. Even
if a court did not ultimately recharacterize the transaction as a financing
transaction, the mere commencement of a Seller bankruptcy could result in delays
in payments on the Transition Bonds and could have an adverse effect on the
secondary markets for the Transition Bonds, including the liquidity and market
value of the Transition Bonds.
In order to mitigate the impact of the possible recharacterization of a
sale of intangible transition property as a financing transaction, the
Competition Act and the regulations thereunder provide that if an intangible
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transition property notice is filed and the transfer is thereafter held to
constitute a financing transaction (as opposed to a true sale), such notice will
be deemed to constitute a filing with respect to a security interest. The
Competition Act further provides that any such filing in respect of transition
bonds takes precedence over any other filings. In addition, the Sale Agreement
requires that financing statements under the Uniform Commercial Code executed by
the Issuer be filed in the appropriate offices in Delaware. As a result of such
filings, the Issuer would be a secured creditor of the Seller and entitled to
recover against the security, which is the Collateral. None of this, however,
mitigates the risk of payment delays and other adverse effects caused by a
Seller bankruptcy. Further, in the event an intangible transition property
notice is not filed pursuant to the Competition Act for any reason, the Issuer
fails to otherwise perfect its interest in the Transferred Intangible Transition
Property and the transfer is thereafter deemed not to constitute a true sale,
the Issuer would be an unsecured creditor of the Seller.
Consolidation of the Issuer and the Seller. If the Seller were to become a
debtor in a bankruptcy case, a bankruptcy trustee of the Seller, the Seller
itself as a debtor in possession or another party in interest may attempt to
substantively consolidate the assets of the Issuer and the Seller. Although the
Seller and the Issuer have taken steps to attempt to minimize this risk (see
"The Issuer" in this Prospectus), no assurance can be given that if the Seller
or an affiliate of the Seller (other than the Issuer) were to become a debtor in
a bankruptcy case, a court would not order that the assets and liabilities of
the Issuer be consolidated with those of the Seller or such affiliate, thus
resulting in delays or reductions in payments on the Transition Bonds.
Estimation of Claims; Challenge to Liquidated Damage Claims. If the Seller
were to become a debtor in a bankruptcy case, claims (including indemnity
claims) by the Issuer against the Seller under the Sale Agreement and the other
documents executed in connection therewith would be unsecured claims and would
be subject to being discharged in such proceeding. In addition, a bankruptcy
trustee of the Seller, the Seller as debtor in possession or another party in
interest may request that the Bankruptcy Court estimate any contingent claims
(including any contingent claim for Liquidated Damages) of the Issuer against
the Seller and take the position that such claims should be estimated at zero or
at a low amount because the contingency giving rise to such claims is unlikely
to occur. If the Seller were to become a debtor in a bankruptcy case and the
Liquidated Damages provisions of the Sale Agreement were triggered, a bankruptcy
trustee of the Seller, the Seller as debtor in possession or another party in
interest might challenge the enforceability of the Liquidated Damage provisions.
If a court were to hold that the Liquidated Damage provisions were
unenforceable, the Issuer should be left with a claim for actual damages against
the Seller based on breach of contract principles. The amount of such actual
damages would be subject to estimation and/or calculation by the court.
No assurances can be given as to the result of any of the above-described
actions or claims. Furthermore, no assurance can be given as to what percentage,
if any, unsecured creditors would receive in any bankruptcy proceeding involving
the Seller. Accordingly, Transition Bondholders could suffer a loss on their
investment.
Status of Intangible Transition Property as Current Property. The Seller
has represented in the Sale Agreement, and the Competition Act provides, that
the Transferred Intangible Transition Property constitutes a current property
right on the date that the QRO became effective and that it thereafter exists
continuously for all purposes. Nonetheless, no assurance can be given that if
the Seller were to become a debtor in a bankruptcy case, a bankruptcy trustee of
the Seller, the Seller itself as debtor in possession or another party in
interest would not attempt to take the position 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 were to adopt this position, no
assurance can be given that a security interest in favor of the Transition
Bondholders would attach to Intangible Transition Charges in respect of
electricity consumed after the commencement of a bankruptcy case for the Seller.
If it were determined that the Transferred Intangible Transition Property has
not been sold to the Issuer, and the security interest in favor of the
Transition Bondholders did not attach to Intangible Transition Charges in
respect of electricity consumed after the commencement of a bankruptcy case of
the Seller, then the Issuer would be an unsecured creditor of the Seller, and
delays or reductions in payments on the Transition Bonds could result. Whether
or not a court determined that the Transferred Intangible Transition Property
had been sold to the Issuer, no assurances can be given that a court would not
rule that any Intangible Transition Charges relating to electricity consumed
after the commencement of the Seller's bankruptcy cannot be transferred to the
Issuer or the Bond Trustee, thus resulting in delays or reductions of payments
of the Transition Bonds.
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In addition, because the payments based on the Intangible Transition
Charges are indirectly usage-based charges, if the Seller were to become the
debtor in a bankruptcy case, a bankruptcy trustee of the Seller, the Seller
itself as debtor in possession or another party in interest could take the
position that the Issuer should pay a portion of the costs of the Seller
associated with the generation, transmission or distribution by the Seller of
the electricity, consumption of which gave rise to the ITC Collections used to
make payments on the Transition Bonds. If a court were to adopt this position,
the result could be delays or reductions in payments to the Transition
Bondholders.
Regardless of whether the Seller is the debtor in a bankruptcy case, if a
court were to accept the argument 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 the Seller arising
before the Transferred Intangible Transition Property came into existence could
have priority over the Issuer's interest in the Transferred Intangible
Transition Property, thereby possibly resulting in a reduction of amounts paid
to the Transition Bondholders. Adjustments to the Intangible Transition Charges
may be available to mitigate this risk, although delays in implementation
thereof may cause a delay in receipt of payments.
Enforcement of Rights by Bond Trustee. Upon an Event of Default under the
Indenture, the Competition Act permits the Bond Trustee to enforce in accordance
with the terms of the Indenture the security interest in the Transferred
Intangible Transition Property and direct the PUC to order the sequestration and
payment to Transition Bondholders of all revenues arising with respect to the
Transferred Intangible Transition Property. The Competition Act provides that
such an order will remain in full force and effect notwithstanding bankruptcy,
reorganization, or other insolvency proceedings with respect to the utility or
its assignee. There can be no assurance, however, that the PUC would issue such
an order in light of the automatic stay provisions of Section 362 of the
Bankruptcy Code or, alternatively, that a bankruptcy court would lift the
automatic stay to permit such action by the PUC. In that event, the Bond Trustee
may under the Indenture seek an order from the bankruptcy court lifting the
automatic stay with respect to such action by the PUC, and an order requiring an
accounting and segregation of the revenues arising from the Transferred
Intangible Transition Property. There can be no assurance that a court would
grant either order.
Bankruptcy of Servicer. The Servicer is entitled to commingle ITC
Collections with its own funds until each Remittance Date. The Competition Act
provides that the relative priority of a lien created under the Competition Act
is not defeated or adversely affected by the commingling of funds arising with
respect to Intangible Transition Property with funds of the electric utility.
However, no assurances can be given that in the event of a bankruptcy of the
Servicer, a bankruptcy trustee of the Servicer, the Servicer itself as a debtor
in possession or another party in interest might not assert (or that a court
might not hold) that any ITC Collections held by the Servicer were property of
the Servicer and so included in the bankruptcy estate. This may result in delays
in payments due on the Transition Bonds. In addition, in the event of a Servicer
bankruptcy, the automatic stay may prevent the Issuer from effecting a transfer
of servicing, notwithstanding the contractual provisions in the Master Servicing
Agreement that provide that the Bond Trustee, as assignee of the Issuer,
together with certain other persons, may vote to appoint, or petition the PUC or
a court of competent jurisdiction for the appointment of, a Successor Servicer
which satisfies the Rating Agency Condition. Even if a Successor Servicer may be
appointed, such a successor may be difficult to obtain and may not be capable of
performing all the duties that PECO Energy as Servicer was capable of
performing. See "--Servicing--Issuer's Reliance on Servicer" above.
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The Transition Bonds
Limited Liquidity of Transition Bonds. There is no assurance that a
secondary market for any of the Transition Bonds will develop or, if one does
develop, that it will provide the Transition Bondholders with liquidity of
investment or that it will continue for the life of such Transition Bonds. It is
not anticipated that any Transition Bonds will be listed on any securities
exchange.
Limited Sources of Payments for the Transition Bonds. The Transition Bonds
are obligations of the Issuer, a special purpose entity, only and will not
represent an interest in or obligation of the Seller, the Issuer Trustee or the
Bond Trustee or any entity other than the Issuer. The Issuer has no property
other than the Collateral, and the Collateral is the sole source of payment on
the Transition Bonds. The Issuer's organizational documents will restrict its
right to acquire other assets unrelated to the transactions described in this
Prospectus. None of the Transition Bonds will be guaranteed or insured by the
Seller, the Issuer Trustee or the Bond Trustee or any affiliates thereof (other
than the Issuer) or any other entity.
Effect of Additional Series and Other Financings on Outstanding Transition
Bonds. Subject to certain conditions, the Issuer may from time to time issue new
Series of Transition Bonds. The principal terms of any Series will be specified
in a Prospectus Supplement for such Series, but the terms of any additional
Series will not be subject to the prior review by or consent of the Transition
Bondholders of any previously issued Series. Such principal terms may include
methods for allocating collections, provisions creating different or additional
security or other credit enhancement, and any other amendment or supplement to
the Indenture or otherwise which is made applicable only to such Series of
Transition Bonds. While the issuance of other Series must meet the Rating Agency
Condition, there can be no assurance that the issuance of any other Series of
Transition Bonds might not 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 are subject to a vote of all
Transition Bondholders for all Series of Transition Bonds, even though there may
be differences in the interests or positions among such Series or Classes of
such Series which could result in voting outcomes adverse to the interests of
one or more Series or Classes of Transition Bonds.
The Seller may sell Intangible Transition Property to one or more entities
other than the Issuer to finance Stranded Costs. Neither such sales nor the
terms of any transition bonds issued by such entity or entities will be subject
to the prior review by or consent of the Transition Bondholders of any Series.
ITC Collections will be pro rated among the Issuer and such other entities based
on their respective Percentage at the time such Intangible Transition Charges
are billed. The sale of Intangible Transition Property to an entity other than
the Issuer will be subject, among other things, to the Rating Agency Condition.
There can be no assurance that the issuance of other transition bonds secured by
Intangible Transition Property might not have an impact on the timing or amount
of payments received by Transition Bondholders. See "PECO Energy Company" in
this Prospectus. In addition, in the event such other transition bonds are
issued, pursuant to the Master Servicing Agreement, various matters relating to
the transition bonds (including Transition Bonds issued by the Issuer) are
subject to a vote of the Bond Trustee and any bond trustees of Other Issuers,
even though there may be differences in the interests or positions among the
transition bonds issued by such Other Issuers and the Transition Bonds issued by
the Issuer which could result in voting outcomes adverse to the interests of the
Transition Bonds.
Limited Nature of Ratings. It is a condition of the Underwriters'
obligation to purchase each Series and Class of Transition Bonds that at the
time of issuance such Transition Bonds receive from the Rating Agencies the
respective ratings set forth in the applicable Prospectus Supplement, which, in
each case, will be in one of the four highest categories. The ratings of the
Transition Bonds address the likelihood of the ultimate payment of principal and
the timely payment of interest on the Transition Bonds. The ratings do not
represent any assessment of any particular rate of principal payments on the
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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. As a result, any Series or Class of Transition Bonds might be paid later
than scheduled, resulting in a weighted average life of such 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.
Uncertain Weighted Average Life. The actual dates on which principal is
paid on each Class of Transition Bonds might be affected by, among other things,
the amount and timing of receipt of ITC Collections. Since the amount of
Intangible Transition Charges collected from each Customer will depend upon each
Customer's usage of electricity, the aggregate amount and timing of ITC
Collections (and the resulting amount and timing of principal amortization 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" above. Although the Intangible Transition Charges will be adjusted
from time to time based in part on the actual rate of ITC Collections during
prior billing periods, no assurances can be given that the Servicer will be able
to forecast accurately actual Customer energy usage and the rate of
delinquencies and write-offs and implement adjustments to the Intangible
Transition Charges that will cause payments to be made at any particular rate.
If ITC Collections are received at a slower rate than expected, payments on the
Transition Bonds may be made later than expected. Because principal will only be
paid at a rate not to exceed that reflected in the Expected Amortization
Schedules, the Transition Bonds are not expected to be retired earlier than
scheduled other than in the event of a redemption or acceleration. A payment on
a date that is later than forecasted will result in a longer weighted average
life.
The Transition Bonds may be subject to optional and mandatory redemptions
as specified herein or in the related Prospectus Supplement. Any such redemption
will cause such Transition Bonds to be retired earlier than would otherwise be
expected and may adversely affect the yield to maturity of such Transition
Bonds. There can be no assurance as to whether the Issuer will redeem any Series
of Transition Bonds or as to whether Transition Bondholders will be able to
receive an equally attractive rate of return upon reinvestment of the proceeds
resulting from any such redemption. See "Certain Weighted Average Life and Yield
Considerations" and "The Transition Bonds--Credit Enhancement" in this
Prospectus.
PECO ENERGY COMPANY
Incorporated in Pennsylvania in 1929, PECO Energy provides retail electric
and gas service in Southeastern Pennsylvania and, through pilot programs,
natural gas service to areas in Maryland and New Jersey. PECO Energy also
engages in the wholesale marketing of electricity on a national basis and
participates in joint ventures which provide telecommunication services in the
Philadelphia area. See "The Seller and Servicer" in this Prospectus.
The electric and gas utility industries are both undergoing fundamental
restructuring. See "The Competition Act" in this Prospectus. In addition, in
1996, the Federal Energy Regulatory Commission issued Order No. 888 providing
for competition in wholesale generation by requiring that all public utilities
file non-discriminatory, open-access transmission tariffs.
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,
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Illinois 60661-2511; and New York Regional Office, 7 World Trade Center, 13th
Floor, New York, New York 10048. Copies of periodic reports and exhibits thereto
may be obtained at the above locations at prescribed rates. Information filed
with the SEC can also be inspected at the SEC site on the World Wide Web at
http://www.sec.gov.
THE COMPETITION ACT
General
The Competition Act was enacted in December 1996 and provides for the
restructuring of the electric utility industry in Pennsylvania. The 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 PUC. Under the Competition Act, electric generation
suppliers are subject to certain limited financial and disclosure requirements
but are otherwise unregulated by the PUC. Electric distribution and transmission
services will remain regulated.
The Competition Act requires utilities to submit restructuring plans,
including their stranded costs which will result from retail competition for
generation services. Stranded costs include regulatory assets, nuclear
decommissioning costs and long-term purchase power commitments for which full
recovery is allowed and other costs, including investment in generating plants,
spent fuel disposal, retirement costs and reorganization costs, for which an
opportunity for recovery is allowed in an amount determined by the PUC as just
and reasonable. Under the Competition Act, utilities are subject to a rate cap
through December 31, 2005 which provides that total charges to customers cannot
exceed rates in place at December 31, 1996, subject to certain exceptions. The
Competition Act also caps transmission and distribution rates from December 31,
1996 through June 30, 2001, subject to certain exceptions. Under the Competition
Act, each regulated electric utility was required to implement a retail access
pilot program for customers representing 5% of the peak load of each customer
class for the period from November 1, 1997 through December 31, 1998.
Recovery of Stranded Costs
As a mechanism for utilities (including PECO Energy) to recover their
allowed stranded costs, the Competition Act provides for the imposition and
collection of nonbypassable charges on customer's 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 system,
and may be collected over a maximum period of nine years, except as such period
may be extended by the PUC for good cause shown. As the competitive transition
charges are based on access to the utility's transmission and distribution
system, they will be assessed regardless of whether such customer purchases
electricity from the utility or an independent electric generation supplier. The
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--Dependence on the Competition Act" in this
Prospectus.
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Securitization of Stranded Costs
The Competition Act authorizes the PUC 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 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.
The Competition Act contains a number of provisions designed to facilitate
the securitization of stranded costs.
Irrevocability of Intangible Transition Property. Under the Competition
Act, intangible transition property is created by the issuance by the PUC of a
qualified rate order and the declaration by the PUC that the relevant paragraphs
of such qualified rate order are irrevocable. The PUC is granted the power under
the Competition Act to specify that all or a portion of a qualified rate order
will be irrevocable. The Competition Act provides that to the extent that the
PUC declares all or a portion of a qualified rate order irrevocable, the PUC may
not, by any subsequent action, reduce, postpone, impair or terminate either the
order or the intangible transition charge authorized therein. In addition, under
the Competition Act, the Commonwealth 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 Competition Act provides, however, that nothing precludes the
Commonwealth 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 pursuant to 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--Possible Commonwealth Amendment or Repeal of Competition Act" and
"--Dependence on the Competition Act and the QRO" in this Prospectus.
Adjustments of the Intangible Transition Charges. The Competition Act
requires the PUC to provide in all qualified rate orders a procedure for
expeditiously approving periodic adjustments to the intangible transition
charges. The Competition Act requires that such adjustments be made on at least
an annual basis on each anniversary of the issuance of the qualified rate order
and at additional intervals as specified therein. The PUC must approve such
adjustments within 90 days of each request for adjustment.
Nonbypassability. The 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 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 PUC authorizes the utility to contract with
such assignee for the utility (i) to continue to operate the system to provide
electric services to the utility's customers, (ii) to impose and collect the
applicable intangible transition charges for the benefit and account of the
assignee, (iii) to
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make periodic adjustments of the intangible transition charges and (iv) 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 such contract (i) will be binding upon the
utility, its successors and assigns and (ii) will be required by the PUC 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 such customer or the municipal entity providing such services in
place of the utility.
Creation of a Statutory Lien on Intangible Transition Property. The
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 (i) value is given by purchasers of the
transition bonds and (ii) a filing is made with the PUC to perfect the security
interest within 10 days from issuance of transition bonds. The 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 PUC in
accordance with the provisions of the 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 Competition Act provides that any such 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 Competition Act. The Competition Act provides
that priority of security interests in intangible transition property will not
be defeated or adversely affected by (i) commingling of revenues with other
funds of the utility or (ii) changes to the qualified rate order or the
intangible transition charges.
Characterization of Transfer of Transferred Intangible Transition Property
as True Sale. The 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 (i) the
parties expressly state in governing documents that a transfer is to be a sale
or other absolute transfer and (ii) 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 Competition Act
grants to the PUC 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.
PECO ENERGY'S RESTRUCTURING PLAN
General
In accordance with the provisions of the Competition Act, in April 1997,
PECO Energy filed with the PUC a comprehensive restructuring plan detailing its
proposal to implement full customer choice of electric generation suppliers.
PECO Energy's restructuring plan identified $7.5 billion of retail electric
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generation-related stranded costs. In August 1997, PECO Energy and various
intervenors in PECO Energy's restructuring proceeding filed with the PUC a Joint
Petition for Partial Settlement (the "Joint Petition"). In December 1997, the
PUC rejected the Joint Petition and entered an Opinion and Order, revised in
January and February 1998 (the "PUC Restructuring Order"), which deregulated
PECO Energy's electric generation operations. The PUC 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 (the "Eastern District Court")
seeking injunctive and monetary relief on the grounds that the provisions of the
PUC Restructuring Order relating to transmission rates were preempted by the
Federal Power Act and that implementation of the Competition Act by the PUC 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 (the "Commonwealth Court") appealing the PUC
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 PUC Restructuring Order. See
"Litigation" in this Prospectus.
On April 29, 1998, PECO Energy and all but one of the 25 parties who
challenged PECO Energy's Restructuring Plan filed the Settlement with the PUC.
The Settlement was approved by the PUC in the Final Order. The Final Order was
subsequently appealed by IP&L. Under the terms of the 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, will remain pending, but inactive, until final resolution of a
separate suit now pending before the Pennsylvania Supreme Court, in which IP&L
claims that the provisions of the Competition Act that allow recovery of
stranded costs violate the Commerce Clause of the United States Constitution.
See "Litigation."
The Settlement
Recovery of Stranded Costs. The Settlement authorizes PECO Energy to
recover $5.26 billion of Stranded Costs, together with a return of 10.75%
thereon. For good cause shown, the PUC 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 to be through
competitive transition charges (with respect to PECO Energy, the "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 will be
established assuming annual growth in sales of 0.8% and will be reconciled
annually to actual sales.
The following table shows the estimated average levels of Competitive
Transition Charges and/or Intangible Transition Charges for the years 1999
through 2010, based on estimated 0.8% annual sales growth assumed in the
Settlement.
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TABLE 1
Annual Stranded Cost
Amortization And Return
<TABLE>
<CAPTION>
Annual CTC Revenue Excluding gross receipts tax(3)
Year Sales and/or ITC(2) Total Return @ 10.75% Amortization
---- ---------- ------------- -------- --------------- ------------
MWh(1) $/kWh ($000) ($000) ($000)
<S> <C> <C> <C> <C> <C> <C>
1999 33,569,358 $0.0172 $551,988 $566,134 $(14,146)
2000 33,837,913 0.0192 621,102 564,222 56,879
2001 34,108,616 0.0251 818,457 547,777 270,680
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 924,459 141,229 783,231
2010 36,644,507 0.0266 931,855 52,381 879,474
</TABLE>
- --------------
(1) Subject to reconciliation of actual sales and collections. Under the
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 levied at the rate of 5% on each dollar of
the utility's gross receipts arising from certain sales of energy.
Authorization to Securitize up to $4 Billion. Under the Settlement, PECO
Energy may securitize up to $4 billion of its $5.26 billion of Stranded Cost
recovery through the issuance of transition bonds. The Intangible Transition
Charges associated with the issuance of transition bonds must terminate no later
than December 31, 2010. The rate reductions and rate caps described in Table 2
included as part of the Settlement anticipate the benefits of the
securitization, and no adjustment in PECO Energy's base rates will be made upon
issuance of any transition bonds. After January 1, 1999, Competitive Transition
Charges (or PECO Energy's distribution rates) will be reduced by the amount of
Intangible Transition Charges. As part of its approval of the Settlement, the
PUC issued the QRO providing for securitization. See "The QRO and the Intangible
Transition Charges" in this Prospectus.
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Unbundling of Rates and Rate Reductions and Rate Caps. The Settlement
requires PECO Energy to unbundle its retail electric rates on January 1, 1999
into the following components: (i) distribution and transmission charges, (ii)
Competitive Transition Charges and, if applicable, Intangible Transition Charges
and (iii) a shopping credit for generation, which is 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 Settlement requires PECO Energy to reduce rates during 1999 and 2000 by
8% and 6%, respectively, from rates in existence on December 31, 1996. The
Settlement also extends the rate caps on generation rates at higher levels than
required by the Competition Act, until December 1, 2010 and extends rate caps on
transmission and distribution rates until June 30, 2005. PECO Energy's unbundled
rates, rate reductions and rate caps are reflected in the schedule of
system-wide average rates included in the Settlement and shown in Table 2 below.
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TABLE 2
Schedule of System-Wide Average Rates (per kilowatt-hour ("kWh"))(1)
<TABLE>
<CAPTION>
T&D CTC Shopping Generation
Effective Date Transmission(2) Distribution Rate Cap(3) and/or ITC(4) Credit Rate Cap
- -------------- --------------- ------------ ----------- ------------- -------- ----------
(1) (2) (3)=(1) + (2) (4) (5) (6)=(4) + (5)
$/kWh $/kWh $/kWh $/kWh $/kWh $/kWh
<S> <C> <C> <C> <C> <C> <C>
January 1, 1999 $0.0045 $0.0253 $0.0298 $0.0172 $0.0446 $0.0618
January 1, 2000 0.0045 0.0253 0.0298 0.0192 0.0446 0.0638
January 1, 2001 0.0045 0.0253 0.0298 0.0251 0.0447 0.0698
January 1, 2002 0.0045 0.0253 0.0298 0.0251 0.0447 0.0698
January 1, 2003 0.0045 0.0253 0.0298 0.0247 0.0451 0.0698
January 1, 2004 0.0045 0.0253 0.0298 0.0243 0.0455 0.0698
January 1, 2005 0.0045(5) 0.0253(5) 0.0298(5) 0.0240 0.0458 0.0698
January 1, 2006 N/A N/A N/A 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
</TABLE>
(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 the Restructuring Plan.
(2) The transmission prices listed are for unbundled rates only. The PUC does
not regulate the rates for transmission service.
(3) The T&D (Transmission & Distribution) Rate Cap under Section 2804(4) of the
Competition Act will be extended until June 30, 2005.
(4) Figures result in the recovery of $5.26 billion of Stranded Costs plus the
allowed return on such 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 the Restructuring Plan. Both the Competitive Transition Charges
and the Intangible Transition Charges are subject to adjustment.
(5) Effective until June 30, 2005.
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The Competition Act authorizes electric distribution companies to recover
changes in their state tax liability resulting from the introduction of
competition in the electric market through adjustments in the rates charged to
customers, which in certain circumstances set forth in the regulations adopted
by the PUC may result in rates exceeding the applicable rate cap. PECO Energy
may apply for such recovery of state tax liability changes in accordance with
the procedures outlined in the PUC's regulations if PECO Energy in fact
experiences adverse consequences to its state tax liability as contemplated in
the Competition Act.
Competitive Metering and Billing. As provided in the Restructuring Plan,
the Settlement and the Final Order of the PUC, on January 1, 1999, PECO Energy
will unbundle 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. Effective January 1, 1999,
PUC-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 PUC-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 PUC, 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 or
provider of last resort service. See also "The QRO and the Intangible Transition
Charges--Intangible Transition Charges" in this Prospectus.
Customer Choice. Under the Settlement, customer choice of electric
generation suppliers will be phased in between January 1, 1999 and January 2,
2000 with one-third of each Rate Class entitled to choose their electric
generation supplier by January 1, 1999, an additional one-third by January 2,
1999 and the remaining one-third by January 1, 2000. If on January 1, 2001 and
January 1, 2003 less than 35% and 50%, respectively, of all of PECO Energy's
residential and commercial Customers by Rate Class are obtaining generation
service from alternate electric generation suppliers, non-shopping Customers
will be randomly assigned to electric generation suppliers, including those
affiliated with PECO Energy, to meet those thresholds. Assignment of
non-shopping Customers shall be through a PUC-approved process. No assignment
will be made until all Customers have been notified in advance of the process
and have been given the option to remain with PECO Energy as the provider of
last resort or to select an electric generation supplier of their choice. The
35% and 50% threshold amounts will be determined for residential and commercial
customers on the basis of the number of customers and for large commercial
customers on the basis of peak load. Customers assigned to a provider of last
resort, other than PECO Energy, will be counted as customers receiving service
from an alternate electric generation supplier.
Provider of Last Resort
Under the Restructuring Plan, PECO Energy will act 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 certain terms, conditions and
qualifications. On January 1, 2001, 20% of all of PECO Energy's residential
customers, determined by random selection, including low-income and
inability-to-pay customers, and without regard to whether such customers are
obtaining generation service from an electric generation supplier, will be
assigned to a provider of last resort other than PECO Energy (the service
provided by
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such supplier, "Competitive Default Service"). Such alternative supplier (the
"Competitive Default Supplier") will be selected on the basis of an energy and
capacity market price bidding process approved, established and maintained by
the PUC among electric generation suppliers who meet certain qualifications. The
right to provide Competitive Default Service will be rebid annually, unless an
alternative bidding term is approved by the PUC. If, 30 days prior to the annual
bid, the number of residential customers served by Competitive Default Service
has fallen below 17%, a further random selection of customers will be assigned
to Competitive Default Service to restore the number of customers to the 20%
level. The further random selection will be made from the customers not already
assigned to Competitive Default Service and customers served by electric
generation suppliers other than PECO Energy. The PUC will develop qualifications
for an electric generation supplier to bid on Competitive Default Service,
including creditworthiness and an increased bond amount, by January 1, 1999.
Other Provisions. The Settlement also provides 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.
THE QRO AND THE INTANGIBLE TRANSITION CHARGES
The QRO
As part of its approval of the Settlement, the PUC issued the QRO on May
14, 1998. In the QRO, the PUC determined that PECO Energy's recovery of Stranded
Costs as set forth in the Settlement is 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 Settlement is just and reasonable and in the
public interest.
The QRO provides that, to the extent that PECO Energy, or any assignee,
assigns, sells, transfers, or pledges any interest in Intangible Transition
Property created by the QRO, the PUC authorizes PECO Energy to contract, for a
specified fee, with such assignee for PECO Energy to continue to operate the
system to provide electric services to PECO Energy's customers, to impose and
collect the applicable Intangible Transition Charges for the benefit and account
of the assignee, to make periodic adjustments of Intangible Transition Charges
contemplated under the QRO, and 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 QRO also authorizes 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 such
issuers and perform the obligations of PECO Energy contemplated in the QRO. The
obligations of PECO Energy (i) shall be binding upon PECO Energy, its successors
and assigns and (ii) shall be required by the PUC 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 such
Customer or municipal entity providing such services in place of PECO Energy by
PECO Energy or other entity.
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Authorization of Issuance of Transition Bonds. In the QRO, the PUC
authorized the issuance of transition bonds in an aggregate principal amount not
to exceed $4 billion. PECO Energy, or any assignee of PECO Energy to whom
Intangible Transition Property is sold, may issue and sell, in reliance on the
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 thereof.
The QRO provides 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 PUC a
description of the financing structure of the transition bonds, including the
principal amount, the price at which each series or class of 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 such offering.
Notwithstanding such filing, the final structure of each issuance of transition
bonds is not subject to change or revision by the PUC after the date of such
issuance.
Authorization to Impose Intangible Transition Charges. Pursuant to the QRO,
the PUC 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 of its $5.26 billion of Stranded Costs. Under the QRO, the
PUC 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 accordance with the Competition Act, the PUC 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 Competition Act to December
31, 2010.
In accordance with the Settlement, the rate reductions included as part of
the Settlement anticipated the benefits of securitization, and no rate
adjustment will be made upon issuance of any transition bonds. After January 1,
1999, Competitive Transition Charges (or PECO Energy's distribution rates) will
be reduced by the amount of Intangible Transition Charges associated with the
issuance of Transition Bonds and transition bonds issued by Other Issuers, if
any.
In the QRO, the PUC approves the allocation and methodology for imposing
Competitive Transition Charges and Intangible Transition Charges on Customers.
The QRO also authorizes PECO Energy to make annual adjustments to Intangible
Transition Charges if collections of such 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 such adjustments during the final calendar
year during which any series of transition bonds are outstanding may be
quarterly or monthly if necessary to ensure full recovery of Intangible
Transition Charges. The QRO states that the revenues received by the transition
bond trustee through Intangible Transition Charges shall be determined to be
sufficient for the foregoing purpose if, and only if, the ITC Collections so
received are sufficient to amortize the transition bonds, fund any reserves and
to pay premiums, if any, thereon (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 thereof. For each annual
adjustment, the QRO directs PECO Energy to file with the PUC (i) an accounting
of Intangible Transition Charges received by the transition bond trustee for the
previous annual period; (ii) a statement of any over-or-under receipts; and
(iii) 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
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the transition bonds and the corresponding reduction or increase in Competitive
Transition Charges or PECO Energy's distribution rates, as the case may be. The
QRO provides that, in accordance with the Competition Act, the PUC shall approve
all annual adjustments within 90 days of PECO Energy's annual adjustment filing.
Authorization to Sell Intangible Transition Property. Under the QRO, the
PUC 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 and all revenues, collections, claims, payments or
money or proceeds arising from Intangible Transition Charges. The PUC 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 PUC authorized
PECO Energy to contract, for a specified fee, with such assignee for PECO Energy
to continue to operate its transmission and distribution system, to provide
electric service to Customers, to impose and collect Intangible Transition
Charges for the benefit and account of the assignee, to make periodic
adjustments of Intangible Transition Charges and to 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. The QRO also authorized the assignee
to contract with an alternate party to replace PECO Energy as servicer of the
Intangible Transition Property. The QRO provides that the obligations of PECO
Energy in servicing the Intangible Transition Property shall be required by the
PUC to be undertaken and performed by PECO Energy and any other entity which
provides transmission or distribution services to Customers.
Irrevocability of QRO. The QRO declares that the paragraphs in the QRO
concerning the recovery of $4 billion 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, the methodology and allocation and timing of adjustments to the
Intangible Transition Charges and the sale of Intangible Transition Property,
among other things, are irrevocable for purposes of the Competition Act, and the
PUC accordingly agrees that it will not, directly or indirectly, by any
subsequent action, reduce, postpone, impair or terminate the QRO or the
Intangible Transition Charges. In the QRO, the PUC further declared that the
right, title and interest of PECO Energy and any assignee in the QRO and the
Intangible Transition Charges, the rates and other charges authorized by the
QRO, 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 QRO are to be recovered from Customers in each of
PECO Energy's separate Rate Classes based on the allocation of
generation-related charges borne by each Rate Classes through current electric
rates approved by the PUC. The Intangible Transition Charges will be calculated
by determining the total amount of Intangible Transition Charges required to be
billed to each Rate Class in order to generate ITC Collections sufficient to
ensure timely recovery of Qualified Transition Expenses among affected Rate
Classes. 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
(except in the case of Customers participating in the pilot program for
competition, where the percentage will be applied to the non-generation portion
of the 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
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payable by such 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, ITC Collections will vary. Variations in ITC Collections will be
addressed by recalculating the percentages applied to Customers' bills on each
Calculation Date. See Tables 7, 8, 9 and 10 under "Description of the Seller's
Business" in the related Prospectus Supplement and "--The ITC Adjustment
Process" below. Once Customer bills are unbundled beginning January 1, 1999 and
charges for generation, transmission and distribution and other services are
separately identified, the Intangible Transition Charge percentage will be
applied to total projected revenue per Rate Class, exclusive of transmission,
energy and capacity and fixed distribution charges. This will be reflected in
the calculation of the Intangible Transition Charge percentage.
Initial Billing and Termination of ITC Collections. Intangible Transition
Charges for each Series of Transition Bonds will be assessed on all Customer
bills where all current charges are for services provided after the relevant
Series Issuance Date. For instance, if a particular Series Issuance Date is
August 15, bills that include current charges for services provided before
August 15 (i.e. for a billing period beginning prior to August 15) will not be
assessed Intangible Transition Charges with respect to that Series. 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 such Intangible
Transition Charges, such that the total amount billed to Customers with respect
to PECO Energy's Stranded Costs 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
make ITC Collections from 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, as applicable, with
respect to each such Series or Class, as applicable, but in no event later than
December 31, 2010. Upon the Series Termination Date or Class Termination Date,
as applicable, relating to the Series or Class, as applicable, of Transition
Bonds having the latest Series Termination Date or Class Termination Date, as
applicable, 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 ITC Collections exceed the amount
necessary to amortize fully all Transition Bonds and pay interest thereon and
certain fees and expenses, such ITC Collections will be retained by the Issuer.
The ITC Adjustment Process. In order to enhance the likelihood that the
actual ITC Collections allocated to the Issuer pursuant to 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 therefor and to fund the Overcollateralization Subaccount to the
Calculated Overcollateralization Level, the Master Servicing Agreement requires
the Servicer to seek, and the Competition Act and the QRO require the PUC to
approve, annual adjustments to the Intangible Transition Charges based on actual
ITC Collections so 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. In addition, the QRO provides that
adjustments during the final calendar year of ITC Collections for any Series of
Transition Bonds may be made quarterly or monthly. If at the time of issuance of
a Series, the Servicer determines such additional adjustments are required, the
dates for such adjustments will be specified in the Prospectus Supplement for
such Series. Such adjustments will cease with respect to a Series on the final
Adjustment Date specified in the related Prospectus Supplement for such Series.
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The Servicer will file an Adjustment Request on each Calculation Date,
requesting modifications to the Intangible Transition Charges which are
designed, among other things, to result in the Transition Bond Balance for each
Series equaling the Projected Transition Bond Balance therefor and the amount on
deposit in the Overcollateralization Subaccount equalling the Calculated
Overcollateralization Level, by the Payment Date immediately [preceding] the
next Adjustment Date or the Expected Final Payment Date, as applicable, taking
into account any amounts on deposit in the Reserve Subaccount. The Competition
Act and the QRO require the PUC to approve such 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
The Restructuring Plan and subsequent orders of the PUC give customers who
purchase electric generation from electric generation suppliers the opportunity
to choose from several billing source options as of January 1, 1999:
consolidated billing from the utility, consolidated billing from the electric
generation supplier or other third party, or separate billing from the utility
and from either the electric generation supplier or other third party providing
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 such amounts from its
Customers. In such event, the electric generation supplier or other third party
will replace the Customer as the obligor with respect to such Intangible
Transition Charges, and the Servicer, on behalf of the Issuer, will generally
have no right to collect such 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 certain payment defaults by an electric generation supplier
or other third party and the expiration of the applicable grace period. See
"Risk Factors--Servicing--Credit Concerns Arising Out of Third Party Billing."
The Restructuring Plan sets forth and future orders of the PUC will set
forth guidelines governing metering, billing and other activities by electric
generation suppliers and other third parties. The PUC 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 (i) demonstrating that it has an investment grade
rating for its own long-term debt or (ii) depositing with the PUC 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
PUC 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 PUC may waive any
of those requirements at any time in the future. Further, the parties to the
Settlement agreed to review and, as appropriate, to recommend changes to PUC
regulations and procedures in order to facilitate the efficient and full
recovery of revenues from Customers, while at the same time protecting
Customers. On July 17, 1998, PECO Energy filed a Petition for Reconsideration
requesting that the PUC reconsider and reverse its decision to allow third
parties (other than a customer's electric distribution company or electric
generation supplier) to provide metering and billing services and, if the PUC
rejected that request, to give PECO Energy more time to develop standards,
including operational standards, for third party entities. On August 27, 1998, a
public meeting was held regarding this matter. As of the date of this
Prospectus, the PUC has not published any order. See also "Risk Factors--The
Electric Industry Generally--Uncertainties Created by the Changing Regulatory
Environment" in this Prospectus.
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Discounts, Special Charges, Termination Fees. Under the Restructuring Plan,
PECO Energy will provide certain discounts to certain classes of Customers, for
instance commercial and industrial Customers who reduce their purchase of
electricity through installation of self-generating equipment and Customers in
certain low-income assistance programs, among others. Such discounts in the
Competitive Transition Charges, including the Intangible Transition Charges, are
already accounted for in the average rates to be charged to all other Customers.
In addition, the Restructuring Plan requires PECO Energy to allow certain
Customers to pay Competitive Transition Charges, including Intangible Transition
Charges, in a lump sum, based on a calculation that takes into account such
Customers' last 12 months of demand and PECO Energy's weighted average cost of
capital. Electric sales revenue attributable to Customers who will be eligible
to exercise this option was 3.7% of total sales for the 1997 fiscal year.
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 will be 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 will determine annually, after
the end of each calendar year in which Competitive Transition Charges or
Intangible Transition Charges are assessed, whether such 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 (i) the amount of usage difference caused by the
on-site generation and (ii) the base year usage is 10% or more, the Servicer
will bill the Customer separately in an amount equal to the difference between
(x) 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 (y) 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 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 such
calculation and the Servicer's projection with respect to future
self-generation.
LITIGATION
Two actions, one filed by the Utility Workers Union of America (the "Union
Action") and one filed by a group of plaintiffs including State Senator Vincent
J. Fumo (the "Fumo Action"), respectively, allege that the adoption of the
Competition Act violated certain provisions of the Pennsylvania Constitution
governing legislative procedure. In particular, these plaintiffs allege that
enactment of the Competition Act by attaching it to a bill to increase the
maximum legal operational age of taxicabs in Philadelphia (a change already
enacted by the legislature) violated Pennsylvania constitutional provisions
prohibiting any bill from addressing more than one subject, prohibiting any bill
from being altered or amended during passage so as to change its original
purpose and requiring every bill to be considered on three separate days in each
house of the General Assembly. The PUC has filed preliminary objections seeking
dismissal of these actions at the pleading stage, on the ground that enactment
of the Competition Act did not violate any of these Pennsylvania constitutional
provisions as a matter of law. Generally, Pennsylvania courts have
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interpreted the "original purpose" and "single subject" requirements with
deference to the legislature. In a recent case, however, the Commonwealth Court
of Pennsylvania, by memorandum opinion, rejected preliminary objections raised
in response to a challenge to the constitutionality of the adoption of an act
repealing a portion of the Pennsylvania election code, which act was adopted
under similar circumstances to the manner in which the Competition Act was
adopted.
A separate action challenging the Competition Act, filed by IP&L, alleges
that the 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 Competition Act does not violate the Commerce Clause. IP&L has petitioned
the Pennsylvania Supreme Court for allowance of appeal. In the petition, IP&L
claims 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. Whether the Pennsylvania Supreme Court grants the
petition for allowance of appeal and whether, if it does grant the petition, it
will invalidate the Competition Act under the Commerce Clause, cannot be
predicted with certainty. If the Pennsylvania Supreme Court either denies the
petition, or grants the petition and affirms the Commonwealth Court's decision,
IP&L could seek review of the Pennsylvania Supreme Court's decision in the
United States Supreme Court. Whether the United States Supreme Court would grant
review and whether, if it did, it would invalidate the Competition Act, also
cannot be predicted with certainty.
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 Settlement with the PUC. The Settlement was
approved by the PUC through the Final Order.
Under the terms of the Settlement, PECO Energy and all signatories to the
Settlement requested, and were granted, a general continuance of their appeals
and cross-appeals of the Restructuring Order until such time as the Final Order
is 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 is identical in scope to its Commerce Clause arguments described above.
The IP&L appeal constitutes a judicial challenge to the Final Order and, under
the terms of the Settlement, the appeals of PECO Energy and the other
signatories to the Settlement will remain pending, but inactive, until
resolution of the IP&L appeal. PECO Energy and IP&L have entered into a
stipulation that the outcome of the IP&L Commerce Clause case that is now on
petition for allowance of appeal before the Pennsylvania Supreme Court will be
controlling for the IP&L appeal of the Final Order. As a result, it is
anticipated that all appeals and cross-appeals to the PUC Restructuring Order
and Final Order will remain pending, but inactive, until final resolution of the
IP&L action challenging the Competition Act described above.
Subject to the limitations described in "The Sale Agreement--Seller
Representations and Warranties," the Seller will pay Liquidated Damages and the
Issuer will redeem the Transition Bonds in the event of a determination in any
of the cases mentioned above or in any other cases that, based
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on laws in effect on the date any Intangible Transition Property is sold, the
Competition Act, the QRO, the Final Order, the Intangible Transition Property or
the Intangible Transition Charges were invalid or unenforceable, in whole or in
part. See "Risk Factors--Unusual Nature of Intangible Transition
Property--Limited Availability of Liquidated Damages" and "The Sale Agreement"
in this Prospectus.
THE SELLER AND SERVICER
PECO Energy Company
Retail Electric Service Territory
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 such 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.
Customers and Operating Revenues
PECO Energy's Customer base is divided into three categories: Residential,
Small Commercial and Industrial, and Large Commercial and Industrial. Rate
Classes are created by the PUC and are subject to change. Such changes will be
reflected in any Adjustment Request filed with the PUC by the Servicer. The
current Rate Classes have remained unchanged for eight years. The current Rate
Classes are:
Residential Rate Classes:
Rate R - Residential Service: Single-phase Electric Delivery Service is
available in the entire territory of PECO Energy to the dwelling and
appurtenances of a single private family for the domestic requirements of
its members, which service is supplied through one meter. Also includes
Rate RS Customers receiving service under a solar rate and payment-troubled
low income Customers receiving discounted rates under the Customer
Assistance Program, Rate CAP.
Rate R-H - Residential Heating Service: Single-phase Electric Delivery
Service is available to the dwelling and appurtenances of a single private
family (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 Rates R, R-H and
with Residence Electric Delivery Service under Rate GS, for any Customer
receiving delivery at 120/240 volts, 3 wires, or 120/208 volts, 3 wires,
for the operation of 240-volt or 208-volt domestic equipment of a type
approved by PECO Energy.
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Small 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.
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 hereunder 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.
Large Commercial and Industrial Rate Classes:
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
55
<PAGE>
usage by Rate Class (Table 4) and retail electric revenues by Rate Class (Table
5). Not all Customers in all Rate Classes will be 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.
56
<PAGE>
TABLE 3
Retail Electric Customers For the Year Ended
<TABLE>
<CAPTION>
12/31/93 12/31/94 12/31/95 12/31/96
-------------------- -------------------- -------------------- --------------------
Average Average Average Average
Number of % of Number of % of Number of % of Number of % of
Customers Total Customers Total Customers Total Customers Total
--------- ----- --------- ----- --------- ----- --------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Residential
R(1) 1,158,750 79.8% 1,164,470 79.7% 1,167,866 79.6% 1,169,654 79.5%
R-H 150,468 10.4% 152,393 10.4% 153,513 10.4% 154,794 10.5%
OP(2) 99,478 6.8% 99,258 6.8% 98,923 6.7% 98,781 6.7%
Total (Excludes OP) 1,309,218 90.2% 1,316,863 90.1% 1,321,379 90.0% 1,324,448 90.0%
Small Commercial
and Industrial
GS 139,067 9.6% 140,241 9.6% 141,653 9.7% 142,431 9.7%
POL(3) 3,304 .2% 3,313 .2% 3,291 .2% 3,173 .2%
SL-P 9 .0006% 9 .0006% 9 .0006% 10 .0006%
SL-S 405 .02% 395 .03% 391 .03% 442 .03%
SL-E 230 .01% 285 .02% 325 .02% 319 .02%
TL 211 .01% 215 .01% 215 .01% 216 .01%
BLI(4) 15 .001% 19 .001% 19 .001% 63 .004%
Total (Excludes POL) 139,937 9.5% 141,164 9.7% 142,612 9.8% 143,481 9.8%
Large Commercial
and Industrial
PD 1,313 .09% 1,213 .08% 1,130 .08% 1,047 .07%
HT 2,355 .2% 2,314 .2% 2,264 .2% 2,252 .2%
EP 3 .0002% 3 .0002% 3 .0002% 3 .0002%
Total 3,671 .3% 3,530 .3% 3,397 .3% 3,302 .3%
Total (Excludes OP and POL) 1,452,826 100% 1,461,557 100% 1,467,388 100% 1,471,231 100%
========= === ========= === ========= === ========= ===
<CAPTION>
12/31/97
--------------------
Average
Number of % of
Customers Total
--------- -----
<S> <C> <C>
Residential
R(1) 1,177,996 79.4%
R-H 155,865 10.5%
OP(2) 98,417 6.6%
Total (Excludes OP) 1,333,861 89.9%
Small Commercial
and Industrial
GS 144,142 9.7%
POL(3) 3,067 .2%
SL-P 10 .0006%
SL-S 408 .03%
SL-E 396 .03%
TL 171 .01%
BLI(4) 108 .007%
Total (Excludes POL) 145,235 9.8%
Large Commercial
and Industrial
PD 1,231 .08%
HT 2,077 .2%
EP 3 .0002%
Total 3,311 .3%
Total (Excludes OP and POL) 1,482,407 100%
========= =====
</TABLE>
- --------------------
(1) For a description of the meanings of Rate Class abbreviations, see "The
Seller and Servicer--Customers and Operating Revenues" in this Prospectus.
(2) Rate OP is available in conjunction with Residential Rate Classes R and R-H
and with Small Commercial and Industrial Rate Class GS for those Customers
in Rate Class GS who use Residence Electric Delivery Service.
(3) Rate POL is available in conjunction with Small Commercial and Industrial
Rate Class GS.
(4) No Intangible Transition Charges will be imposed on Rate BLI Customers.
57
<PAGE>
TABLE 4
Actual Retail Electric Usage (per megawatt-hour ("MWh")) For the Year Ended
<TABLE>
<CAPTION>
12/31/93 12/31/94 12/31/95 12/31/96
--------------------- --------------------- --------------------- ---------------------
% of % of % of % of
MWh Total MWh Total MWh Total MWh Total
--- ----- --- ----- --- ----- --- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Residential
R(1) 7,336,119 22.7% 7,380,127 22.5% 7,669,938 22.8% 7,474,224 22.7%
R-H 2,552,675 7.9% 2,653,978 8.1% 2,625,621 7.8% 2,807,279 8.5%
OP(2) 374,758 1.1% 378,298 1.2% 364,856 1.1% 375,823 1.1%
Total 10,263,552 31.7% 10,412,403 31.8% 10,660,415 31.7% 10,657,327 32.3%
Small Commercial
and Industrial
GS 5,613,800 17.3% 5,945,233 18.1% 6,213,330 18.4% 6,400,620 19.4%
POL(3) 9,232 .03% 9,050 .03% 9,160 .03% 9,002 .03%
SL-P 85,851 .3% 90,717 .3% 91,689 .3% 88,820 .3%
SL-S 24,083 .07% 20,965 .06% 1,938 .006% 16,908 .05%
SL-E 38,739 .1% 42,430 .1% 44,644 .1% 47,017 .1%
TL 39,358 .1% 38,457 .1% 39,336 .1% 39,681 .1%
BLI(4) 81,874 .3% 74,930 .2% 69,543 .2% 71,260 .2%
Total 5,892,937 18.2% 6,221,782 19% 6,469,640 19.3% 6,673,306 20.3%
Large Commercial
and Industrial
PD 1,347,526 4.2% 1,298,117 3.7% 1,213,554 3.6% 1,130,530 3.4%
HT 14,366,187 44.3% 14,324,131 43.7% 14,655,439 43.6% 13,845,485 42.0%
EP 499,860 1.5% 521,951 1.6% 594,543 1.8% 638,800 1.9%
Total 16,213,572 50.0% 16,144,199 49.3% 16,463,535 49.0% 15,614,815 47.4%
Total 32,370,061 100% 32,778,384 100% 33,593,590 100% 32,945,448 100%
========== ==== ========== ==== ========== ==== ========== ====
<CAPTION>
12/31/97
---------------------
% of
MWh Total
--- -----
<S> <C> <C>
Residential
R(1) 7,548,861 22.8%
R-H 2,600,231 7.9%
OP(2) 365,605 1.1%
Total 10,514,697 31.8%
Small Commercial
and Industrial
GS 6,680,070 20.2%
POL(3) 8,721 .03%
SL-P 81,474 .2%
SL-S 15,700 .05%
SL-E 44,367 .1%
TL 39,461 .1%
BLI(4) 65,724 .2%
Total 6,935,517 21.0%
Large Commercial
and Industrial
PD 1,069,260 3.2%
HT 13,922,827 42.1%
EP 594,319 1.8%
Total 15,586,407 47.2%
Total 33,036,621 100%
========== ====
</TABLE>
- --------------------
(1) For description of the meanings of Rate Class abbreviations, see "The
Seller and Servicer--Customers and Operating Revenues" in this Prospectus.
(2) Rate OP is available in conjunction with Residential Rate Classes R and R-H
and with Small Commercial and Industrial Rate Class GS for those Customers
in Rate Class GS who use Residence Electric Delivery Service.
(3) Rate POL is available in conjunction with Small Commercial and Industrial
Rate Class GS.
(4) No Intangible Transition Charges will be imposed on Rate BLI Customers.
58
<PAGE>
Actual usage fluctuations are highly dependent on weather conditions. See "The
Seller and Servicer--Forecasting Customers and Usage." The total annual usage
adjusted for weather effects has decreased for each of the past two years. The
compounded annual growth rate in the usage adjusted for weather effects for all
Customer Categories from 1987 through 1997 was .75%. There can be no assurance
that future usage rates will be similar to historical experience. See "Risk
Factors--Servicing--Inaccurate Projections" in this Prospectus.
TABLE 5
Retail Electric Revenues (dollars in thousands) For the Year Ended
<TABLE>
<CAPTION>
12/31/93 12/31/94 12/31/95 12/31/96
-------------------- -------------------- --------------------- --------------------
% of % of % of % of
$(000s) Total $(000s) Total $(000s) Total $(000s) Total
--------- ----- --------- ----- ---------- ----- --------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Residential
R(1) 1,028,264 32.1% 1,037,528 32.2% 1,082,737 32.5% 1,059,589 32.3%
R-H 259,123 8.1% 264,684 8.2% 269,747 8.1% 280,930 8.6%
OP(2) 25,173 .8% 25,321 .8% 25,134 .8% 25,879 .8%
Total 1,312,560 41.0% 1,327,534 41.2% 1,377,618 41.3% 1,366,398 41.7%
Small Commercial
and Industrial
GS 660,072 20.6% 687,782 21.3% 728,349 21.9% 738,796 22.5%
POL(3) 1,872 .06% 1,842 .06% 1,887 .06% 1,855 .06%
SL-P 14,028 .4% 14,407 .4% 14,596 .4% 13,685 .4%
SL-S 7,725 .2% 6,648 .2% 6,148 .2% 5,116 .2%
SL-E 7,813 .2% 8,512 .3% 9,032 .3% 9,494 .3%
TL 4,412 .1% 4,327 .1% 4,480 .1% 4,520 .1%
BLI(4) 6,820 .2% 6,082 .2% 5,711 .2% 5,865 .2%
Total 702,742 21.9% 729,599 22.6% 770,205 23.1% 779,331 23.8%
Large Commercial
and Industrial
PD 127,744 4.0% 122,102 3.8% 115,491 3.4% 108,056 3.3%
HT 1,019,514 31.8% 1,003,922 31.1% 1,024,012 30.7% 975,971 29.8%
EP 40,468 1.3% 41,919 1.3% 45,234 1.4% 46,979 1.4%
Total 1,187,725 37.1% 1,167,943 36.2% 1,184,737 35.6% 1,131,006 34.5%
Total 3,203,027 100% 3,225,076 100% 3,332,560 100% 3,276,735 100%
========= ==== ========= ==== ========= ==== ========= ====
<CAPTION>
12/31/97
---------------------
% of
$(000s) Total
--------- -----
<S> <C> <C>
Residential
R(1) 1,078,275 32.5%
R-H 273,611 8.3%
OP(2) 25,425 .8%
Total 1,377,311 41.5%
Small Commercial
and Industrial
GS 778,198 23.5%
POL(3) 1,805 .05%
SL-P 12,916 .4%
SL-S 4,236 .1%
SL-E 8,777 .3%
TL 4,375 .1%
BLI(4) 5,468 .2%
Total 815,776 24.6%
Large Commercial
and Industrial
PD 101,513 3.1%
HT 973,872 29.4%
EP 46,994 1.4%
Total 1,122,379 33.9%
Total 3,315,465 100%
========= ====
</TABLE>
- --------------------
(1) For description of the meanings of Rate Class abbreviations, see "The
Seller and Servicer--Customers and Operating Revenues" in this Prospectus.
(2) Rate OP is available in conjunction with Residential Rate Classes R and R-H
and with Small Commercial and Industrial Rate Class GS for those Customers
in Rate Class GS who use Residence Electric Delivery Service.
(3) Rate POL is available in conjunction with Small Commercial and Industrial
Rate Class GS.
(4) No Intangible Transition Charges will be imposed on Rate BLI Customers.
59
<PAGE>
Concentrations. For the period ended _________, the largest Customer
represented approximately ____% of PECO Energy's retail electric revenues, and
the 10 largest Customers represented approximately ____% of PECO Energy's retail
electric revenues. 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" in this Prospectus.
Delinquency and Write-Off Experience. The following table sets forth the
delinquency and write-off experience with respect to payments to PECO Energy by
Customer Category for each of the periods indicated 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
<TABLE>
<CAPTION>
For the
For the Year Ended Period
-------------------------------------------------------------------- Ended
12/31/93 12/31/94 12/31/95 12/31/96 12/31/97 8/31/98
-------- -------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Residential
30+ days 8.55% 8.56% 8.14% 9.11% 8.99% 8.77%
60+ days 7.48% 7.21% 6.89% 7.82% 7.69% 7.56%
90+ days 6.47% 6.16% 5.99% 6.81% 6.665% 6.61%
Small Commercial
and Industrial
30+ days 0.89% 0.64% 0.71% 1.09% 1.31% 1.38%
60+ days 0.685% 0.40% 0.48% 0.77% 0.94% 1.17%
90+ days 0.485% 0.295% 0.35% 0.61% 0.72% 0.85%
Large Commercial
and Industrial
30+ days 0.29% 0.28% 0.23% 0.18% 0.17% 0.15%
60+ days 0.21% 0.20% 0.16% 0.10% 0.07% 0.06%
90+ days 0.17% 0.16% 0.12% 0.07% 0.04% 0.03%
</TABLE>
60
<PAGE>
TABLE 7
Net Write-Offs as a Percentage of Billed Retail Electric Revenues
<TABLE>
<CAPTION>
For the
For the Year Ended Period
-------------------------------------------------------------------- ended
12/31/93 12/31/94 12/31/95 12/31/96 12/31/97 8/31/98
-------- -------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Residential 4.31% 4.26% 4.52% 4.56% 4.79% 4.99%
Small Commercial
and Industrial 0.66% 0.64% 0.86% 0.72% 0.65% 0.79%
Large Commercial
and Industrial 0.23% 0.22% 0.11% 0.09% 0.14% 0.32%
Total 1.99% 1.97% 2.10% 2.09% 2.18% 2.35%
</TABLE>
During the last five years and eight months, the delinquency and write-off
experience for all Customer Categories has remained relatively consistent with
no discernable trend upwards or downwards. PECO energy does not expect the
delinquency or write-off experience with respect to ITC Collections will differ
substantially from the rates indicated above.
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 at levels sufficient to
recover interest on and principal of the Transition Bonds, to maintain the
Calculated Overcollateralization Level, and to pay the Bond Trustee's fee, the
Issuer Trustee Fee, the Monthly Servicing Fee and the other expenses and costs
included in Qualified Transition Expenses. See "The QRO and the Intangible
Transition Charges--The Intangible Transition Charges" and "Risk Factors--
Servicing--Inaccurate Projections" in this Prospectus.
Forecasts are produced by a staff of four employees and are reviewed
internally by PECO Energy's senior management executives. PECO Energy's customer
projections are reviewed by the PUC. In the course of its review, the PUC may
request additional data in support of the projections or compare such
projections to other regional forecasts. The PUC may make an explicit finding
regarding the projections but is not required to do so.
Customer projections are determined by PECO Energy based on demographic and
economic information, and there is a different methodology used for each
Customer Category. The Residential Customer forecasting process begins with a
review of regional household growth population projections and residential
construction permit trends within PECO Energy's retail electric service
territory and
61
<PAGE>
the surrounding counties. An independent economic forecasting and consulting
firm employed by PECO Energy separately from any transaction with respect to the
issuance of Transition Bonds provides these projections. PECO Energy uses these
sources to develop internal population forecasts for each of the five counties
in which it operates. PECO Energy then employs its own historical data regarding
the percentage of each county's population served by PECO Energy, as well as
such other factors as PECO Energy deems relevant, to convert the internal
population forecast into a projection of residential customers within its
service area.
The Small Commercial and Industrial Customer forecasting process begins
with a review of projections of employment trends in the manufacturing and
non-manufacturing Standard Industrial Classification Code numbers, gross
regional product for Pennsylvania, business failures and an overview of economic
prospects in the Philadelphia metropolitan area. These external data are
obtained from an independent economic forecasting and consulting firm and the
local chambers of commerce. PECO Energy uses these sources to develop internal
employment forecasts for each of the five counties it serves. PECO Energy then
considers its historical data regarding the percentage of employment in each
county served by PECO Energy, as well as such other factors as PECO Energy deems
relevant, to convert the internal employment forecast into a projection of Small
Commercial and Industrial Customers within its service area.
PECO Energy does not forecast Customer usage or retail electric revenues
for Rate Class BLI. Rate BLI Customers 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 Rate BLI Customers by the utility in whose retail
electric service territory such Customer belongs. At December 31, 1997, there
were 108 BLI Customers (see Table 3). BLI Customers will not be charged
Intangible Transition Charges.
The usage of Large Commercial and Industrial Customers is estimated in two
stages. Usage for the top ten Customers is projected separately. This is added
to estimates of other Large Commercial and Industrial Customers to obtain the
aggregate forecast. The usage of the top ten Customers is derived in
consultation with the appropriate sales representatives for each such Customer.
The sales representatives provide data on the 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. The other Large Commercial and
Industrial Customers usage forecast is derived with a multiple regression
methodology of which the primary drivers include incremental square footage,
manufacturing manhours, air condition penetration rates and regional economic
and employment growth.
Usage forecasts, which will be used when determining adjustments to the
Intangible Transition Charges, use statistical methods to relate kilowatt-hour
sales growth by Rate Class to key economic and demographic variables. The
statistical method used combines econometric, regression, and other time series
techniques. All three Customer Categories are included in the forecast. The key
variables used have included number of Customers, employment, personal income,
price of electricity, economic growth based on the forecasts of an independent
economic forecasting and consulting firm, and weather (temperature and
rainfall).
Actual sales can deviate from forecasted sales for many reasons, including
the general economic climate in PECO Energy's retail electric service territory
as it impacts net migration of Customers; weather as it impacts air conditioning
and heating usage; levels of business activity; and the availability of more
62
<PAGE>
energy efficient appliances, new energy conservation technologies and the
Customer's ability to acquire these new products.
For calendar year 1997, the Servicer underestimated the number of Customers
by .24%. For calendar year 1997, forecast usage was 2.7% greater than actual
usage because of an unusually cool summer in the Servicer's retail service area.
Summaries of the total annual forecasted and actual number of PECO Energy
Customers and their usage (by Customer Category) since 1993 are shown below.
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 category
or their usage will be similar to the historical experience set forth below.
TABLE 8
Forecasted Number of Customer Variance for the Year Ended December 31,
<TABLE>
<CAPTION>
1993 1994 1995 1996 1997
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Residential
R and OP
Forecasted 1,158,341 1,186,724 1,172,193 1,174,208 1,174,037
Actual 1,180,400 1,186,391 1,167,866 1,169,654 1,177,996
Variance 1.90% (0.03%) (0.37%) (0.39%) .34%
R-H
Forecasted 162,312 165,955 156,765 157,336 157,045
Actual 161,473 163,819 153,513 154,794 155,865
Variance (0.52%) (1.29%) (2.07%) (1.62%) (0.75%)
Small Commercial
and Industrial
GS and POL
Forecasted 142,136 142,508 142,207 142,441 143,445
Actual 142,363 143,605 141,653 142,431 144,142
Variance 0.16% 0.77% (0.39%) (0.01%) .49%
SL-P, SL-S, SL-E
and TL
Forecasted 855 877 904 1,034 987
Actual 873 925 940 987 985
Variance 2.11% 5.47% 3.98% (4.55%) (0.20%)
Large Commercial
and Industrial
PD and HT
Forecasted 3,922 3,780 3,485 3,363 3,264
Actual 3,742 3,603 3,394 3,299 3,308
Variance (4.59%) (4.68%) (2.61%) (1.90%) 1.35%
EP
Forecasted 3 3 3 3 3
Actual 3 3 3 3 3
Variance 0.00% 0.00% 0.00% 0.00% 0.00%
</TABLE>
63
<PAGE>
TABLE 9
Forecasted Customer Usage (in kWh) Variance for the Year Ended December 31,
<TABLE>
<CAPTION>
1993 1994 1995 1996 1997
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Residential
R and OP
Forecasted 7,909,031 7,812,000 7,913,998 7,852,000 7,867,001
Actual 7,916,588 7,965,494 8,130,607 7,906,048 7,858,466
Variance 0.1% 2.0% 2.7% 0.7% (0.1%)
R-H
Forecasted 2,796,000 2,871,000 2,959,381 2,724,000 2,722,000
Actual 2,740,563 2,851,076 2,728,472 2,765,279 2,548,231
Variance (2.0%) (0.7%) (7.8%) 1.5% (6.4%)
Small Commercial
and Industrial
GS and POL
Forecasted 5,612,000 5,843,999 6,405,882 6,377,000 6,775,999
Actual 5,772,912 6,108,112 6,299,521 6,490,621 6,684,791
Variance 2.9% 4.5% (1.7%) 1.8% (1.3%)
SL-P, SL-S, SL-E
and TL
Forecasted 16,217,000 16,043,000 16,009,377 15,804,000 15,597,482
Actual 15,934,603 15,847,047 15,975,731 15,208,015 15,034,087
Variance (1.7%) (1.2%) (0.2%) (3.8%) (3.6%)
Large Commercial
and Industrial
PD and HT
Forecasted 202,998 204,000 204,998 197,000 198,003
Actual 189,085 193,690 195,507 192,425 181,002
Variance (6.9%) (5.1%) (4.6%) (2.3%) (8.6%)
EP
Forecasted 639,000 732,000 688,000 658,000 668,000
Actual 499,860 521,951 594,543 638,800 594,319
Variance (21.8%) (28.7%) (13.6%) (2.9%) (11.0%)
</TABLE>
64
<PAGE>
Billing Process
PECO Energy operates on a continuous billing cycle, with an
approximately equal number of bills being distributed each business day. For the
year ended December 31, 1997, 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 such changes would be designed to enhance PECO Energy's
ability to make timely recovery of amounts billed to Customers.
Limited Information on Customers' Creditworthiness
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.
Under Pennsylvania law, PECO Energy is obligated to provide service to
new Residential Customers. 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.
As part of its obligation to provide universal service, PECO Energy has
developed a special rate program (the "CAP Rate 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 CAP Rate 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 CAP Rate 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 CAP Rate Program at
$50 million, which it recovers through adjustments to the distribution rates
applicable to all Customers. Pursuant to the Restructuring Plan, the initial
maximum participation for the CAP Rate Program is 100,000 Customers, subject to
review by the participants in the Settlement, to ensure that total annual CAP
Rate Program costs do not exceed $50 million and all eligible Customers are able
to participate. As of August 31, 1998, there were approximately 32,000 Customers
enrolled in the CAP Rate Program accounting for approximately $5.3 million of
revenues for the eight months ended August 31. Pursuant to the provisions of the
Competition Act, the PUC has adopted regulations which establish reporting
requirements for universal service programs, such as the CAP Rate Program, that
are applicable to all electric distribution companies including PECO Energy.
In 1997, approximately 83% of total bill payments were received by PECO
Energy via the U.S. mail. During the same period, approximately 9% of total
payments were paid in person at either PECO Energy's local business office or at
approximately 300 pay stations (which are located in unaffiliated businesses or
organizations, such as supermarkets and convenience stores) throughout the
retail electric service territory. Other payment methods include pay-by-phone
and direct debits of Customer accounts through local banks, which accounted for
approximately 8% of bill payments collected in 1997.
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Collection Process for Residential Customers and Small Commercial and
Industrial Customers. 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. PECO Energy's Residential
Customer and Small Commercial and Industrial Customer 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. 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. 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.
Customers in the third segment are moved into a portfolio management program
where each Customer's account is referred to a collection agency which follows
up on the account for 60 days using letters and collection calls. 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. 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 within 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 PUC-mandated winter moratorium (the "Winter
Moratorium"), which requires special approval from the PUC prior to the
disconnection of electricity to certain residential Customers from December 1
through March 31 of each year. Currently, residential accounts are managed
during the Winter Moratorium through a combination of letters, proactive phone
contacts and negotiated payment plans. Delinquencies which accumulate during the
Winter Moratorium continue to contribute to the credit scoring, which can lead
to termination after the Winter Moratorium.
If a Customer account is closed, either because a 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 after efforts by the collection
agency are unsuccessful. Written-off accounts are then placed with a second
vendor to increase collections. In 1997, 190,000 accounts, totalling $116
million, were referred to the collection agency; $8.1 million was recovered by
the collection agency from accounts previously referred to it. Over $3 million
in additional recoveries of delinquencies were received through litigation.
Collection recovery rates are monitored monthly. Once written off, the
uncollected account is monitored for six years and may be collected at any point
during that time. During April, 1998, a portfolio of accounts aggregating
approximately $271 million which were written off prior to October, 1997 were
sold as part of PECO Energy's effort to improve cash flow and manage bad debt.
Written-off accounts which are the subject of bankruptcy, litigation or disputes
were excluded from the sale.
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 efforts are
initiated to submit claims in the bankruptcy of these customers. Deposits are
also required for delinquent bankrupt customers for which PECO Energy is
required to continue services. Deposits are also required as a condition of
providing service to all new Small Commercial and Industrial Customers. Such
deposits are maintained for three years.
Collection Process for Large Commercial and Industrial Customers. PECO
Energy's Large Commercial and Industrial Customer collection process is based on
providing special handling of accounts and
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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 with respect to Large Commercial and Industrial Customers is for
delinquencies to be no greater than .5% 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 through implementation of
disconnection and litigation.
Application of Customer Payments. The Competition Act provides that the
PUC require the unbundling of electric utility services, tariffs and customer
bills to separate the charges for generation, transmission and distribution by
January 1, 1999. Until such date, PECO Energy will continue to employ its
current system to record and apply Customer payments to Intangible Transition
Charges, transmission and distribution charges and electric generation charges.
In the event that a Customer makes a partial payment toward an outstanding
balance, the payment will be 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 PUC in the 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 will be applied as follows:
(i) 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;
(ii) To the balance due for state tax charges;
(iii) To the balance due or the installment amount for a payment
agreement for Intangible Transition Charges;
(iv) To the balance due or the installment amount for a payment
agreement for Competitive Transition Charges;
(v) To the balance due or the installment amount for a payment
agreement for fixed and variable utility distribution service
charges;
(vi) To the current state tax charges;
(vii) To the current Intangible Transition Charges;
(viii) To the current Competitive Transition Charges;
(ix) To the current fixed and variable utility distribution service
charges;
(x) To the balance due for prior charges for energy and capacity (if
PECO Energy is the provider of last resort);
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(xi) To the current charges for energy and capacity charges (if PECO
Energy is the provider of last resort); and
(xii) 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 first to state
tax charges, then to Intangible Transition Charges, then to Competitive
Transition Charges, then to transmission and distribution charges and finally to
electric generation charges.
Electric Generation Suppliers and Other Third Party Billers
The Servicer, on behalf of the Issuer, will pursue 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
will pursue any failure by a Customer to remit Intangible Transition Charges.
The Servicer will have the right to bill and collect Intangible Transition
Charges and other amounts payable to the Issuer or the Servicer directly from
all of the electric generation supplier's or other third party's consolidated
billing Customers as follows: if PECO Energy does not receive payment for
undisputed charges within 25 calendar days for Residential Customers or 20
calendar days for Small Commercial and Industrial and Large Commercial and
Industrial Customers after the charges are communicated to the electric
generation supplier or other third party, then PECO Energy may provide notice of
breach to the electric generation supplier or other third party at any time
thereafter, at PECO Energy's discretion. Upon notice of a breach, the electric
generation supplier or other third party will have 20 calendar days to cure such
breach. If the electric generation supplier or other third party has not cured
such breach within 20 calendar days, PECO Energy may terminate consolidated
billing by the electric generation supplier or other third party and take over
billing functions for the customer. In no event will these procedures result in
a Customer being sent two bills covering the same service. 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 ITC Collections
to PECO Energy, as Servicer. See "Risk Factors--Servicing--Credit Concerns
Arising Out of Third Party Billing" in this Prospectus.
Year 2000 Compliance
PECO Energy is faced with the task of addressing the Year 2000 issue.
The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year and other programming
techniques which constrain date calculations or assign special meanings to
certain dates. Any of PECO Energy's computer systems that have date-sensitive
software or microprocessors may recognize a date using "00" as the year 1900
rather than the year 2000. This could result in a system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to measure usage, read meters, process
transactions, send bills or operate electric generation stations. In addition,
the Year 2000 issue could affect the ability of Customers to receive bills sent
by PECO Energy or make payments on such bills.
PECO Energy has determined that it will be required to modify or
replace significant portions of its software so that its computer systems will
properly use dates beyond December 31, 1999. PECO Energy presently believes
that, with modifications to existing software and conversions to new software,
the Year 2000 issue can be mitigated. However, if such modifications and
conversions are not made or are not completed in a timely manner, the Year 2000
issue could have a material adverse impact on the
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operations and financial condition of PECO Energy. The costs associated with
this potential impact are speculative and not presently quantifiable. PECO
Energy has not investigated and has no intention of investigating the Year 2000
issue as it relates to any Customer's ability to receive bills sent by PECO
Energy or make payments on bills.
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 (the "Prior Trust Agreement") between PECO Energy, as grantor
and sole owner of all beneficial interests in the Issuer, the Issuer Trustee and
the other Trustees identified below. The Prior Trust Agreement was subsequently
superseded in its entirety by an Amended and Restated Trust Agreement dated
______, 1998 (the "Trust Agreement") executed by the parties to the Prior Trust
Agreement. The assets of the Issuer will consist of the Transferred Intangible
Transition Property, the other Collateral and any money distributed to the
Issuer from the Collection Account in accordance with the Indenture. As of the
date of this Prospectus, the Issuer has not carried on any business activities
and has no operating history. Audited financial statements of the Issuer are
included as an exhibit to this Prospectus.
The Issuer has been created for the purpose of purchasing and owning
the Transferred Intangible Transition Property, issuing Transition Bonds from
time to time, 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 performing activities that are necessary,
suitable or convenient to accomplish these purposes.
The Issuer's business will be managed by no fewer than one and no more
than three trustees (if the Delaware Trustee and Independent Trustee are the
same entity) or five trustees (if the Delaware Trustee and Independent Trustee
are different entities) appointed from time to time by PECO Energy or, in the
event PECO Energy transfers its interest in the 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 (the "Delaware Trustee"). 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 (i)
a direct or indirect legal or beneficial owner of the Issuer or PECO Energy or
any of their respective affiliates, (ii) a relative, supplier, employee,
officer, director, manager, contractor or material creditor of the Issuer or
PECO Energy or any of their respective affiliates, or (iii) a person who
controls PECO Energy or its affiliates. The Delaware Trustee and the Independent
Trustee may, and will initially, 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 will serve as the initial Issuer Trustee and
as the Delaware Trustee and the Independent Trustee. The remaining trustees are
representatives of PECO Energy and are referred to as the "Beneficiary
Trustees." The Issuer Trustee and the Beneficiary Trustees are collectively
referred to as the "Trustees."
The Issuer Trustee and the Beneficiary Trustees have served since the
establishment of the Issuer. The Trustees will 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:
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Name Age Title
---- --- ------
Diana Moy Kelly 44 Beneficiary Trustee
George R. Shicora 51 Beneficiary Trustee
Diana Moy Kelly is a Beneficiary Trustee of the Issuer. Ms. Moy Kelly
has served as Assistant Treasurer of PECO Energy since she joined PECO Energy in
1995. From 1984 to 1994, she served as Vice President - Treasurer of Tokai
Financial Services, Inc.
George R. Shicora is a Beneficiary Trustee of the Issuer. Mr. Shicora
has served as Assistant Treasurer of PECO Energy since 1995 and has held various
positions at PECO Energy since 1968.
The Issuer has not paid any compensation to any Trustee since the
Issuer was formed. The Beneficiary Trustees will not be compensated by the
Issuer for their services on behalf of the Issuer. The Issuer Trustee will be
paid an annual retainer from the assets of the Issuer and will be reimbursed for
its reasonable expenses, including, without limitation, the reasonable
compensation, expenses and disbursements of such agents, representatives,
experts and counsel as 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. The Trust
Agreement provides that the Trustees shall not be personally liable under any
circumstances except for (i) liabilities arising from their own wilful
misconduct or gross negligence, (ii) liabilities arising from the failure by any
of the Trustees to perform obligations expressly undertaken in the Trust
Agreement or (iii) 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 shall indemnify
the Trustees against any liability incurred in connection with their services as
Trustees for the Issuer, unless such liability is based on or arises in
connection with the circumstances described in clauses (i) through (iii) above.
The Trust Agreement provides that the trust created thereunder 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, such 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 to pay certain expenses of issuance and to purchase the Transferred
Intangible Transition Property from PECO Energy. PECO Energy proposes using the
proceeds it receives from the sale of the Transferred Intangible Transition
Property to reduce Stranded Costs and related capitalization.
THE TRANSITION BONDS
The Transition Bonds will be issued under and secured by a base
indenture between the Issuer and the Bond Trustee substantially in the form
filed as an exhibit to the Registration Statement of which this Prospectus forms
a part. The terms of each Series of Transition Bonds will be provided in a
separate supplement to the base indenture (each such supplement, a "Supplemental
Indenture" and together with the base Indenture, the "Indenture"). The following
summary describes certain general terms and provisions of the Transition Bonds.
The particular terms of the Transition Bonds of any Series offered by any
Prospectus Supplement will be described in such Prospectus Supplement. This
summary does not purport to be complete and is subject to, and is qualified by
reference to, the terms and provisions of the Transition Bonds and the
Indenture.
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 such 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 thereof:
(i) the designation of the Series and, if applicable, the Classes
thereof;
(ii) the aggregate principal amount of the Transition Bonds of the
Series and, if applicable, each Class thereof;
(iii) the Bond Rate of the Series and, if applicable, each Class
thereof or the formula, if any, used to calculate the applicable
Bond Rate or Bond Rates for the Series;
(iv) the Payment Dates for the Series;
(v) the Monthly Allocated Interest Balances for the Series;
(vi) the Monthly Allocated Principal Balances for the Series;
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(vii) the Expected Final Payment Date of the Series and, if applicable,
each Class thereof;
(viii) the Series Termination Date for the Series and, if applicable,
the Class Termination Dates for each Class thereof;
(ix) the Series Issuance Date for the Series;
(x) the place or places for payments with respect to the Series;
(xi) the authorized initial denominations for the Series;
(xii) the provisions, if any, for redemption of the Series by the
Issuer;
(xiii) the Expected Amortization Schedule for the Series;
(xiv) the Overcollateralization Amount with respect to the Series;
(xv) the Calculation Dates and Adjustment Dates for the Series;
(xvi) the credit enhancement applicable to the Series; and
(xvii) 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. Generally,
each Series of Transition Bonds will initially be represented by one or more
Transition Bonds registered in the name of Cede, as the nominee of DTC. 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 DTC 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 DTC or Cede, as the registered holder of each Series of Transition
Bonds, for distribution to Transition Bondholders in accordance with DTC's
procedures with respect thereto. 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 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 such 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 such Series only until the outstanding principal balance
thereof has been reduced to the principal balance specified for such Payment
Date in the Expected Amortization Schedule for such Series on such Payment
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Date, but only to the extent funds are available therefor as described in this
Prospectus. Accordingly, principal of such Series or Class of Transition Bonds
may be paid later than reflected in the Expected Amortization Schedule therefor.
See "Risk Factors--Unusual Nature of Intangible Transition Property," "--The
Transition Bonds--Uncertain Weighted Average Life" and "Certain 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 "Certain Weighted Average Life and
Yield Considerations" in this Prospectus.
Redemption
Each Series of Transition Bonds 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, as Seller, will be required to pay Liquidated
Damages as a result of a breach by PECO Energy of certain of its representations
relating to Intangible Transition Property under the Sale Agreement if such
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 certain other representations is
reasonably expected to be incurred beyond the twelve-month period immediately
succeeding such breach and such amounts are reasonably expected to exceed the De
Minimis Loss Amount. The Bond Trustee, which may consult with the Servicer and
other third parties, will determine whether a breach by PECO Energy of any such
representation has a material adverse effect on the Transition Bondholders. See
"The Sale Agreement--Seller Representations and Warranties" in this Prospectus.
Additional redemption provisions, if any, for any Series will be
specified in the related Prospectus Supplement, including the premiums, if any,
payable upon redemption. Unless the context requires otherwise, all references
in this Prospectus to principal of the Transition Bonds of a Series insofar as
it relates to redemption includes any premium that might be payable thereon if
Transition Bonds of such Series are redeemed, as described in the applicable
Prospectus Supplement. 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 such other
manner or at such 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 such notice shall be
of no effect unless such 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 such Transition Bonds will have no further rights with
respect thereto, except to receive payment of the redemption price thereof and
unpaid interest accrued to the date fixed for redemption from the Bond Trustee.
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Credit Enhancement
Credit enhancement with respect to the Transition Bonds of all Series
will be 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 thereof, additional credit enhancement may be provided with
respect thereto. The amounts and types of credit enhancement, and the provider
of credit enhancement, if any, with respect to each Series of Transition Bonds
or one or more Classes thereof 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, repurchase obligation,
third party payment or other support, cash deposit or other credit enhancement,
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 such additional credit enhancement is provided with respect to a
Series offered hereby, the applicable Prospectus Supplement will include a
description of (i) the amount payable under such credit enhancement, (ii) any
conditions to payment thereunder not otherwise described in this Prospectus,
(iii) the conditions (if any) under which the amount payable under such credit
enhancement may be reduced and under which such credit enhancement may be
terminated or replaced and (iv) any material provisions of any applicable
agreement relating to such credit enhancement. Additionally, in certain cases,
the applicable Prospectus Supplement may describe certain information with
respect to the provider of any third-party credit enhancement, including (i) a
brief description of its principal business activities, (ii) its principal place
of business, place of incorporation and the jurisdiction under which it is
chartered or licensed to do business, (iii) if applicable, the identity of
regulatory agencies which exercise primary jurisdiction over the conduct of its
business and (iv) its total assets, and its 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 will be book-entry Transition Bonds,
which are initially represented by one or more bonds registered in the name of
Cede, as nominee of DTC, or another securities depository and are available only
in the form of book-entries ("Book-Entry Transition Bonds"); provided, however,
the applicable Prospectus Supplement relating to a Series of Transition Bonds
may provide that the Transition Bonds of such Series or a Class thereof will be
issued as definitive Transition Bonds. Transition Bondholders may also hold
Transition Bonds of a Class through Cedel, societe anonyme ("CEDEL") or the
Euroclear System ("Euroclear") (in Europe), if they are participants in such
systems or indirectly through organizations that are participants in such
systems ("Participants").
Cede, as nominee for DTC, will hold the global bond or bonds
representing the Transition Bonds. CEDEL and Euroclear will hold omnibus
positions on behalf of their participants through customers' securities accounts
in CEDEL's and Euroclear's names on the books of their respective depositaries
which in turn will hold such positions in customers' securities accounts in the
depositaries' names on the books of DTC. Citibank, N.A. will act as depositary
for CEDEL and Morgan Guaranty Trust Company of New York will act as depositary
for Euroclear (in such capacities, the "Depositaries").
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 Commercial Code and a
"clearing agency" registered pursuant to Section 17A of the Exchange
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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 certain 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 CEDEL 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 CEDEL 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
such 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. CEDEL Participants and Euroclear Participants may
not deliver instructions directly to the Depositaries.
Because of time-zone differences, credits of securities received in
CEDEL or Euroclear as a result of a transaction with a Participant will be made
during subsequent settlement processing and dated the Business Day following the
DTC settlement date. Such credits or any transactions in such Transition Bonds
settled during such processing will be reported to the relevant Euroclear or
CEDEL Participant on such Business Day. Cash received in CEDEL or Euroclear as a
result of sales of Transition Bonds by or through a CEDEL 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 CEDEL or Euroclear
cash account only as of the Business Day following settlement in DTC.
Transition Bondholders that are not direct or indirect 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 Participants. In
addition, Transition Bondholders will receive all payments of principal and
interest on the Transition Bonds, through the 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 such date, 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 thereof (whether or not such Transition Bond is overdue and
notwithstanding any notice of ownership or writing thereon 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 Participants
and DTC. All
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references herein to actions by Transition Bondholders thus refer to actions
taken by DTC upon instructions from its Participants, and all references herein
to payments, notices, reports and statements to Transition Bondholders refer to
payments, notices, reports and statements to 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 (the "Rules"), 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. 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 such payments on behalf of their
respective Transition Bondholders. Accordingly, although Transition Bondholders
will not possess physical bonds, the Rules 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 Participants, who in turn act on
behalf of indirect Participants and certain 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 such Transition Bonds, may be limited due to the lack of a
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.
CEDEL is incorporated under the laws of Luxembourg as a professional
depository. CEDEL holds securities for its participating organizations ("CEDEL
Participants") and facilities the clearance and settlement of securities
transactions between CEDEL Participants through electronic book-entry changes in
accounts of CEDEL Participants, thereby eliminating the need for physical
movement of securities. Transactions may be settled in CEDEL in any of 28
currencies, including United States dollars. CEDEL provides to CEDEL
Participants, among other things, services for safekeeping, administration,
clearance and settlement of internationally traded securities and securities
lending and borrowing. CEDEL interfaces with domestic markets in several
countries. As a professional depository, CEDEL is subject to regulation by the
Luxembourg Monetary Institute. CEDEL Participants are recognized financial
institutions around the world including underwriters, securities brokers and
dealers, banks, trust companies, clearing corporations and certain other
organizations and may include any Underwriters, agents or dealers with respect
to a Series of Transition Bonds offered hereby. Indirect access to CEDEL is also
available to others, such as banks, brokers, dealers and trust companies that
clear through or maintain a custodial relationship with a CEDEL Participant,
either directly or indirectly.
Euroclear was created in 1968 to hold securities for participants of
the Euroclear System ("Euroclear Participants") 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 29 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 Morgan Guaranty Trust Company of New
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York, out of its Brussels, Belgium office (the "Euroclear Operator"), under
contract with Euroclear Clearance System S.C., a Belgian cooperative corporation
(the "Cooperative"). All operations are conducted by the Euroclear Operator, and
all Euroclear securities clearance accounts and Euroclear cash accounts are
accounts with the Euroclear Operator, not the Cooperative. The Cooperative
establishes policy for Euroclear on behalf of Euroclear Participants. Euroclear
Participants include banks (including central banks), securities brokers and
dealers and other professional financial intermediaries. Indirect access to
Euroclear is also available to other firms that clear through or maintain a
custodial relationship with a Euroclear Participant, either directly or
indirectly.
The Euroclear Operator is the Belgian branch of a New York banking
corporation that is a member bank of the Federal Reserve System. As such, it is
regulated and examined by the Board of Governors of the Federal Reserve System
and the New York State Banking Department, as well as the Belgian Banking
Commission.
Securities clearance accounts and cash accounts with the Euroclear
Operator are governed by the Terms and Conditions Governing Use of Euroclear and
the related Operating Procedures of Euroclear and applicable Belgian law
(collectively, the "Terms and Conditions"). The Terms and Conditions govern
transfers of securities and cash within Euroclear, withdrawals of securities and
cash from Euroclear and receipts of payments with respect to securities in
Euroclear. All securities in Euroclear are held on a fungible basis without
attribution of specific securities to specific securities clearance accounts.
The Euroclear Operator acts under the Terms and Conditions only on behalf of
Euroclear Participants and has no record of or relationship with persons holding
through Euroclear Participants.
Payments with respect to Transition Bonds held through CEDEL or
Euroclear will be credited to the cash accounts of CEDEL Participants or
Euroclear Participants in accordance with the relevant systems' rules and
procedures, to the extent received by its Depositary. Such payments will be
subject to tax reporting in accordance with relevant United States tax laws and
regulations. See "Material Tax Matters" in this Prospectus. CEDEL 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 CEDEL
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, CEDEL and Euroclear have agreed to the foregoing
procedures in order to facilitate transfers of Transition Bonds among
Participants of DTC, CEDEL 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
Unless otherwise specified in the applicable Prospectus Supplement,
each Class of Transition Bonds will be issued in fully registered, certificated
form to Transition Bondholders or their nominees, rather than to DTC or its
nominee, only if (i) 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 such Class of Transition Bonds and the Issuer is
unable to locate a qualified successor, (ii) the Issuer, at its option, elects
to terminate the book-entry system through DTC or (iii) 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 thereto) is no longer in the
Transition Bondholders' best interest.
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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 such 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. Such payments
will be made by check mailed to the address of such 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 such
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
therewith.
CERTAIN WEIGHTED AVERAGE LIFE
AND YIELD CONSIDERATIONS
The rate of principal payments on each Series or Class of Transition
Bonds, 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 ITC
Collections. Accelerated receipts of ITC Collections will 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 Schedules will be deposited in the Overcollateralization Subaccount
or Reserve Subaccount. However, delayed receipts of ITC Collections may result
in principal payments on the Transition Bonds occurring more slowly than as
reflected in the Expected Amortization Schedules or later than the related
Expected Final Payment Dates. Redemption of any Class or Series of Transition
Bonds in accordance with the terms thereof 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 thereof will be affected
primarily by the rate of ITC Collections and the timing of receipt of ITC
Collections, 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 ITC Collections and the rate of principal
amortization on the Transition Bonds will depend, in part, on actual energy
usage by Customers and the rate of delinquencies and write-offs. Although the
Intangible Transition Charges will be adjusted from time to time based in part
on the actual rate of ITC Collections, no assurances are given that the Servicer
will be able to forecast accurately actual electricity usage and the rate of
delinquencies and write-offs or implement adjustments to the Intangible
Transition Charges that will cause ITC Collections to be received at any
particular rate. See "Risk Factors--Unusual Nature of Intangible Transition
Property" and "The QRO and the Intangible Transition Charges--The Intangible
Transition Charges--The ITC Adjustment Process" in this Prospectus; see also
"PECO Energy Company" in this
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Prospectus. If ITC Collections 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 islater than forecasted will result in a longer weighted average life.
In addition, if a larger portion of the delayed payments on the Transition Bonds
are received in later years, this will result in a longer weighted average life
of the Transition Bonds.
THE SALE AGREEMENT
The following summary describes certain general terms and provisions of
the Sale Agreement pursuant to which the Seller is selling and the Issuer is
purchasing Intangible Transition Property. The Sale Agreement may be amended by
the parties thereto, with the consent of the Bond Trustee, provided notice of
the substance of such amendment is provided by the Issuer to each Rating Agency.
The form of the Sale Agreement has been filed as an exhibit to the Registration
Statement of which this Prospectus forms a part. This summary does not purport
to be complete and is subject to, and is qualified by reference to, the
provisions of the Sale Agreement.
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 such sales nor the terms of any
transition bonds issued will be subject to the prior review by or consent of the
Transition Bondholders of any Series. All ITC Collections received by PECO
Energy, as Servicer, will be allocated among the Issuer and any Other Issuers
based on their respective Percentage. "Percentage" means, with respect to any
issuer of transition bonds, the percentage equivalent of a fraction, 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 such
issuer and 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 all the issuers (including the Issuer). "Other Issuer" means any
person other than the Issuer that issues transition bonds secured by Intangible
Transition Property sold by the Seller to such person. See "The Master Servicing
Agreement" in this Prospectus. The sale of Intangible Transition Property to an
Other Issuer will be subject to the conditions that the Rating Agency Condition
is satisfied with respect to all outstanding Transition Bonds and the purchaser
of such Intangible Transition Property becomes a party to the Master Servicing
Agreement. See "The Master Servicing Agreement--Addition of Other Issuers."
Sale and Assignment of Intangible Transition Property
On the Series Issuance Date for the first Series of Transition Bonds
(the "Initial Transfer Date"), pursuant to the Sale Agreement, the Seller will
sell and assign to the Issuer, without recourse, except as provided therein,
Initial Intangible Transition Property representing the irrevocable right to
receive through Intangible Transition Charges amounts sufficient to recover
Qualified Transition Expenses with respect to such Series of Transition Bonds.
The net proceeds received from the sale of the Transition Bonds issued on the
Initial Transfer Date will be applied to the purchase of such Transferred
Intangible Transition Property. In addition, the Seller may from time to time
offer to sell additional Intangible Transition Property to the Issuer, subject
to the satisfaction of certain conditions (each,
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a "Subsequent Sale"). Each Subsequent Sale will be financed through the issuance
of an additional Series of Transition Bonds. If any such offer is accepted by
the Issuer, the Subsequent Sale will be effective on a date (a "Subsequent
Transfer Date") specified in a written notice provided by the Seller to the
Issuer.
In accordance with the Competition Act, upon the execution and delivery
of the Sale Agreement and the related bill of sale, the transfer of the Initial
Intangible Transition Property will be perfected as against all third persons,
including judicial lien creditors, and upon the execution of a subsequent bill
of sale and an addition notice, a transfer of Subsequent Intangible Transition
Property will also be perfected against all third persons, including judicial
lien creditors.
"Initial Intangible Transition Property" means Intangible Transition
Property, as identified in the related bill of sale, sold to the Issuer on the
Initial Transfer Date pursuant to the Sale Agreement in connection with the
issuance of the initial Series of Transition Bonds. "Subsequent Intangible
Transition Property" means Intangible Transition Property, as identified in the
related bill of sale, sold to the Issuer on any Subsequent Transfer Date
pursuant to the Sale Agreement in connection with the subsequent issuance of a
Series of Transition Bonds.
The Seller's accounting records and computer systems will reflect the
sale and assignment of Intangible Transition Property to the Issuer, and the
Seller shall treat the Transition Bonds as debt of the Seller for Federal income
tax purposes so long as any of 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:
(i) on or prior to the Initial Transfer Date or Subsequent Transfer
Date, as applicable, 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;
(ii) as of the Initial Transfer Date or the Subsequent Transfer Date,
as applicable, the Seller was not insolvent and will not have been made
insolvent by such sale, and the Seller is not aware of any pending
insolvency with respect to itself;
(iii) as of the Initial Transfer Date or the Subsequent Transfer Date,
as applicable, no breach by the Seller of its representations, warranties
or covenants in the Sale Agreement shall exist, and no Servicer Default
shall have occurred and be continuing;
(iv) as of the Initial Transfer Date or the Subsequent Transfer Date,
as applicable, the Issuer shall have sufficient funds available to pay the
purchase price for the Transferred Intangible Transition Property to be
conveyed on such date, and all conditions to the issuance of one or more
Series of Transition Bonds intended to provide such funds set forth in the
Indenture shall have been satisfied or waived;
(v) on or prior to the Initial Transfer Date or Subsequent Transfer
Date, as applicable, the Seller shall have taken all action required to
transfer to the Issuer ownership of the Transferred Intangible Transition
Property to be conveyed on such date, free and clear of all liens other
than liens created by the Issuer pursuant to the Indenture, and the Issuer
shall have taken, or the Servicer shall have taken on behalf of the Issuer,
any action required
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for the Issuer to grant the Bond Trustee a first priority perfected
security interest in the Collateral and maintain such security interest;
(vi) 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 addition notice specifying the Subsequent Transfer
Date for such Subsequent Intangible Transition Property not later than 10
days prior to such Subsequent Transfer Date;
(vii) the Seller shall have delivered to the Rating Agencies and the
Issuer the opinion of counsel specified in the Sale Agreement and certain
other opinions of counsel to the Issuer Trustee and Bond Trustee; and
(viii) the Seller shall have delivered to the Bond Trustee and the
Issuer an officers' certificate confirming the satisfaction of each
condition precedent specified above.
Seller Representations and Warranties
In the Sale Agreement, the Seller will make representations and warranties
to the Issuer as of the Initial Transfer Date and any Subsequent Transfer Date
to the effect, among other things, that:
(i) all information provided by the Seller to the Issuer with respect
to the Transferred Intangible Transition Property is correct in all
material respects;
(ii) the transfers and assignments contemplated by the Sale Agreement
constitute sales of the Initial Intangible Transition Property or the
Subsequent Intangible Transition Property, as the case may be, 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;
(iii) the Seller is the sole owner of the Intangible Transition
Property being sold to the Issuer on the Initial Transfer Date or
Subsequent Transfer Date, as applicable, the Transferred Intangible
Transition Property has been validly transferred and sold to the Issuer
free and clear of all liens other than liens created by the Issuer pursuant
to the Indenture and all filings (including filings with the PUC under the
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 Bond Trustee a first priority perfected security interest in
Transferred Intangible Transition Property have been made, other than any
such filings (except for filings with the PUC under the 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 Serviced Intangible Transition Property or (y)
the rights of the Issuer or the Bond Trustee with respect to the
Transferred Intangible Transition;
(iv) the QRO has been issued by the PUC in accordance with the
Competition Act, the QRO and the process by which it was issued comply with
all applicable laws, rules and regulations and the QRO is in full force and
effect;
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(v) as of the date of issuance of any Series of Transition Bonds, such
Transition Bonds are entitled to the protections provided by the
Competition Act and, accordingly, the provisions of the QRO relating to the
Intangible Transition Property and Intangible Transition Charges are not
revocable by the PUC;
(vi) (x) under the Competition Act, neither the Commonwealth of
Pennsylvania nor the PUC may limit, alter or in any way impair or
reduce the value of Intangible Transition Property or Intangible
Transition Charges approved by the QRO or any rights thereunder,
except such a limitation or alteration may be made by the Commonwealth
of Pennsylvania or the PUC 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, the Commonwealth
of Pennsylvania and the PUC cannot take any action that substantially
impairs the rights of the Transition Bondholders unless such action is
a reasonable exercise of the Commonwealth of Pennsylvania's sovereign
powers and appropriate to further a legitimate public purpose, and,
under the Takings Clauses of the Pennsylvania and United States
Constitutions, in the event such 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, unless just compensation, as
determined by a court of competent jurisdiction, is provided to
Transition Bondholders.
(vii) there is no order by any court providing for the revocation,
alteration, limitation or other impairment of the Competition Act, QRO,
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 QRO;
(viii) 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;
(ix) 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 QRO or the
Competition Act;
(x) no failure on the Initial Transfer Date or any Subsequent Transfer
Date or any time thereafter to satisfy any condition imposed by the
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;
(xi) the assumptions used in calculating Intangible Transition Charges
are reasonable and made in good faith;
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(xii) (x) Intangible Transition Property, other than Intangible
Transition Property retained by the Seller, constitutes a current
property right;
(y) Intangible Transition Property includes, without limitation,
(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 QRO in an amount equal to the aggregate principal amount of
Transition Bonds and other 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
transition bonds issued by Other Issuers, and (B) all right, title and
interest of the Seller or its assignee applicable to the Transition
Bonds and transition bonds issued by Other Issuers in the QRO and in
all revenues, collections, claims, payments, money, or proceeds of or
arising from the Intangible Transition Charges applicable to the
Transition Bonds and transition bonds issued by Other Issuers set
forth in the QRO to the extent that in accordance with the Competition
Act, the QRO and the rates and charges authorized under the QRO are
declared to be irrevocable; and
(z) paragraphs 4 through 19 of the QRO, including the right to
collect Intangible Transition Charges, have been declared to be
irrevocable by the PUC;
(xiii) 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;
(xiv) 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 and assign the Initial Intangible Transition Property, in the case of
the Initial Transfer Date, and the Subsequent Intangible Transition
Property, in the case of each Subsequent Transfer Date, as applicable, and
the Seller has duly authorized such sale and assignment 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;
(xv) 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;
(xvi) the consummation of the transactions contemplated by the Sale
Agreement and the fulfillment of the terms thereof 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 the PECO Energy mortgage indenture on
the Seller's interest in the Sale Agreement) pursuant to the terms of any
such indenture, agreement or other instrument; nor violate any law or any
order, rule or regulation applicable to the Seller
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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;
(xvii) except for UCC continuation filings, 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;
(xviii) 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 Trust
Agreement or the certificate of trust filed with the State of Delaware to
establish the Issuer (collectively, 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;
(xix) after giving effect to the sale of any Transferred Intangible
Transition Property under the Sale Agreement, the Seller (x) is solvent and
expects to remain solvent, (y) is adequately capitalized to conduct its
business and affairs considering its size and the nature of its business
and intended purposes, (z) is not engaged nor does it expect to engage in a
business for which its remaining property represents an unreasonably small
capital, (xx) believes that it will be able to pay its debts as they become
due and that such belief is reasonable and (yy) 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; and
(xx) 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 such 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).
In the event of a breach by the Seller of any representation and
warranty specified in (ii), (iii), (iv), (v), (vii) and (xii) above that has a
material adverse effect on the Transition Bondholders, the Seller shall pay to
the Bond Trustee, as assignee of the Issuer, for deposit into the General
Subaccount of the Collection Account the Liquidated Damages on the Liquidated
Damages Payment Date; provided, however, that the Seller shall not be obligated
to pay Liquidated Damages if (i) within 90 days after the date of occurrence
thereof such 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 such breach and (ii) either (x) if the Seller had, immediately
prior to the breach, a long term debt rating of at least "A3" by Moody's and
"BBB" by S&P and the equivalent of "BBB" by any
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other Rating Agency, the Seller enters into a binding agreement with the Issuer
to pay any amounts necessary so that all interest payments due on the Transition
Bonds during such 90-day period will be paid in full or (y) if the Seller does
not have such long term debt ratings, the Seller deposits, within two Business
Days after such breach, an amount in escrow with the Bond Trustee sufficient,
taking into account amounts on deposit in the Collection Account which will be
available for such purpose, to pay all interest payments which will become due
on the Transition Bonds during such 90-day period. In the event that within such
90-day period, such breach is cured or the Seller takes the remedial action
described in subsection (i) in the preceding sentence, any amounts paid by the
Seller to the Bond Trustee, as assignee of the Issuer, which have not been
distributed pursuant to the Indenture shall be returned to the Seller at the end
of such 90-day period.
The "Liquidated Damages Payment Date" means the date that is:
(i) 90 days after the date of a breach of a representation or warranty
specified in (ii), (iii), (iv), (v), (vii) or (xii) above if the Seller (x)
has the long term debt ratings specified by, and enters into the binding
agreement described in, subsection (ii)(x) of the preceding paragraph or
(y) does not have such long term debt ratings but makes the deposit
required in subsection (ii)(y) of the preceding paragraph; or
(ii) in all other cases, two Business Days after the date of such
breach.
If the full amount of losses attributable to the breach of
representations described in (vi), (viii), (ix), (xiii), (xiv), (xv) and (xvi)
above is reasonably expected to be incurred beyond a twelve-month period
immediately succeeding such breach, the Seller shall, except as provided below,
pay Liquidated Damages to the Bond Trustee, as assignee of the Issuer, for
deposit into the General Subaccount of the Collection Account on the first
Monthly Allocation Date following the expiration of such twelve-month period.
With respect to any losses described in the previous sentence the full amount of
which is reasonably expected not to exceed the De Minimis Loss Amount, the
Seller on the Monthly Allocation Date immediately following the Initial Loss
Calculation Date shall pay to the Bond Trustee as assignee of the Issuer, for
deposit in the Loss Subaccount of the Collection Account, the aggregate expected
amount of such losses for all Monthly Allocations Dates on which losses are
expected to be incurred, following which the Seller's obligation to pay
indemnification or Liquidated Damages, as applicable, as a result of such 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 such losses
exceeds the amounts paid by the Seller to the Bond Trustee as assignee of the
Issuer, with respect thereto, the Seller shall pay to the Bond Trustee, as
assignee of the Issuer, on the next Monthly Allocation Date the amount of such
excess for such Monthly Allocation Date and the expected amount of excess for
all subsequent Monthly Allocation Dates.
The Seller shall also indemnify the Issuer and the Bond Trustee and
certain other related parties, against (i) 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 (ii) any liabilities, obligations, 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 set forth above, other than (ii), (iii), (iv),
(v), (vii) and (xii) above; provided, that the amount of such losses for which
the Seller
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shall be obligated to provide indemnification shall not exceed the amount of
Liquidated Damages. If such an event occurs, upon receipt of written notice of
the breach by the Seller from the Issuer or Bond Trustee, the Seller will notify
the Servicer of the occurrence of such event so that the Servicer may calculate
the amount of indemnification in accordance with the provisions of the Master
Servicing Agreement. If such breach continues unremedied beyond the Initial Loss
Calculation Date, the Seller shall pay such amount to the Bond Trustee for
deposit into the General Subaccount of the Collection Account. Amounts on
deposit in the Reserve Subaccount and the Capital Subaccount shall not be
available to satisfy any indemnification amounts owed by the Seller under the
Sale Agreement.
In addition to the foregoing representations and warranties, the Seller
has also covenanted, among other things, that it will deliver all ITC
Collections it receives to the Servicer and will promptly notify the Issuer
Trustee and 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 and, in the case of Intangible Transition Property
retained by the Seller, the lien of the Seller's mortgage.
The Seller shall also be obligated to take such 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 (i) 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 (ii) to block or
overturn any attempts to cause a repeal of, modification of or supplement to the
Competition Act, the QRO 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 such filings, including filings with the
PUC pursuant to the 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 above, the Seller shall not be
under any obligation to appear in, prosecute or defend any legal action that
shall not be incidental to its obligations under the Sale Agreement and that in
its opinion may involve it in any expense or liability.
Certain 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 such persons execute an agreement of assumption to
perform every obligation of the Seller under the Sale Agreement. The Sale
Agreement further requires that (i) immediately after giving effect to such
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, (ii) the Rating Agencies shall have received prior written notice of
such transaction and (iii) certain officers' certificates and opinions of
counsel shall have been delivered to the Issuer and the Bond Trustee.
Governing Law
The Sale Agreement will be governed by and construed under the laws of
the Commonwealth of Pennsylvania.
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THE MASTER SERVICING AGREEMENT
The following summary describes certain general terms and provisions of the
Master Servicing Agreement pursuant to which the Servicer is undertaking to
service Intangible Transition Property. The form of the Master Servicing
Agreement has been filed as an exhibit to the Registration Statement of which
this Prospectus forms a part. This summary does not purport to be complete and
is subject to, and is qualified by reference to, the provisions of the Master
Sale Agreement. Because the Master Servicing Agreement relates to all Serviced
Intangible Transition Property (as opposed to just the Transferred Intangible
Transition Property owned by the Issuer), the rights and obligations set forth
in such 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.
The Master Servicing Agreement may be amended by the parties thereto with
the consent of the Bond Trustee under the Indenture and all bond trustees of
any Other Issuers, if any. The form of the Master Servicing Agreement has been
filed as an exhibit to the Registration Statement of which this Prospectus forms
a part.
Servicing Procedures
General. The Servicer, as agent for the Issuer and the Other Issuers, will
manage, service and administer, and make collections in respect of Intangible
Transition Property. The Servicer's duties will include (i) calculating and
billing the Intangible Transition Charges and collecting (from Customers,
electric generation suppliers and other third parties, as applicable) and
posting all ITC Collections, (ii) responding to inquiries by Customers, electric
generation suppliers and other third parties, the PUC, or any Federal, local or
other state governmental authority with respect to the Intangible Transition
Property and Intangible Transition Charges, (iii) accounting for ITC Collections
and furnishing periodic reports to the Issuer, any Other Issuers, the Bond
Trustee (and any bond trustees of any Other Issuers), and the Rating Agencies,
(iv) selling, as agent for the Issuer and any Other Issuers, as their respective
interests may appear, defaulted or written-off accounts in accordance with the
Servicer's usual and customary practices and (v) taking action in connection
with adjustments to the Intangible Transition Charges as described below. See
also "The QRO and the Intangible Transition Charges--Competitive Billing." The
Servicer shall notify the Issuer, any Other Issuers, the Bond Trustee (and any
bond trustees of any Other Issuers) and the Rating Agencies in writing of any
laws or PUC 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 under the Master Servicing Agreement.
Any ITC Collections received by the Servicer shall be allocated between the
Issuer and any Other Issuers based on their respective Percentages at the time
such Intangible Transition Charges were billed.
The Servicer shall institute any action or proceeding necessary to compel
performance by the PUC or the Commonwealth of any of their obligations or duties
under the Competition Act or the QRO with respect to the Intangible Transition
Property. The cost of any such action reasonably allocated by the Servicer to
the Serviced Intangible Transition Property shall be payable from ITC
Collections as an operating expense and shall be allocated among the Issuer and
any Other Issuers based on their respective Percentages at the time such costs
are incurred.
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ITC Adjustment Process. Among other things, the Master Servicing Agreement
requires the Servicer to file, and the Competition Act and the QRO require the
PUC to approve, Adjustment Requests on each Calculation Date based on actual ITC
Collections and updated assumptions by the Servicer as to projected future usage
of electricity by Customers, expected delinquencies and write-offs and future
payments and expenses relating to Intangible Transition Property and the
Transition Bonds. In addition, the QRO provides that adjustments during the
final calendar year during which any Series of Transition Bonds is outstanding
may be implemented quarterly or monthly. The Servicer agrees to calculate such
adjustments to result in the Transition Bond Balance equaling the Projected
Transition Bond Balance, and the amount on deposit in the Overcollateralization
Subaccount equaling the Calculated Overcollateralization Level, by the Payment
Date immediately [preceding] the next Adjustment Date or the Expected Final
Payment Date, as applicable, taking into account any amounts on deposit in the
Reserve Subaccount. The Servicer will file Adjustment Requests on each
Calculation Date for the Issuer as specified in the Master Servicing Agreement.
In accordance with the Competition Act and the QRO, the PUC has 90 days to
approve such adjustments. The adjustments to the Intangible Transition Charges
are expected to occur on each Adjustment Date. Such adjustments to the
Intangible Transition Charges will cease with respect to each Series on the
final Adjustment Date specified in the Prospectus Supplement for that Series.
ITC Collections. The Servicer is required to remit all ITC Collections
(from whatever source) allocated to the Issuer or Other Issuers, if any, and all
proceeds of other Collateral, if any, of the Issuer or Other Issuers, if any,
received by the Servicer (i) in the case of the Issuer, to the Bond Trustee for
deposit pursuant to the Indenture or (ii) in the case of Other Issuers, to the
bond trustees of such Other Issuers under the indenture to which each such Other
Issuer is a party on each Remittance Date. Until ITC Collections are remitted to
the Collection Account, the Servicer will not segregate them from its general
funds. Remittances of ITC Collections will not include interest thereon prior to
the Remittance Date or late fees from customers, which the Servicer will be
entitled to retain.
Servicer Advances
If specified in the related annex to the Master Servicing Agreement, the
Servicer will make advances of interest or principal on the related Series of
Transition Bonds in the manner and to the extent specified in such annex.
Servicing Compensation; Releases
The Issuer and each Other Issuer, severally and not jointly, agrees to pay
the Servicer the Monthly Servicing Fees with respect to their respective series
of transition bonds. The Monthly Servicing Fee for each Series (together with
any portion of such Monthly Servicing Fee that remains unpaid from prior Monthly
Allocation Dates) will be paid solely to the extent funds are available therefor
as described under "The Indenture--Allocations and Payments" in this Prospectus.
The Monthly Servicing Fee will be paid prior to the payment of or provision for
any amounts in respect of interest on and principal of the Transition Bonds.
In the Master Servicing Agreement, the Servicer releases the Issuer, every
Other Issuer, the Bond Trustee and any bond trustees of any Other Issuers from
any and all claims, whenever relating to Intangible Transition Property or the
Servicer's servicing activities with respect thereto.
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Servicer Duties
In the Master Servicing Agreement, the Servicer has agreed, among other
things, that, in servicing Intangible Transition Property:
(i) 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 any Other Issuer's bond trustee's respective interests in Intangible
Transition Property,
(x) it will manage, service, administer and make collections in
respect of Intangible Transition Property with reasonable care and in
material compliance with applicable law, including all applicable PUC
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;
(y) it will follow standards, policies and procedures in
performing its duties as Servicer that are customary in the Servicer's
industry;
(z) it will use all reasonable efforts, consistent with its
customary servicing procedures, to enforce and maintain rights in
respect of Intangible Transition Property;
(xx) it will calculate Intangible Transition Charges in
compliance with the Competition Act, the QRO and any applicable
tariffs;
(ii) 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
Intangible Transition Property; and
(iii) 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.
The duties of the Servicer set forth in the Master Servicing Agreement are
qualified by any PUC regulations or orders in effect at the time such duties are
to be performed.
Servicer Representations and Warranties
In the Master Servicing Agreement, the Servicer will make representations
and warranties as of each date the Seller sells or otherwise transfers any
Intangible Transition Property to any issuer of transition bonds to the effect,
among other things, that:
(i) 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 such
properties are currently owned and such 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
Intangible Transition Property;
(ii) 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;
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(iii) the Servicer's execution, delivery and performance of the Master
Servicing Agreement have been duly authorized by the Servicer by all
necessary corporate action;
(iv) 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;
(v) 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 the 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;
(vi) except for filings with the PUC 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
(vii) 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, the bond trustees of any Other Issuers, on behalf of the holders of
transition bonds issued by such Other Issuers, and certain other related
parties, against any costs, expenses, losses, damages, claims and liabilities
that may be imposed upon, incurred by or asserted against such person as a
result of (i) 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 (ii) the Servicer's breach of
any of its representations or warranties under the Master Servicing Agreement.
Statements to Issuer and Bond Trustee
For each Calculation Date, the Servicer will provide to the Issuer and the
Bond Trustee a statement indicating, with respect to the Transferred Intangible
Transition Property (i) the Transition Bond Balance and the Projected Transition
Bond Balance for each Series as of the immediately preceding Payment Date, (ii)
the amount on deposit in the Overcollateralization Subaccount and the Calculated
Overcollateralization Level as of the immediately preceding payment date, (iii)
the Projected
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Transition Bond Balance for the next Payment Date and the Servicer's projection
of the Transition Bond Balance as of the next Payment Date and (iv) the
Calculated Overcollateralization Level Payment Date and the Servicer's
projection of the amount on deposit in the Overcollateralization Subaccount as
of the next Payment Date. Moreover, on or before each Remittance Date, the
Servicer will prepare and furnish 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 such Remittance Date pursuant to the Indenture.
In addition, on or before each Monthly Allocation Date, the Servicer will
prepare and furnish to the Issuer and the Bond Trustee a statement setting forth
the transfers and payments to be made on such Monthly Allocation Date and the
amounts thereof. Further, on or before each Payment Date for each Series of
Transition Bonds, the Servicer will prepare and furnish to the Issuer and the
Bond Trustee a statement setting forth the amounts to be paid to the holders of
Transition Bonds of such Series. On the basis of this information, the Bond
Trustee will furnish to the Transition Bondholders on each Payment Date the
report described under "The Indenture--Reports to Transition Bondholders" in
this Prospectus.
Evidence as to Compliance
The Master Servicing Agreement will provide that a firm of independent
public accountants will furnish to the Issuer, any Other Issuer, the Bond
Trustee, the bond trustees of any Other Issuers and the Rating Agencies, on or
before March 31 of each year, a statement as to compliance by the Servicer
during the preceding calendar year (or the relevant portion thereof) with
certain standards relating to the servicing of Intangible Transition Property.
This report (the "Annual Accountant's Report") will state that such firm has
performed certain procedures in connection with the Servicer's compliance with
the servicing procedures of the Master Servicing Agreement, identifying the
results of such procedures and including any exceptions noted. The Annual
Accountant's Report will also indicate that the accounting firm providing such
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 will also provide for delivery to the
Issuer, any Other Issuer, the Bond Trustee and the bond trustees of such Other
Issuer, on or before March 31 of each 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 thereof) or, if there has been a default in the fulfillment of
any such obligation, describing each such default. The Servicer has agreed to
give the Issuer, any Other Issuer, each Rating Agency, the Bond Trustee or the
bond trustee of such Other Issuer, as the case may be, notice of any Servicer
Default under the Master Servicing Agreement.
Certain Matters Regarding the Servicer
Pursuant to the QRO, PECO Energy may assign its obligations under the
Master Servicing Agreement to any electric distribution company, as such term is
defined in the Competition Act, which succeeds to the major part of PECO
Energy's electric distribution business. Under the Master Servicing Agreement,
certain persons which succeed to the major part of the electric distribution
business of the Servicer,
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which persons assume the obligations of the Servicer, will be the successor of
the Servicer under the Master Servicing Agreement. The Master Servicing
Agreement further requires that (i) immediately after giving effect to such
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; (ii) certain officers'
certificates and opinions of counsel shall have been delivered to the Issuer,
any Other Issuers, the Bond Trustee (and any other bond trustees of any Other
Issuers), as the case may be, and the Rating Agencies; and (iii) prior written
notice shall have been received by the Ratings 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 Issuers, the Bond Trustee (and any bond trustees of any 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 QRO and the 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 pursuant to the Master Servicing
Agreement or for errors in judgment, except to the extent such liability is
imposed by reason of the Servicer's wilful 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 will include,
among other things:
(i) 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 such Other Issuer, any required remittance that shall continue
unremedied for a period of three Business Days after written notice of such
failure is received by the Servicer;
(ii) 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
continues unremedied for 30 days after notice of
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such failure has been given to the Servicer, by the Issuer, any Other
Issuer or the Bond Trustee (or bond trustees of any Other Issuer), as the
case may be, or after discovery of such failure by an officer of the
Seller, as the case may be;
(iii) 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 holders of transition bonds issued by any Other Issuer, the Issuer or
any Other Issuer and which continues unremedied for 60 days after notice of
such failure has been given to the Servicer by the Issuer, any Other
Issuer, the Bond Trustee or any bond trustee of any Other Issuer, as the
case may be; and
(iv) certain events of insolvency, readjustment of debt, marshalling
of assets and liabilities, or similar proceedings with respect to the
Servicer and certain actions by the Servicer indicating its insolvency,
reorganization pursuant to bankruptcy proceedings or inability to pay its
obligations.
The Bond Trustee, together with all 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 such Other Issuers and the Bond
Trustee, representing a majority of the outstanding principal amount of all
transition bonds issued by such Other Issuers and the Issuer, as assignees of
such Other Issuers and the Issuer, as applicable, 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), whereupon a
Successor Servicer appointed by the Bond Trustee or, if there are more than one,
by a majority of the bond trustees voting by outstanding amount of Transition
Bonds 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 "Insolvency Laws"), the Bond Trustee, the Issuer, any Other Issuers and any
bond trustees of such Other Issuers, if any, may be prevented from effecting a
transfer of servicing. See "Risk Factors--Bankruptcy; Creditors' Rights" in this
Prospectus. The Bond Trustee 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. See
"Risk Factors--Bankruptcy; Creditors' Rights" in this Prospectus. 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 PUC for sequestration and payment of revenues arising
from the Intangible Transition Property.
Successor Servicer
In accordance with the provisions of the QRO and pursuant to 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 (in
such role, the "Successor Servicer"), the Master Servicing Agreement will
require the Servicer to cooperate with the Issuer, any Other Issuer, the Bond
Trustee (or any bond trustee of any Other Issuer), as the case may be, and the
Successor Servicer
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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 will provide that the Servicer shall 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.
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 such purchaser as a
party, such purchaser shall become a party to the Master Servicing Agreement, as
if originally named therein. The addition of any such purchaser shall not
require the consent of the Issuer or any Other Issuer under the Master Servicing
Agreement.
Governing Law
The Master Servicing Agreement will be governed by and construed under the
laws of the Commonwealth of Pennsylvania.
THE INDENTURE
The following summary describes certain terms of the Indenture pursuant to
which Transition Bonds will be issued. The form of the Indenture, including the
form of the Supplemental Indenture, has been filed as an exhibit to the
Registration Statement of which this Prospectus forms a part. This summary does
not purport to be complete and is subject to, and is qualified by reference to,
the provisions of the Indenture. See "PECO Energy Company" in this Prospectus.
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 pursuant to the
Indenture, the Issuer will grant 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: (i) the Transferred Intangible
Transition Property sold by the Seller to the Issuer from time to time pursuant
to the Sale Agreement and all proceeds thereof, (ii) the Sale Agreement (except
for certain provisions for indemnification of the Issuer), (iii) all bills of
sale delivered by the Seller pursuant to the Sale Agreement, (iv) the Master
Servicing Agreement (except for certain provisions for indemnification of the
Issuer), (v) the Collection Account and all amounts on deposit therein from time
to time, (vi) all other property of whatever kind owned from time to time by the
Issuer, which other property is not expected to be substantial, (vii) all
present and future claims, demands, causes and choses in action in respect of
any or all of the foregoing and (viii) 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.
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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 (a "Refunding Issuance"). The
aggregate principal amount of Transition Bonds that may be authenticated and
delivered under the Indenture may not exceed $4 billion plus the amount of any
Refunding Issuance. Any Series of Transition Bonds may include one or more
Classes which differ, among other things, as to interest rate and amortization
of principal. The terms of all Transition Bonds of the same Series will be
identical, unless such 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 thereof, will be set forth in the Supplemental Indenture for that
Series. The terms of such Series and any Classes thereof will not be subject to
prior review by, or consent of, the Transition Bondholders of any previously
issued Series. See "Risk Factors--The Transition Bonds--Effect of Additional
Series and Other Financings on Outstanding Transition Bonds," "The Transition
Bonds" and "PECO Energy Company" 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
occurred and is continuing, an opinion of counsel to the Issuer and evidence of
satisfaction of the Rating Agency Condition.
In addition, in connection with the issuance of the each new Series, the
Bond Trustee 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
Tangible Property or, if applicable, the most recent revised Intangible
Transition Charges with respect to the Transferred Intangible Tangible Property,
after giving effect to the issuance of such Series and the application of the
proceeds therefrom, such Intangible Transition Charges will be sufficient to pay
all fees and expenses, interest of each Series of Transition Bonds when due and
principal of each Series of Transition Bonds in accordance with the Expected
Amortization Schedule therefor and to fund the Calculated Overcollateralization
Level 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 will establish 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 will be divided into subaccounts, which need not be separate
bank accounts: the General Subaccount, one or more Series Subaccounts, the
Overcollateralization Subaccount, the Capital Subaccount, the Reserve Subaccount
and, 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
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Collection Account include all of the subaccounts contained therein. All monies
deposited from time to time in the Collection Account, all deposits therein
pursuant to the Indenture, and all investments made in Eligible Investments with
such monies, shall be held by the Bond Trustee in the Collection Account as part
of the Collateral.
"Eligible Institution" means (i) the corporate trust department of the Bond
Trustee or (ii) 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 either (A) a long-term unsecured debt rating of "AAA" by S&P and "A1" by
Moody's or (B) a certificate of deposit rating of "A-1+" by S&P and "P-1" by
Moody's, or any other long-term, short-term or certificate of deposit rating
acceptable to the Rating Agencies and (y) whose deposits are insured by the
Federal Deposit Insurance Corporation.
So long as no Default or Event of Default has occurred and is continuing,
all funds in the Collection Account shall be invested in, any of the following:
(i) direct obligations of, and obligations fully and unconditionally guaranteed
as to the timely payment by, the United States of America, (ii) demand deposits,
time deposits, certificates of deposit of certain depository institutions or
trust companies, (iii) commercial paper other than commercial paper issued by
the Seller or the Servicer having, at the time of investment, a rating in the
highest rating category from each Rating Agency, (iv) demand deposits, time
deposits and certificates of deposit which are fully insured by the Federal
Deposit Insurance Corporation, (v) money market funds which have the highest
rating from each Rating Agency (including funds for which the Bond Trustee or
any of its affiliates is investment manager or advisor), (vi) banker's
acceptances issued by any depository institution or trust company referred to in
clause (ii) above, (vii) repurchase obligations with respect to any security
that is a direct obligation of, or fully guaranteed by, the United States of
America or certain agencies or instrumentalities thereof, entered into with
certain depository institutions or trust companies, or (viii) any other
investment permitted by each Rating Agency (collectively, the "Eligible
Investments"); provided, however, that (i) any book-entry security, instrument
or security having a maturity of one month or less that would be an Eligible
Investment but for its failure (or the failure of the obligor thereon) to have
the rating specified above shall be an Eligible Investment if such book-entry
security, instrument or security (or the obligor thereon) has a long-term
unsecured debt rating of at least "A2" by Moody's (or the equivalent thereof by
the other Rating Agencies) or a short-term rating of at least "P-1" by Moody's
(or the equivalent thereof by the other Rating Agencies), and (ii) any
book-entry security, instrument or security having a maturity of greater than
one month that would be an Eligible Investment but for its failure (or the
failure of the obligor thereon) to have the rating specified above shall be an
Eligible Investment if such book-entry security, instrument or security (or the
obligor thereon) has a long-term unsecured debt rating of at least "A1" by
Moody's (or the equivalent thereof by the other Rating Agencies) and a
short-term rating of at least "P-1" by Moody's (or the equivalent thereof by the
other Rating Agencies). Such Eligible Investments may not: (i) mature later than
the Business Day prior to (x) with respect to funds in the General Subaccount,
the Overcollateralization Subaccount, the Capital Subaccount, the Reserve
Subaccount, the Loss Subaccount and the Interest Deposit Subaccount, the next
Monthly Allocation Date or (y) with respect to the funds in the Series
Subaccount for any Series, the next Payment Date for such Series, or (ii) be
sold, liquidated or otherwise disposed of at a loss prior to the maturity
thereof. No funds in the Defeasance Subaccount for any Series may be invested in
Eligible Investments or otherwise except that U.S. government obligations
deposited by the Issuer with the Bond Trustee to fund the defeasance of such
Series shall remain as such. No moneys held in the Collection Account shall be
invested, and no investment held in the Collection Account shall be sold, unless
the security interest granted and perfected in such account will continue to be
perfected in such investment or the proceeds of such sale in either case without
any further action by any person.
On each Remittance Date, the Servicer will remit all ITC Collections (from
whatever source) allocated to the Issuer pursuant to 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 not later
than the second Business Day after receipt thereof. In addition, the Bond
Trustee will deposit all Indemnity Amounts remitted to the Bond Trustee by the
Seller or the 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 shall 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. "Interest Deposit Amounts" means any amounts remitted by the Seller
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to the Bond Trustee in respect of interest payments pursuant to (i) a binding
agreement with the Issuer entered into by the Seller or an escrow arrangement
pursuant to the Sale Agreement. "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 certain willful misconduct, bad faith, gross negligence, or
reckless disregard of its obligations therein or the breach of certain
representations and warranties therein by the Seller. See "The Sale Agreement"
and "The Master Servicing Agreement" in this Prospectus.
General Subaccount. ITC Collections remitted by the Servicer to the Bond
Trustee, as well as Liquidated Damages and Indemnity Amounts remitted by the
Seller or the Servicer or otherwise received by the Bond Trustee or the Issuer,
shall be deposited in the General Subaccount. On each Monthly Allocation Date,
the Bond Trustee will draw on amounts in the General Subaccount to make the
allocations and payments described in "--Allocations and Payments" below.
Reserve Subaccount. ITC Collections available on any Monthly Allocation
Date above that necessary to pay (i) amounts payable in respect of fees and
expenses of the Bond Trustee and the Servicer andcertain other fees and
expenses, (ii) amounts distributable to Series Subaccounts in respect of
principal of and interest on each Series of Transition Bonds payable on the next
Payment Date therefor and (iii) amounts allocable to the Overcollateralization
Subaccount (all as described under "--Allocations and Payments" below) will be
allocated to the Reserve Subaccount. Amounts in the Reserve Subaccount will be
invested in Eligible Investments, and the Issuer will be entitled to earnings
thereon, subject to the limitations described under "--Allocations and Payments"
below. On each Monthly Allocation Date, the Bond Trustee will draw on amounts in
the Reserve Subaccount, if any, to the extent amounts available in the General
Subaccount, the Interest Deposit Subaccount (with respect to payments of
Interest) and the Loss Subaccount (with respect to payments contemplated by (i)
through (vii) in "--Allocations and Payments" below) are insufficient to make
scheduled distributions to the Series Subaccounts and pay expenses of the
Issuer, the Bond Trustee, the Servicer and certain other fees and expenses.
Overcollateralization Subaccount. ITC Collections to the extent available
as described under "--Allocation and Payments" will be 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 will be invested in Eligible Investments and
the Issuer will be entitled to earnings thereon, subject to the limitations
described under "--Allocations and Payments" below. On each Monthly Allocation
Date, the Bond Trustee will draw on amounts in the Overcollateralization
Subaccount to the extent amounts on deposit in the General Subaccount, the
Interest Deposit Subaccount (with respect to payments of Interest), the Loss
Subaccount (with respect to payments contemplated by (i) through (vii) in
"--Allocations and Payments" below) 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 certain other fees and
expenses. If any Series or Class of Transition Bonds has been retired 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. Upon the issuance of each Series of Transition Bonds,
the Seller will make a capital contribution in the amount of the Required
Capital Amount to the Issuer, and the Issuer will pay such amount to the Bond
Trustee for deposit into the Capital Subaccount which will be invested in
Eligible Investments, and the Issuer will be entitled to earnings thereon
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, Interest Deposit Subaccount
(with respect topayments of Interest), the Loss Subaccount (with respect to
payments contemplated by (i) through (vii) in "Allocations and Payments" below),
the Reserve Subaccount and the Overcollateralization 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 certain other fees and
expenses.
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If any Series or Class of Transition Bonds has been retired 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 will be established with respect to such Series. On each
Monthly Allocation Date, deposits will be made to each Series Subaccount as
described under "--Allocations and Payments" below. On each Payment Date, the
Bond Trustee will withdraw funds from the Series Subaccount to make payments on
the related Series of Transition Bonds. Any balance remaining in any Series
Subaccount on any Payment Date after payments have been made to Transition
Bondholders of the related Series will be 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 such
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 such 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 into which such 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 such amounts were deposited with the Bond Trustee, including all sums due
for principal, premium, if any, and interest. See "--Legal Defeasance and
Covenant Defeasance" below.
Allocations and Payments
On each Monthly Allocation Date, the Bond Trustee shall apply all amounts
on deposit in the General Subaccount of the Collection Account and any
investment earnings thereon in the following priority:
(i) all amounts owed to the Bond Trustee (including legal fees and
expenses, Indemnity Amounts and Loss Amounts) will be paid to the Bond
Trustee;
(ii) all amounts owed to the Issuer Trustee (including legal fees and
expenses, Indemnity Amounts and Loss Amounts) will be paid to the Issuer
Trustee;
(iii) the Monthly Servicing Fee and all unpaid Monthly Servicing Fees
from prior Monthly Allocation Dates will be paid to the Servicer;
(iv) so long as no Event of Default has occurred and is continuing or
would be caused by such payment, all operating expenses other than (i),
(ii) and (iii) above will be paid to the Persons entitled thereto, provided
that the amount paid on any Monthly Allocation Date pursuant to this clause
(iv) may not exceed $33,000 in the aggregate for all Series;
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(v) an amount equal to Interest with respect to each Series of
Transition Bonds for such Monthly Allocation Date will be transferred on a
Pro Rata basis to the Series Subaccount for such Series;
(vi) 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 will be transferred to the Series Subaccount for such
Series, taking into account amounts on deposit therein in respect of
Principal as of such Monthly Allocation Date;
(vii) an amount equal to Principal with respect to each Series of
Transition Bonds for such Monthly Allocation Date not provided for pursuant
to clause (vi) above will be transferred on a Pro Rata basis to the Series
Subaccount for such Series;
(viii) all unpaid operating expenses, Indemnity Amounts and Loss
Amounts will be paid to the Persons entitled thereto;
(ix) Overcollateralization with respect to all Series of Transition
Bonds for such Monthly Allocation Date will be transferred to the
Overcollateralization Subaccount;
(x) 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;
(xi) the balance, if any, will be allocated to the Reserve Subaccount;
and
(xii) 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.
If on any Monthly Allocation Date funds on deposit in the General
Subaccount are insufficient to make the allocations contemplated by clauses (i)
through (viii) 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 such
payments and transfers: (i) from the Interest Deposit Subaccount, with respect
to the payments or transfers contemplated by clause (v) above only, (ii) then
from the Loss Subaccount, with respect to the payments or transfers contemplated
by clauses (i) through (vii) above only, (iii) 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 (other than net income or other gain thereon, which,
so long as no Event of Default has occurred and is continuing, shall be released
to the Issuer free of the lien of the Indenture) will be applied as follows (in
the priority indicated): (i) interest due and payable on the Transition Bonds of
such Series, together with any overdue interest and, to the extent permitted by
law, interest thereon, will be paid to the holders of Transition Bonds of such
Series, (ii) the balance, if any, up to the principal amount of the Transition
Bonds of such Series that is scheduled to be paid by such Payment Date in
accordance with the Expected Amortization Schedule therefor or, with respect to
any Series of Transition Bonds
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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 such
Series and premium, if any, will be paid to the holders of Transition Bonds of
such Series and (iii) the balance, if any, will be transferred to the General
Subaccount for allocation on the next Monthly Allocation Date.
All payments to Transition Bondholders of a Series pursuant to clauses (i)
and (ii) of the preceding paragraph shall be made pro rata based on the
respective principal amounts of Transition Bonds of such Series held by such
Transition Bondholders, unless, in the case of a Series comprised of two or more
Classes, the applicable Supplemental Indenture for such Series specifies
otherwise. All payments to Transition Bondholders of a Class pursuant to clause
(i) or (ii) of the preceding paragraph shall be made pro rata based on the
respective principal amounts of Transition Bonds of such Class held by such
Transition Bondholders.
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 (the "Liquidated Damages Redemption Date"),
which date may not be more than ___ days after receipt of Liquidated Damages by
the Issuer, in the following amounts and priority:
(i) 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;
(ii) the Monthly Servicing Fee or the portion thereof 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;
(iii) all other operating expenses shall be paid to the Persons
entitled thereto;
(iv) the redemption price and accrued interest for each Series of
Transition Bonds shall be paid to Transition Bondholders of such Series;
and
(v) the balance, if any, will be released to the Issuer, free from the
lien of the Indenture.
Reports to Transition Bondholders
With respect to each Series of Transition Bonds, on or prior to each
Payment Date, the Bond Trustee will deliver a statement prepared by the Bond
Trustee to each Transition Bondholder of that Series which will include (to the
extent applicable) the following information (and any other information so
specified in the applicable Supplemental Indenture) as to the Transition Bonds
of such Series with respect to such Payment Date or the period since the
previous Payment Date, as applicable:
(i) the amount paid to such Transition Bondholders in respect of
principal;
(ii) the amount paid to such Transition Bondholders in respect of
interest;
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(iii) the Transition Bond Balance and the Projected Transition Bond
Balance, in such case for such Series and as of the most recent Payment
Date;
(iv) 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;
(v) the amount on deposit in the Capital Subaccount as of the most
recent Payment Date; and
(vi) the amount, if any, on deposit in the Reserve Subaccount as of
the most recent Payment Date.
Modification of Indenture
Without the consent of any of the holders of the outstanding Transition
Bonds 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:
(i) to correct or amplify the description of the Collateral, or better
to assure, convey and confirm unto the Bond Trustee the Collateral, or to
subject to the lien of the Indenture additional property;
(ii) 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;
(iii) 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 therein
conferred upon the Issuer;
(iv) to convey, transfer, assign, mortgage or pledge any property to
or with the Bond Trustee;
(v) 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 (i) such action shall not, as evidenced by an opinion of
counsel, adversely affect in any material respect the interests of any
Transition Bondholder and (ii) the Rating Agency Condition shall have been
satisfied with respect thereto;
(vi) 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, pursuant to
certain requirements of the Indenture;
(vii) to modify, eliminate or add to the provisions of the Indenture
to such extent as shall be necessary to effect the qualification of the
Indenture under the Trust Indenture
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Act or under any similar Federal statute hereafter enacted and to add to
the Indenture such other provisions as may be expressly required by the
Trust Indenture Act; or
(viii) to set forth the terms of any Series that has not theretofore
been authorized by a Supplemental Indenture.
Additionally, without the consent of any of the Transition Bondholders, 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, that (i) such action shall not, as evidenced by an
opinion of counsel, adversely affect in any material respect the interests of
any Transition Bondholder and (ii) the Rating Agency Condition shall have been
satisfied with respect thereto.
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 of any of the provision
of, the Indenture or modifying in any manner the rights of the Transition
Bondholders under the Indenture; provided, however, that no such Supplemental
Indenture shall, without the consent of the holder of each outstanding
Transition Bond of each Series or Class affected thereby:
(i) 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 thereof, the interest rate specified thereon or the
redemption price or the premium, if any, with respect thereto, change the
provisions of the Indenture and the related applicable Supplemental
Indenture relating to the application of collections on, or the proceeds of
the sale of, the Collateral to payment of principal of or 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
thereon is payable;
(ii) impair the right to institute suit for the enforcement of certain
provisions of the Indenture regarding payment;
(iii) reduce the percentage of the aggregate amount of the outstanding
Transition Bonds, or of a Series or Class thereof, the consent of the
holders of which is required for any such Supplemental Indenture, or the
consent of the holders of which is required for any waiver of compliance
with certain provisions of the Indenture or of certain defaults thereunder
and their consequences provided for in the Indenture;
(iv) 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;
(v) 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 therein or to
provide that certain 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 thereby.
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(vi) modify any of the provisions of the Indenture in such 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 Schedules or Series
Termination Dates or Class Termination Dates of any Transition Bonds;
(vii) decrease the Required Capital Amount with respect to any Series,
the Overcollateralization Amount or the Calculated Overcollateralization
Level with respect to any Payment Date;
(viii) 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; or
(ix) 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 certain other related
agreements; or
(x) 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 thereto or deprive the holder of any Transition Bond of the
security provided by the lien of the Indenture.
Enforcement of the Sale Agreement and Master Servicing Agreement
The Indenture will provide 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 the Seller 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 and the Seller or Servicer propose to amend,
modify, waive, supplement, terminate or surrender, or agree to any amendment,
modification, supplement, termination, waiver or surrender of, the process for
adjusting Intangible Transition Charges, the Issuer shall notify the Bond
Trustee and the Bond Trustee shall notify Transition Bondholders of such
proposal and the Bond Trustee shall consent thereto only with the consent of the
Holder of each Outstanding Transition Bond of each Series or Class affected
thereby.
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 amount of the
Transition Bonds of all Series shall, 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 such action shall be suspended.
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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, so long as the Rating Agency Condition is
satisfied in connection therewith, at any time and from time to time, without
the consent of the Transition Bondholders, provided that such amendment shall
not, as evidenced by an opinion of counsel, adversely affect the interest of any
Transition Bondholder or change the adjustment process for the Intangible
Transition Charges.
If the Issuer, the Seller or the Servicer proposes to amend, modify waive
supplement, terminate or surrender, or agree to any other amendment,
modification, waiver, supplement, termination or surrender of, the terms of the
Sale Agreement or the Master Servicing Agreement, or waive timely performance or
observance by the Seller or the Servicer under the Sale Agreement or Master
Servicing Agreement, respectively, in each case in such a way as would adversely
affect the interests of Transition Bondholders, the Issuer shall first notify
the Rating Agencies of the proposed amendment and, upon receiving notification
regarding the Rating Agency Condition, thereafter shall notify the Bond Trustee
and the Bond Trustee shall notify the Transition Bondholder of the proposed
amendment and whether the Rating Agency condition has been satisfied with
respect thereto. The Bond Trustee shall consent to such proposed amendment,
modification, supplement or waiver [only with the consent of the holders of a
majority of the outstanding amount of the Transition Bonds of each Series or
Class].
Events of Default; Rights Upon Event of Default
An "Event of Default" is defined in the Indenture as being:
(i) a default for five days or more in the payment of any interest on
any Transition Bond;
(ii) a default in the payment of the then unpaid principal of any
Transition Bond of any Series on the Series Termination Date for such
Series or, if applicable, any Class on the Class Termination Date for such
Class;
(iii) a default in the payment of the redemption price for any
Transition Bond on the redemption date therefor;
(iv) 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 (i), (ii) or (iii) above) and the continuation
of any such default for a period of thirty days after notice thereof 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 principal amount of the
Transition Bonds of any Series; and
(v) certain events of bankruptcy, insolvency, receivership or
liquidation of the Issuer.
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. Such declaration may, under certain
circumstances, be rescinded by the holders of a majority in principal amount of
all Series of the Transition Bonds then outstanding.
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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 therefor set in the related
Supplemental Indenture unless:
(i) the holders of 100% of the principal amount of all Series of
Transition Bonds consent thereto;
(ii) the proceeds of such 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
(iii) 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 such 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 all 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 such request. Subject to such
provisions for indemnification and certain 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, among other things:
(i) such direction shall not conflict with any rule of law or with the
Indenture;
(ii) subject to certain 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
(iii) the Bond Trustee may take any other action deemed proper by the
Bond Trustee that is not inconsistent with such direction.
The holders of a majority in principal amount of the Transition Bonds of
all Series then outstanding may, in certain cases, waive any default with
respect thereto, 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 Competition Act, with respect to the Indenture,
unless:
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(i) such holder previously has given to the Bond Trustee written
notice of a continuing Event of Default;
(ii) the holders of not less than 25% in principal amount of the
outstanding Transition Bonds of all Series have made written request of the
Bond Trustee to institute such proceeding in its own name as Bond Trustee;
(iii) such 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 such request;
(iv) the Bond Trustee for 60 days after its receipt of such notice,
request and offer has failed to institute such proceeding; and
(v) no direction inconsistent with such written request has been given
to the Bond Trustee during such 60-day period by the holders of a majority
in principal amount of the outstanding Transition Bonds of all Series.
Certain 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:
(i) the entity formed by or surviving such consolidation or merger or
to whom substantially all of such assets are sold is organized under the
laws of the United States or any state thereof 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;
(ii) such entity expressly assumes all obligations and succeeds to all
rights of the Issuer under the Sale Agreement and the Master Servicing
Agreement pursuant to an assignment and assumption agreement executed and
delivered to the Bond Trustee;
(iii) no default or Event of Default will have occurred and be
continuing immediately after giving effect such merger, consolidation or
sale;
(iv) the Rating Agency Condition will have been satisfied with respect
to such consolidation or merger or sale;
(v) the Issuer has received an opinion of counsel to the effect that
such consolidation or merger or sale of assets would have no material
adverse tax consequence to the Issuer or any Transition Bondholder, such
consolidation or merger or sale complies with the Indenture and all
conditions precedent therein provided relating to such consolidation or
merger or sale and will result in the Bond Trustee maintaining a continuing
valid first priority security interest in the Collateral;
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(vi) none of the Intangible Transition Property, the QRO or PECO
Energy's, the Seller's, the Servicer's or the Issuer's rights under the
Competition Act or the QRO are impaired thereby; and
(vii) 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 such documents, make
all filings and take any other action necessary or advisable to, among other
things, maintain and preserve the lien and security interest (and priority
thereof) 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
thereof or any interest therein or the proceeds thereof, or permit the lien of
the Indenture not to constitute a continuing valid first priority security
interest in the Collateral.
The Issuer may not, among other things:
(i) 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
(ii) 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 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 thereto.
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. The Issuer may not, except as
contemplated by the Indenture, the Sale Agreement, the Master Servicing
Agreement and certain 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 pursuant to, 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 such beneficial
interest, except in accordance with the Indenture.
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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 will be 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 shall 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 certain
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 such Series or upon the Expected Final Payment Date or the
date of redemption therefor, provided that the Issuer has deposited funds
sufficient for the payment in full of all of the Transition Bonds of such Series
with the Bond Trustee and the Issuer has delivered to the Bond Trustee the
officer's certificate and opinion of counsel specified in the Indenture. Such
deposited funds will be segregated and held apart solely for paying such
Transition Bonds, and such Transition Bonds shall not be entitled to any amounts
on deposit in the Collection Account other than amounts on deposit in the
Defeasance Subaccount for such Transition Bonds.
Legal Defeasance and Covenant Defeasance
The Issuer may, at any time, terminate (i) all of its obligations under the
Indenture with respect to the Transition Bonds of any Series ("Legal Defeasance
Option") or (ii) its obligations to comply with certain covenants, including
certain of the covenants described under "The Indenture--Certain Covenants" (the
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"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 such Series.
If the Issuer exercises the Legal Defeasance Option with respect to any
Series, such Series of Transition Bonds shall be entitled to payment only from
the funds or other obligations set aside under the Indenture for payment thereof
on the Expected Final Payment Date or redemption date therefor as described
below. Such Series of Transition Bonds shall not be subject to payment through
redemption or acceleration prior to such Expected Final Payment Date or
redemption date, as applicable. If the Issuer exercises the Covenant Defeasance
Option with respect to any Series, the final payment of the Transition Bonds of
such 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:
(i) 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 such Transition Bonds
to the Expected Payment Date or redemption date therefor, as applicable,
such deposit to be made in the Defeasance Subaccount for such Series of
Transition Bonds;
(ii) 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 such times and in such amounts as will be
sufficient to pay in respect of the Transition Bonds of such Series:
(x) principal in accordance with the Expected Amortization
Schedule therefor, or if such Series is to be redeemed, the redemption
price of such redemption on the redemption date therefor, and
(y) interest when due;
(iii) 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;
(iv) no default has occurred and is continuing on the day of such
deposit and after giving effect thereto;
(v) 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;
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in either case to the effect that, and based thereon such opinion shall
confirm that, the holders of the Transition Bonds of such Series will not
recognize income, gain or loss for federal income tax purposes as a result
of the exercise of such 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 such Legal Defeasance had not
occurred;
(vi) 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 such Series will not recognize income,
gain or loss for federal income tax purposes as a result of the exercise of
such 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 such Covenant Defeasance had not occurred; and
(vii) 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 such Series have been complied with as required by the
Indenture.
There will be no other conditions to the exercise by the Issuer of its
Legal Defeasance Option or its Covenant Defeasance Option.
"U.S. Government Obligations" means direct obligations (or certificates
representing an ownership interest in such obligations) of the United States of
America (including any agency or instrumentality thereof) 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.
The Bond Trustee
The Bank of New York will be 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 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 Bond Trustee shall at all times satisfy the requirements of the Trust
Indenture Act 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. 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.
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Governing Law
The Indenture will be governed by and construed under the laws of the
Commonwealth of Pennsylvania.
MATERIAL TAX MATTERS
Material U.S. Federal Income Tax Considerations
In the opinion of Ballard Spahr Andrews & Ingersoll, LLP, special tax
counsel to PECO Energy ("Tax Counsel"), the following are the material United
States federal income tax consequences of the purchase, ownership and
disposition of Transition Bonds. This summary deals only with initial purchasers
of Transition Bonds where such Transition Bonds are held as capital assets
within the meaning of Section 1221 of the Code. It does not address all of the
tax consequences that may be relevant to a particular holder of Transition Bonds
in light of the holder's personal circumstances, or to certain types of holders,
such as certain financial institutions, dealers in securities or commodities,
insurance companies, regulated investment companies, personal holding companies,
corporations subject to the alternative minimum tax, tax-exempt organizations or
persons who hold Transition Bonds as positions in a "straddle" or as part of a
"hedging," "conversion" or "constructive sale" transaction for United States
federal income tax purposes, or persons whose functional currency is not the
United States dollar. This summary is based on the Code, Treasury regulations
thereunder and administrative and judicial interpretations thereof, as of the
date hereof, all of which are subject to change. Prospective purchasers should
particularly note that any such change could have retroactive application to
Transitions Bonds acquired through this offering. This summary also generally
does not address the consequences to Transition Bondholders under state, local
and foreign tax laws or the tax consequences to subsequent holders. Except to
the extent discussed below under "--Taxation of Foreign Transition Bondholders,"
this discussion may not apply to foreign persons who are not subject to United
States federal income tax on a net income basis.
For purposes of the discussion below, "United States Person" means (i) a
citizen or resident of the United States, (ii) a corporation, partnership or
other specified entity created or organized in or under the laws of the United
States, or any state or any political subdivision thereof, (iii) an estate the
net income of which is subject to United States federal income taxation
regardless of its source or (iv) a trust (x) over the administration of which a
court within the United States is able to exercise primary supervision and (y)
all substantial decisions of which one or more United States Persons have the
authority to control, and "Foreign Person" means a person other than a United
States Person.
IT IS RECOMMENDED THAT ALL PROSPECTIVE INVESTORS CONSULT THEIR TAX ADVISERS
REGARDING THE FEDERAL INCOME TAX CONSEQUENCES OF THE OWNERSHIP AND DISPOSITION
OF TRANSITION BONDS IN LIGHT OF THEIR PARTICULAR CIRCUMSTANCES, AS WELL AS THE
EFFECT OF ANY FOREIGN, STATE, LOCAL OR OTHER LAWS.
Tax Status of the Trust and of the Transition Bonds
The Issuer is a wholly owned subsidiary of PECO Energy which has not
elected to be taxed as a corporation for federal income tax purposes. Tax
Counsel has advised PECO Energy that, as such, the Issuer will be treated as a
division of PECO Energy and will not be treated as a separate taxable entity.
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PECO Energy has received a ruling from the Internal Revenue Service
regarding certain aspects of the transactions described in this Prospectus, upon
which Tax Counsel has relied in preparing this section. The Internal Revenue
Service ruled that (i) the issuance of the QRO by the PUC would not result in
the recognition of gross income by PECO Energy, and (ii) the Transition Bonds
would be classified as obligations of PECO Energy.
Taxation of United States Transition Bondholders
For federal income tax purposes, the transactions described in this
Prospectus will be treated as a loan by the holders of the Transition Bonds to
PECO Energy secured by a pledge of the Collateral. Accordingly, each holder of
Transition Bonds that is a United States Person will be required to include in
income, in accordance with its usual method of accounting, the portion of the
stated interest attributable to the Transition Bonds during the period the
Transition Bonds are held by the holder. A Transition Bondholder who uses the
accrual method of accounting may be required to accrue and pay tax on interest
income prior to the receipt of such income. Tax Counsel is of the opinion that
the holder of Transition Bonds will not be required to include in taxable income
from the Issuer any original issue discount ("OID") income, assuming that the
Transition Bonds are issued at or very close to par value.
A holder of Transition Bonds that is a United States Person will recognize
capital gain or loss upon the sale or exchange of a Transition Bond equal to the
difference between the amount realized from such sale or exchange (exclusive of
any portion thereof reflecting accrued but unpaid interest, which is taxable as
ordinary income) and its tax basis in the Transition Bond. A Transition
Bondholder that is a United States Person will have a tax basis in a Transition
Bond equal to the Transition Bondholder's purchase price for such Transition
Bond (exclusive of any portion thereof representing accrued but unpaid
interest), decreased by any principal repayments. Capital gain recognized by an
individual who is a United States Person generally will be subject to a maximum
United States federal income tax rate of (i) 39.6% if the United States Person
held the Transition Bond for not more than one year before sale or (ii) 20% if
the United States Person held the Transition Bond for more than one year.
Information Reporting and Backup Withholding
The Bond Trustee or other responsible person will be required to report
annually to the Internal Revenue Service, and to each holder of Transition Bonds
of record, certain information, including the name, address and taxpayer
identification number of the holder, the aggregate amount of principal and
interest paid and the amount of tax withheld, if any. This obligation, however,
does not apply with respect to certain United States Persons, including
corporations, tax-exempt organizations, qualified pension and profit-sharing
trusts and individual retirement accounts.
In the event a United States Person subject to the reporting requirements
described above fails to supply its correct taxpayer identification number in
the manner required by applicable law or underreports itstax liability, the
Issuer or its agents may be required by the Internal Revenue Service to withhold
United States federal income tax equal to 31% of each payment of principal and
interest on the Transition Bonds. This backup withholding is not an additional
tax and will be credited against the Transition Bondholder's United States
federal income tax liability, provided that certain required information is
furnished to the Internal Revenue Service.
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Taxation of Foreign Transition Bondholders
Payments of interest income received by a Transition Bondholder that is a
Foreign Person generally will not be subject to United States federal
withholding tax, provided that the Foreign Person complies with the requirements
listed below.
Payments of interest income on the Transition Bonds received by a Foreign
Person on or prior to December 31, 1999, will not be subject to United States
federal withholding tax (or to backup withholding and information reporting),
provided that (i) the Foreign Person does not actually or constructively own 10%
or more of the total combined voting power of all classes of stock of PECO
Energy entitled to vote, (ii) the Foreign Person is not a controlled foreign
corporation that is related to PECO Energy through stock ownership, and (iii)
either (x) the beneficial owner of the Transition Bonds, under penalties of
perjury, provides PECO Energy or its paying agent with its name and address and
certifies that it is not a United States Person or (y) a securities clearing
organization, bank or other financial institution that holds customers'
securities in the ordinary course of its trade or business (a "Financial
Institution") certifies to PECO Energy or its paying agent, under penalties of
perjury, that such a statement has been received from the beneficial owner by it
or another Financial Institution and furnishes to PECO Energy or its agent a
copy thereof. Backup withholding and information reporting also generally will
not apply to payments of interest on or prior to December 31, 1999, if the
certification described above is received, provided that the payor does not have
actual knowledge that the Transition Bondholder is a United States Person.
Payments of interest income on the Transition Bonds received by a Foreign
Person after December 31, 1999, will not be subject to United States federal
withholding tax (or to backup withholding and information reporting) provided
that requirements (i) and (ii) of the preceding paragraph are satisfied and, in
general, PECO Energy or its paying agent has received (i) appropriate
documentation to treat the payment as made to a foreign beneficial owner under
Treasury regulations issued under Section 1441 of the Code, (ii) a withholding
certificate from a person claiming to be a foreign partnership and the foreign
partnership has received appropriate documentation to treat the payment as made
to a foreign beneficial owner in accordance with such Treasury regulations,
(iii) a withholding certificate from a person representing to be a "qualified
intermediary" that has assumed primary withholding responsibility under such
Treasury regulations and the qualified intermediary has received appropriate
documentation from a foreign beneficial owner in accordance with its agreement
with the Internal Revenue Service, or (iv) a statement, under penalties of
perjury from an authorized representative of a Financial Institution, stating
that the Financial Institution has received from the beneficial owner a
withholding certificate described in such Treasury regulations or that it has
received a similar statement from another Financial Institution acting on behalf
of the foreign beneficial owner. In general, it will not be necessary for a
Transition Bondholder that is a Foreign Person to obtain or furnish a United
States taxpayer identification number to PECO Energy or its paying agent in
order to claim any of the foregoing exemptions from United States withholding
tax on payments of interest.
Interest paid to a holder of Transition Bonds that is a Foreign Person will
be subject to a United States withholding tax of 30% upon the actual payment of
interest income, except as described above and except where an applicable tax
treaty provides for the reduction or elimination of such withholding tax. A
Transition Bondholder that is a Foreign Person generally will be taxable in the
same manner as a United States corporation or resident with respect to interest
income if such income is effectively connected with the conduct of a trade or
business in the United States. Such effectively connected income received by a
Foreign Person that is a corporation may in certain circumstances be subject to
an additional "branch profits tax" at a 30% rate, or if applicable, a lower
treaty rate.
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A Transition Bondholder that is a Foreign Person generally will not be
subject to United States federal income or withholding tax on gain realized on
the sale or exchange of Transition Bonds, unless (i) the Foreign Person is an
individual who is present in the United States for 183 days or more during the
taxable year and as to whom such gain is from United States sources or (ii) the
gain is effectively connected with a United States trade or business of the
Foreign Person.
The payment of the proceeds of the sale of Transition Bonds to or through
the United States office of a broker will be subject to information reporting
and possible backup withholding at a rate of 31% unless the owner certifies its
non-United States status under penalties of perjury or otherwise establishes an
exemption in accordance with applicable Treasury regulations. The payment of the
proceeds of the sale of Transition Bonds to or through the foreign office of a
broker generally will not be subject to this backup withholding tax. However, in
the case of the payment of proceeds from the disposition of Transition Bonds
through a foreign office of a broker that is a United States Person or a "United
States related person," the applicable Treasury regulations require information
reporting on the payment unless the broker has documentary evidence in its files
that the owner is a Foreign Person and the broker has no actual knowledge to the
contrary. For this purpose, a "United States related person" is (i) a
"controlled foreign corporation" for United States federal income tax purposes,
or (ii) a Foreign Person 50% or more of whose gross income from all sources for
a specified period is derived from activities that are effectively connected
with the conduct of a United States trade or business. Any amounts withheld
under the backup withholding rules from a payment to a Foreign Person will be
allowed as a refund or a credit against such Foreign Person's United States
federal income tax, provided that the required information is furnished to the
Internal Revenue Service.
Material State Tax Matters
In the opinion of Tax Counsel, interest from Transition Bonds received by a
person who is not otherwise subject to corporate or personal income or
intangible personal property tax in the Commonwealth will not be subject to such
taxes. Neither the Commonwealth nor any of its political subdivisions presently
impose intangible personal property taxes and therefore Commonwealth residents
will not be subject to such taxes.
ERISA CONSIDERATIONS
ERISA and/or Section 4975 of the Code impose certain requirements on
employee benefit plans and certain other plans and arrangements, including
individual retirement accounts and annuities, Keogh plans and certain collective
investment funds or insurance company general or separate accounts in which such
plans, accounts or arrangements are invested, that are subject to the fiduciary
responsibility and prohibited transaction provisions of ERISA and/or Section
4975 of the Code (collectively, "Plans"), and on persons who are fiduciaries
with respect to Plans, in connection with the investment of assets that are
treated as "plan assets" of any Plan for purposes of applying Title I of ERISA
and Section 4975 of the Code ("Plan Assets"). ERISA imposes on Plan fiduciaries
certain general fiduciary requirements, including those of investment prudence
and diversification and the requirement that a Plan's investments be made in
accordance with the documents governing the Plan. Generally, any person who has
discretionary authority or control respecting the management or disposition of
Plan Assets, and any person who provides investment advice with respect to Plan
Assets for a fee or other consideration, is a fiduciary with respect to such
Plan Assets.
114
<PAGE>
ERISA and Section 4975 of the Code prohibit a broad range of transactions
involving Plan Assets and persons who have certain specified relationships to a
Plan or its Plan Assets ("parties in interest" under ERISA and "disqualified
persons" under the Code (collectively, "Parties in Interest")), unless a
statutory or administrative exemption is available. Parties in Interest and Plan
fiduciaries that participate in a prohibited transaction may be subject to
penalties imposed under ERISA and/or excise taxes imposed pursuant to Section
4975 of the Code, unless a statutory or administrative exemption is available.
These prohibited transactions generally are set forth in Section 406 of ERISA
and Section 4975 of the Code.
Any fiduciary or other Plan investor considering whether to purchase the
Transition Bonds of any Class or Series on behalf of or with Plan Assets of any
Plan should consult with its legal advisors and refer to the related Prospectus
Supplement for guidance regarding the ERISA Considerations applicable to the
Transition Bonds offered thereby.
Certain employee benefit plans, such as governmental plans (as defined in
Section 3(32) of ERISA) and certain church plans (as defined in Section 3(33) of
ERISA), are not subject to the requirements of ERISA or Section 4975 of the
Code. Accordingly, assets of such plans may be invested in the Transition Bonds
of any Class or Series without regard to the ERISA considerations described in
this Section, subject to the provisions of other applicable federal and state
law and subject to the possibility that the applicable Prospectus Supplement
will provide alternate rules as specified in such Prospectus Supplement.
However, any such plan that is qualified and exempt from taxation under Sections
401(a) and 501(a) of the Code is subject to the prohibited transaction rules set
forth in Section 503 of the Code.
PLAN OF DISTRIBUTION
The Transition Bonds of each Series may be sold to or through underwriters
named in the related Prospectus Supplement (the "Underwriters") by a negotiated
firm commitment underwriting and public reoffering by the Underwriters or such
other underwriting arrangement as may be specified in the related Prospectus
Supplement or may be offered or placed either directly or through agents. The
Issuer and the Bond Trustee intend that Transition Bonds will be offered through
such various methods from time to time and that offerings may be made
concurrently through more than one of such methods or that an offering of a
particular Series of Transition Bonds may be made through a combination of such
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 such
prevailing market prices or in negotiated transactions or otherwise at varying
prices to be determined at the time of sale.
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 certain dealers at prices less a
concession. Underwriters may allow, and such dealers may reallow, a concession
to certain 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. Any such
Underwriters or agents will be identified, and any such compensation received
from the Issuer will be described, in the related Prospectus Supplement.
115
<PAGE>
Under agreements which may be entered into by the Seller, the Issuer and
the Bond Trustee, Underwriters and agents who participate in the distribution of
the Transition Bonds may be entitled to indemnification by the Seller and the
Issuer against certain liabilities, including under the Securities Act.
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 thereafter. If a rating of any Class of
Transition Bonds is revised or withdrawn, the liquidity of such 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 Transaction Bonds by the applicable Series Termination Date or Class
Termination Date.
LEGAL MATTERS
Certain 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. Certain 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. Certain
legal matters relating to the federal and state tax consequences of the issuance
of the Transition Bonds will be passed upon for the Issuer by Ballard Spahr
Andrews & Ingersoll, LLP.
116
<PAGE>
INDEX OF PRINCIPAL DEFINITIONS
Set forth below is a list of defined terms used in this Prospectus and defined
herein and the pages on which the definitions may be found.
TERM PAGE
---- ----
Adjustment Date..........................................................11
Adjustment Request.......................................................11
Annual Accountant's Report...............................................89
Basic Documents..........................................................83
Beneficiary Trustees.....................................................68
Bond Rate................................................................13
Bond Trustee..............................................................1
Book-Entry Transition Bonds..............................................73
Business Day.............................................................14
Calculated Overcollateralization Level...................................14
Calculation Date.........................................................11
CAP Rate Program.........................................................64
Capital Subaccount.......................................................15
Cede......................................................................4
CEDEL....................................................................73
CEDEL Participants.......................................................75
Class.....................................................................1
Class Termination Date....................................................4
Code.....................................................................23
Collateral................................................................1
Collection Account.......................................................14
Collection Period........................................................23
Commonwealth.............................................................12
Commonwealth Court.......................................................42
Competition Act...........................................................1
Competitive Default Service..............................................46
Competitive Default Supplier.............................................46
Competitive Transition Charges...........................................43
Cooperative..............................................................75
Covenant Defeasance Option..............................................106
Customer.................................................................12
Customer Category........................................................12
De Minimis Loss Amount...................................................21
Defeasance Subaccount....................................................15
Delaware Trustee.........................................................68
Depositaries.............................................................73
DTC.......................................................................4
Eastern District Court...................................................42
electric distribution companies...........................................8
electric generation suppliers.............................................8
Eligible Institution.....................................................94
117
<PAGE>
Eligible Investments.....................................................94
ERISA....................................................................23
Euroclear................................................................73
Euroclear Operator.......................................................75
Euroclear Participants...................................................75
Event of Default........................................................102
Exchange Act..............................................................3
Expected Amortization Schedule...........................................13
Expected Final Payment Date..............................................20
Final Order..............................................................26
Financial Institution...................................................111
Financing Issuance.......................................................93
Foreign Person..........................................................109
Fumo Action..............................................................52
General Subaccount.......................................................14
H.R. 1230................................................................27
Indemnity Amounts........................................................15
Indenture.................................................................1
Independent Trustee......................................................68
Initial Intangible Transition Property...................................79
Initial Loss Calculation Date............................................21
Initial Transfer Date....................................................78
Insolvency Laws..........................................................91
Intangible Transition Charges.............................................1
Intangible Transition Property............................................1
Interest.................................................................19
Interest Deposit Amounts.................................................95
Interest Deposit Subaccount..............................................15
IP&L.....................................................................26
Issuer....................................................................1
Issuer Trustee............................................................9
ITC Collections..........................................................10
Joint Petition...........................................................42
Legal Defeasance Option.................................................106
Liquidated Damages.......................................................21
Liquidated Damages Payment Date..........................................83
Liquidated Damages Redemption Date.......................................98
Loss Amounts.............................................................95
Loss Subaccount..........................................................15
Master Servicing Agreement................................................1
Monthly Allocated Interest Balance.......................................19
Monthly Allocated Overcollateralization Balance..........................20
Monthly Allocated Principal Balance......................................19
Monthly Allocation Date..................................................14
Monthly Servicing Fee....................................................23
Moody's..................................................................22
OID.....................................................................110
Other Issuer.............................................................78
118
<PAGE>
Overcollateralization....................................................19
Overcollateralization Amount.............................................14
Overcollateralization Subaccount.........................................14
Participants.............................................................73
Parties in Interest.....................................................112
Payment Date..............................................................4
PECO Energy...............................................................1
Percentage...............................................................78
Plan Assets.............................................................112
Plans...................................................................112
Principal................................................................19
Prior Trust Agreement....................................................68
Pro Rata.................................................................19
Projected Transition Bond Balance........................................11
Prospectus Supplement.....................................................1
PUC.......................................................................1
PUC Restructuring Order..................................................42
QRO.......................................................................1
Qualified Transition Expenses.............................................8
Rate BLI.................................................................55
Rate Class...............................................................12
Rate EP..................................................................55
Rate GS..................................................................54
Rate HT..................................................................55
Rate OP..................................................................54
Rate PD..................................................................55
Rate POL.................................................................54
Rate R...................................................................54
Rate R-H.................................................................54
Rate SL-E................................................................55
Rate SL-P................................................................55
Rate SL-S................................................................55
Rate TL..................................................................55
Rating Agency.............................................................4
Rating Agency Condition...................................................4
Record Date..............................................................13
Refunding Issuance.......................................................93
Registration Statement....................................................3
Remittance Date..........................................................22
Required Capital Amount..................................................16
Reserve Subaccount.......................................................14
Restructuring Plan.......................................................26
Rules....................................................................75
S&P......................................................................22
Sale Agreement............................................................1
SEC.......................................................................3
Securities Act............................................................3
Seller....................................................................1
Series....................................................................1
119
<PAGE>
Series Issuance Date......................................................1
Series Subaccount........................................................14
Series Termination Date...................................................4
Serviced Intangible Transition Property...................................1
Servicer..................................................................1
Servicer Defaults........................................................91
Settlement...............................................................26
Stranded Costs............................................................8
Subsequent Intangible Transition Property................................79
Subsequent Sale..........................................................78
Subsequent Transfer Date.................................................78
Successor Servicer.......................................................92
Supplemental Indenture...................................................70
Tax Counsel.............................................................109
Terms and Conditions.....................................................76
Transferred Intangible Transition Property................................1
Transition Bond Balance..................................................11
Transition Bondholder.....................................................4
Transition Bonds..........................................................1
Trust Agreement..........................................................68
Trustees.................................................................68
U.S. Government Obligations.............................................108
Underwriters............................................................113
Union Action.............................................................52
United States Person....................................................109
United States related person............................................112
Winter Moratorium........................................................65
120
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Page
----
Consolidated Financial Statements:
Report of Independent Public 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
<PAGE>
Report of Independent Accountants
To the Trustees
PECO Energy Transition Trust
Wilmington, Delaware:
We have audited the accompanying statement of net assets available for trust
activities of PECO Energy Transition Trust (PETT) as of June 26, 1998, and the
related statement of changes in net assets available for trust activities for
the period from June 23, 1998 (date of trust inception) to June 26, 1998. These
financial statements are the responsibility of PETT. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the net assets available for trust activities as of June
26, 1998, and the changes in net assets available for trust activities for the
period from June 23, 1998 to June 26, 1998 in conformity with generally accepted
accounting principles.
Coopers & Lybrand L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
June 26, 1998
F-2
<PAGE>
PECO Energy Transition Trust
Statement of Net Assets Available for Trust Activities
June 26, 1998
ASSETS
------
Cash $ 5,000
Unamortized debt issuance costs 930,295
---------
Total Assets 935,295
=========
LIABILITIES
-----------
Due to related party (See Note 4) 930,295
---------
Total Liabilities 930,295
=========
Net Assets Available for Trust Activities $ 5,000
=========
See Notes to Financial Statements.
F-3
<PAGE>
PECO Energy Transition Trust
Statement of Changes in Net Assets Available for Trust Activities
For the period from June 23, 1998 (date of trust inception) to June 26, 1998
<TABLE>
<S> <C>
Additions:
Contribution by Trust Grantor $ 5,000
Deductions:
----------
Changes in Net Assets Available for Trust Activities 5,000
Net Assets Available for Trust Activities at Inception June 23, 1998 --
----------
Net Assets Available for Trust Activities at June 26, 1998 $ 5,000
==========
</TABLE>
See Notes to Financial Statements.
F-4
<PAGE>
PECO Energy Transition Trust
Notes to Financial Statements
1. 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,
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 a national
provider of electric and natural gas services.
PETT was organized for the limited purpose of purchasing and owning the
Intangible Transition Property (ITP), issuing Transition Bonds (Bonds), pledging
its interest in ITP and other collateral to the bond trustee to secure the
transition bonds, and performing activities that are necessary, suitable or
convenient to accomplish these purposes. ITP represents the irrevocable right of
PECO Energy, or its successor or assignee, to collect a non-by-passable
Intangible Transition Charge (ITC) from customers pursuant to a Qualified Rate
Order (QRO) issued May 14, 1998 by the Pennsylvania Public Utility Commission
(PUC) in accordance with the Pennsylvania Electricity Generation Customer Choice
and Competition Act ("applicable law") enacted in Pennsylvania in December 1996.
The QRO authorizes the ITC to be sufficient to recover $4 billion of the
stranded costs and an amount sufficient to recover the aggregate principal
amount of Bonds, plus an amount sufficient to provide for any credit
enhancement, to fund any reserves and to pay interest, redemption premiums, if
any, servicing fees and other expenses relating to the Bonds.
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 as both PECO Energy and
PETT will treat the transfer of ITP to PETT as a sale under applicable law. The
Bonds will be treated as debt obligations of PETT.
For financial reporting 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 as a sale. Furthermore, the results of operations
of PETT will be consolidated with PECO Energy for financial and income tax
reporting purposes.
2. Significant Accounting Policies
Basis of Presentation
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions. These estimates and assumptions affect the reported amount of
revenues, expenses, assets, and liabilities and disclosure of contingencies.
Actual results could differ from these estimates.
Cash and Cash Equivalents
PETT considers all liquid debt instruments purchased with a maturity of
three months or less to be cash equivalents.
F-5
<PAGE>
Notes to Financial Statements, Continued
Unamortized Debt Issuance Costs
The costs associated with the anticipated issuance of the Bonds have been
capitalized and will be amortized over the life of the Bonds.
Income Taxes
PETT is a wholly owned subsidiary of PECO Energy which has not elected to
be taxed as a corporation for federal income tax purposes. PETT will be treated
as a division of PECO Energy and will not be treated as a separate taxable
entity.
3. The Bonds
The purpose of PETT is to issue Bonds pursuant to authority granted by the
PUC in the QRO. PETT intends to issue Bonds in series (Series) from time to
time, the maturities and interest rates of which will depend upon market
conditions at the time of issuance. The proceeds will be used to fund the
purchase of ITP from PECO Energy. The Bonds will be secured by the ITP and other
assets of PETT. Under applicable law, the Bonds will not be an obligation of
PECO Energy or secured by the assets of PECO Energy. Also under applicable law,
the Bonds will be recourse to PETT and will be secured on a pari passu basis by
the ITP and the equity and assets of PETT. The source of repayment will be the
ITC authorized pursuant to a QRO, which charges will be collected from PECO
Energy customers by PECO Energy, as servicer.
ITC collections will be deposited monthly by PECO Energy with PETT and used
to pay the expenses of PETT, debt service on the Bonds and fund credit
enhancement for the Bonds. PETT will also pledge the capital contributed by PECO
Energy to secure the Bonds satisfying the debt service requirements. The debt
service requirements will include an Overcollateralization Account, an Equity
Reserve Account and an Overcollections Reserve Account which will be available
to bond holders. Any amounts securing the Bonds will be returned to PETT upon
payment of the Bonds.
4. Significant Agreements and Related Party Transactions
Under the Master Servicing Agreement to be entered into by PETT and PECO
Energy concurrently with the issuance of the first Series of Bonds, PECO Energy,
the servicer, will be required to manage and administer the ITP of PETT and to
collect the ITC on behalf of PETT. PETT shall pay an annual servicing fee equal
to a percentage of the outstanding principal amount of the Bonds, which will be
determined when the Bonds are issued.
All debt issuance costs incurred to date have been or will be paid by PECO
Energy and reimbursed by PETT upon issuance of the Bonds.
F-6
<PAGE>
No person has been authorized to give any information or to make any
representations other than those contained in this Prospectus Supplement or the
Prospectus in connection with the offer contained in this Prospectus Supplement
and the Prospectus, and, if given or made, such other information or
representations must not be relied upon as having been authorized by the Issuer
or by any of the Underwriters. Neither the delivery of this Prospectus
Supplement and the Prospectus nor any sale made thereunder will, under any
circumstances create any implication that there has been no change in the
affairs of the Issuer since the date of this Prospectus Supplement. This
Prospectus Supplement and the Prospectus do not constitute an offer or
solicitation by anyone in any state in which such offer or solicitation is not
authorized or in which the person making such offer or solicitation is not
qualified to do so or to anyone to whom it is unlawful to make such offer or
solicitation. The delivery of this Prospectus Supplement and the accompanying
Prospectus at any time does not imply that information herein or therein is
correct as of any time subsequent to its date; however, if any material change
occurs while this Prospectus Supplement or the accompanying Prospectus is
required by law to be delivered, this Prospectus Supplement or the accompanying
Prospectus will be amended or supplemented accordingly.
TABLE OF CONTENTS
Prospectus Supplement
REPORTS TO TRANSITION BONDHOLDERS.......................................... S-1
SUMMARY OF TERMS........................................................... S-2
THE SERIES ___ BONDS....................................................... S-7
DESCRIPTION OF INTANGIBLE TRANSITION PROPERTY..............................S-13
DESCRIPTION OF THE SELLER'S BUSINESS.......................................S-16
SERVICING..................................................................S-22
MATERIAL TAX MATTERS.......................................................S-22
ERISA CONSIDERATIONS.......................................................S-23
UNDERWRITING...............................................................S-24
RATINGS....................................................................S-25
INDEX OF PRINCIPAL DEFINITIONS.............................................S-26
Prospectus
AVAILABLE INFORMATION........................................................ 2
REPORTS TO TRANSITION BONDHOLDERS............................................ 3
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE.............................. 3
PROSPECTUS SUPPLEMENT........................................................ 3
PROSPECTUS SUMMARY........................................................... 7
RISK FACTORS.................................................................24
PECO ENERGY COMPANY..........................................................38
THE COMPETITION ACT..........................................................39
PECO ENERGY'S RESTRUCTURING PLAN.............................................41
THE QRO AND THE INTANGIBLE TRANSITION CHARGES................................47
LITIGATION...................................................................52
THE SELLER AND SERVICER......................................................54
THE ISSUER...................................................................69
USE OF PROCEEDS..............................................................71
THE TRANSITION BONDS.........................................................71
CERTAIN WEIGHTED AVERAGE LIFE
AND YIELD CONSIDERATIONS...................................................79
THE SALE AGREEMENT...........................................................79
THE MASTER SERVICING AGREEMENT...............................................87
THE INDENTURE................................................................94
MATERIAL TAX MATTERS.......................................................111
ERISA CONSIDERATIONS........................................................114
PLAN OF DISTRIBUTION........................................................115
RATINGS.....................................................................116
LEGAL MATTERS...............................................................116
INDEX OF PRINCIPAL DEFINITIONS..............................................117
UNTIL 90 DAYS AFTER THE DATE OF THIS PROSPECTUS SUPPLEMENT, ALL DEALERS
EFFECTING TRANSITIONS IN THE RELATED SERIES OF TRANSITION BONDS, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS AND
A PROSPECTUS SUPPLEMENT. THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE
OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS SUPPLEMENT AND PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
PECO ENERGY TRANSITION
TRUST
$
Transition Bonds
Series 199__-__
%
--------------------
PROSPECTUS SUPPLEMENT
__________, 199__
--------------------
[Underwriters]
<PAGE>
PART II
Item 14. Other Expenses of Issuance and Distribution
The following is an itemized list of the estimated expenses to be incurred
in connection with the offering of the securities being offered hereunder other
than underwriting discounts and commissions.
Registration Fee.............................. $295
Printing and Engraving Expenses............... *
Trustees' Fees and Expenses................... *
Legal Fees and Expenses....................... *
Blue Sky Fees and Expenses.................... *
Accountants' Fees and Expenses................ *
Rating Agency Fees............................ *
Miscellaneous Fees and Expenses............... *
----
Total................................ $ *
====
* To be provided by amendment.
Item 15. Indemnification of Directors and Officers.
Section 3817 of the Delaware Business Trust Act (the "Delaware Trust Act")
provides that subject to such standards and restrictions, if any, as are set
forth in the governing instrument of a business trust, a business trust shall
have the power to indemnify and hold harmless any trustee or beneficial owner or
other person from and against any and all claims and demands whatsoever. The
Delaware Trust Act also provides that the absence of a provision for indemnity
in the governing instrument of a business trust shall not be construed to
deprive any trustee or beneficial owner or other person of any right to
indemnify which is otherwise available to such person under the laws of the
State of Delaware.
The Amended and Restated Trust Agreement (the "Trust Agreement") of PECO
Energy Transition Trust (the "Trust") provides that, to the fullest extent
permitted by law, the Trust shall indemnify its trustees against any liability
incurred in connection with any proceeding in which the trustees may be involved
as a party or otherwise by reason of the fact that such trustee is or was
serving in its capacity as a trustee, unless such liability is based on or
arises in connection with the trustee's own willful misconduct or gross
negligence, the failure to perform the obligations set forth in the Trust
Agreement, or taxes, fees or other charges on, based on or measured by any fees,
commissions or compensation received by the trustees in connection with any of
the transactions contemplated by the Trust Agreement and related agreements.
Item 16. Exhibits
Exhibit No. Description
- ----------- -----------
1.1 Form of Underwriting Agreement.*
4.1.1 Trust Agreement for PECO Energy Transition Trust.**
4.1.2 Form of Amended and Restated Trust Agreement for PECO
Energy Transition Trust.
II-1
<PAGE>
- ------------------
* To be filed by amendment
4.2 Certificate of Trust for PECO Energy Transition Trust.**
4.3 Form of Indenture.
4.4 Form of Transition Bonds.*
5.1 Opinion of Richards, Layton & Finger, P.A. relating to legality
of the Transition Bonds.
5.2 Opinion of Ballard Spahr Andrews & Ingersoll, LLP, relating to
legality of the Transition Bonds.
8.1 Opinion of Ballard Spahr Andrews & Ingersoll, LLP with respect to
material federal and state tax matters.
10.1 Form of Sale Agreement.
10.2 Form of Master Servicing Agreement.
10.3 Joint Petition for Full Settlement of PECO Energy Company's
Restructuring Plan and Related Appeals and Application for a
Qualified Rate Order and Application for Transfer of Generation
Assets dated April 29, 1998.
23.1 Consent of Ballard Spahr Andrews & Ingersoll, LLP (included in
its opinion filed as Exhibits 5.2 and 8.1).
23.2 Consent of Richards, Layton & Finder, P.A. (included in its
opinion filed as Exhibit 5.1).
23.3 Consent of PricewaterhouseCoopers LLP (previously known as
Coopers & Lybrand, L.L.P.).
24.1 Power of Attorney (included on page II-4 of the original
Registration Statement).**
25.1 Statement of Eligibility under the Trust Indenture Act of 1939,
as amended, of The Bank of New York, as Bond Trustee under the
Indenture.*
27.1 Financial Data Schedule.*
99.1 Qualified Rate Order issued May 14, 1998.
99.2 Internal Revenue Service Private Letter Ruling pertaining to
Transition Bonds.
- --------------
* To be filed by amendment
** Previously filed.
Item 17. Undertakings
The undersigned Registrant on behalf of the PECO Energy Transition Trust
(the "Trust") hereby undertakes as follows:
(a) (1) to file, during any period in which offers or sales are being made,
a post-effective amendment to this Registration Statement; (i) to include any
prospectus required by Section 10(a)93) of the Securities Act of 1933, as
amended; (ii) to reflect in the prospectus any facts or events arising after the
effective date of the Registration Statement (or the most recent post-effective
amendment thereof) which, individually or in the aggregate, represent a
fundamental change in the information set forth in the Registration Statement.
Notwithstanding the foregoing, any increase or decrease in volume of securities
offered (if the total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of prospectus
filed with the
II-2
<PAGE>
Commission pursuant to Rule 424(b) of the Securities Act of 1933, asamended, if,
in the aggregate, the changes in volume and price represent no more than a
twenty percent change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective Registration Statement;
and (iii) to include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement or any
material change in such information in the Registration Statement; provided,
however, that (a)(1)(i) and (a)(i)(ii) will not apply if the information
required to be included in a post-effective amendment by those paragraphs is
contained in periodic reports filed pursuant to Section 13 or Section 15(d) of
the Securities Exchange Act of 1934, as amended, that are incorporated by
reference in this Registration Statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, as amended, each such post-effective amendment shall be
deemed to be a new Registration Statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering hereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
(b) That, for purposes of determining any liability under the Securities
Act of 1933, as amended, each filing of the Registrant's annual report pursuant
to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended
(and, where applicable, each filing of an employee benefit plan's annual report
pursuant to Section 15(d) of the Securities Exchange Act of 1934, as amended)
with respect to the Trust that is incorporated by reference in the Registration
Statement shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
(c) That insofar as indemnification for liabilities arising under the
Securities Act of 1933, as amended, may be permitted to directors, officers and
controlling persons of the registrant pursuant to the provisions described under
Item 15 above, or otherwise, the Registrant has been advised that in the opinion
of the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, theretofore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer of
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant will; unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by its is against public policy as expressed in the
Securities Act of 1933 and will be governed by the final adjudication of such
issue.
(d) That, for purposes of determining any liability under the Securities
Act of 1933, as amended, the information omitted from the form of prospectus
filed as part of this Registration Statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the registrant pursuant to Rule
424(b)(i) or (4) or 497(h) under the Securities Act of 1933, as amended, shall
be deemed to be part of this Registration Statement as of the time it was
declared effective.
(e) That, for the purpose of determining any liability under the Securities
Act of 1933, as amended, each post-effective amendment that contains a form of
prospectus shall be deemed
II-3
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to be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(f) The undersigned registrant hereby undertakes to file an application for
the purpose of determining the eligibility of the trustee to act under
subsection (a) of Section 310 of the Trust Indenture Act of 1939, as amended, in
accordance with the rules and regulations prescribed by the Commission under
Section 305(b)(2) of the Trust Indenture Act of 1939, as amended.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-3 and that the security rating
requirement of Form S-3 will be met by the time of sale, and has duly caused
this Amendment No. 1 of the Registration Statement to be signed on its behalf by
the undersigned, thereunto duly authorized, in the City of Philadelphia,
Commonwealth of Pennsylvania, on September 18, 1998.
PECO ENERGY TRANSITION TRUST
By: /s/ Diana Moy Kelly
-------------------------------------
Diana Moy Kelly, Beneficiary Trust
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the Registration Statement has been signed by the following persons in
the capacities and on the date indicated.
* Beneficiary Trustee September 18, 1998
- ---------------
* By: /s/ Diana Moy Kelly
----------------------------------------------
Diana Moy Kelly, Beneficiary Trustee
Pursuant to a power of attorney previously held
<PAGE>
INDEX TO EXHIBITS
4.1.2 Form of Amended and Restated Trust Agreement for PECO Energy
Transition Trust.
4.3 Form of Indenture.
5.1 Opinion of Richards, Layton & Finger, P.A. relating to legality
of the Transition Bonds.
5.2 Opinion of Ballard Spahr Andrews & Ingersoll, LLP, relating to
legality of the Transition Bonds.
8.1 Opinion of Ballard Spahr Andrews & Ingersoll, LLP with respect to
material federal and state tax matters.
10.1 Form of Sale Agreement.
10.2 Form of Master Servicing Agreement.
10.3 Joint Petition for Full Settlement of PECO Energy Company's
Restructuring Plan and Related Appeals and Application for a
Qualified Rate Order and Application for Transfer of Generation
Assets dated April 29, 1998.
23.1 Consent of Ballard Spahr Andrews & Ingersoll, LLP (included in
its opinion filed as Exhibits 5.2 and 8.1).
23.2 Consent of Richards, Layton & Finder, P.A. (included in its
opinion filed as Exhibit 5.1).
23.3 Consent of PricewaterhouseCoopers LLP (previously known as
Coopers & Lybrand, L.L.P.).
99.1 Qualified Rate Order issued may 14, 1998.
99.2 Internal Revenue Service Private Letter Ruling pertaining to
Transition Bonds.
================================================================================
PECO ENERGY TRANSITION TRUST
AMENDED AND RESTATED
TRUST AGREEMENT
as of September _, 1998
AMONG
GEORGE SHICORA and DIANA MOY KELLY, as BENEFICIARY TRUSTEES,
FIRST UNION TRUST COMPANY, NATIONAL ASSOCIATION, as ISSUER TRUSTEE,
DELAWARE TRUSTEE AND INDEPENDENT TRUSTEE
and
PECO ENERGY COMPANY,
as GRANTOR and OWNER
================================================================================
<PAGE>
TABLE OF CONTENTS
Page
----
ARTICLE I
DEFINITIONS
1.01. Capitalized Terms.................................................... 1
ARTICLE II
ORGANIZATION
2.01. Name ................................................................ 5
2.02. Office .............................................................. 5
2.03. Purposes and Powers ................................................. 5
2.04. Appointment of the Trustees; Initial Trust Property ................. 6
2.05. Declaration of Trust ................................................ 6
2.06. Other Expenses, Liabilities of Trust ................................ 7
2.07. Situs of Trust ...................................................... 7
2.08. Additional Capital Contributions .................................... 7
2.09. Assignment of Right to Distributions or Payments; Transfers ......... 7
ARTICLE III
COMPLIANCE WITH THE CODE
3.01. Trust to be Treated as a Division For Tax Purposes . ................ 8
ARTICLE IV
SEPARATE EXISTENCE OF TRUST
4.01. Maintenance of Separate Existence ................................... 8
4.02. Merger and Other Transactions ....................................... 12
4.03. Transactions with Affiliates ........................................ 12
4.04. Insolvency .......................................................... 13
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ARTICLE V
INVESTMENT AND APPLICATION OF TRUST FUNDS
5.01. Investment of Trust Funds ........................................... 13
5.02. Application of Funds ................................................ 13
ARTICLE VI
AUTHORITY AND DUTIES OF THE TRUSTEES
6.01. General Authority ................................................... 13
6.02. Specific Authority; Special Authority of Beneficiary Trustees ....... 13
6.03. Accounting and Reports to the Grantor, any Owner,
the Internal Revenue Service and Others ............................. 15
6.04. Signature of Returns ................................................ 15
6.05. Right to Receive Instructions ....................................... 15
6.06. No Duties Except as Specified in this Agreement or in Instructions .. 15
6.07. No Action Except Under Specified Documents or Instructions .......... 16
ARTICLE VII
CONCERNING THE TRUSTEES
7.01. Acceptance of Trusts and Duties ..................................... 16
7.02. Furnishing of Documents ............................................. 17
7.03. Reliance; Advice of Counsel ......................................... 17
7.04. Not Acting in Individual Capacity ................................... 17
ARTICLE VIII
COMPENSATION OF TRUSTEES
8.01. Issuer Trustee's Fees and Expenses .................................. 18
8.02. Beneficiary Trustees' Fees and Expenses ............................. 18
8.03. Fees of Separate Independent Trustee and Delaware Trustee ........... 18
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ARTICLE IX
INDEMNIFICATION OF TRUSTEES
9.01. Scope of Indemnification............................................ 18
ARTICLE X
TERMINATION OF TRUST
10.01. Dissolution of Trust ............................................... 19
10.02. No Termination by Grantor or Owner ................................. 19
10.03. Cancellation of Certificate of Trust ............................... 19
ARTICLE XI
SUCCESSOR TRUSTEES AND ADDITIONAL TRUSTEES
11.01. Resignation of Trustee; Appointment of Successor ................... 19
ARTICLE XII
MISCELLANEOUS
12.01. Supplements and Amendments ....................................... 20
12.02. No Legal Title to Trust Property in Grantor and Owner ............ 20
12.03. Limitations on Rights of Others .................................. 21
12.04. Notices .......................................................... 21
12.05. Severability ..................................................... 21
12.06. Separate Counterparts............................................. 22
12.07. Successors and Assigns............................................ 22
12.08. Headings ......................................................... 22
12.09. Governing Law..................................................... 22
Exhibit 1 Trustee Fee Schedule
Exhibit 2 Certificate of Trust
iii
<PAGE>
AMENDED AND RESTATED TRUST AGREEMENT dated as of September _, 1998
among PECO Energy Company, a Pennsylvania corporation, as Grantor and Owner, and
First Union Trust Company, National Association, a Delaware banking corporation,
as Issuer Trustee, Delaware Trustee and Independent Trustee, George Shicora, an
individual, and Diana Moy Kelly, an individual, as Beneficiary Trustees.
A Certificate of Trust of the Trust was filed with the Secretary of
State of the State of Delaware on June 23, 1998.
The Grantor, the Beneficiary Trustees and the Issuer Trustee are
parties to that certain Trust Agreement dated as of June 23, 1998 (the "Prior
Trust Agreement") and now desire to amend and restate the Prior Trust Agreement
as set forth below.
NOW, THEREFORE, the parties hereto, intending to be legally bound
hereby, agree to amend and restate the Prior Trust Agreement in its entirety as
follows.
ARTICLE I
DEFINITIONS
1.01. Capitalized Terms. For all purposes of this Agreement, the
following terms shall have the meanings set forth below:
"Agreement" means this Amended and Restated Trust Agreement, as it may
be amended from time to time.
"Affiliate" shall mean, with reference to any specified Person, any
other Person controlling or controlled by or under common control with such
specified Person; provided, that, for purposes of this Agreement when used with
respect to the Grantor's or any Owner's direct or indirect subsidiaries, any
limited partners thereof shall also be deemed "Affiliates." For the purposes of
this definition, "control," when used with reference to any specified Person,
shall mean the power to direct the management and policies of such specified
Person, directly or indirectly, whether through the ownership of voting
securities, by contract or otherwise; and the terms "controlling" and
"controlled" have meanings correlative to the foregoing.
"Affiliated Entity" means the Grantor, any Owner, any of their
respective direct or indirect subsidiaries or any Affiliate of any of the
foregoing other than the Trust.
"Beneficiary Trustee" means any Trustee other than the Issuer Trustee,
the Independent Trustee or the Delaware Trustee.
<PAGE>
"Bond Trustee" means The Bank of New York, as Bond Trustee under the
Indenture, and its successors.
"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.
"Business Trust Act" means Chapter 38 of Title 12 of the Delaware Code,
12 Del. C. ss.3801, et seq., and any successor statute, as amended from time to
time.
"Code" means the Internal Revenue Code of 1986, as amended.
"Competition Act" means the Pennsylvania Electricity Generation
Customer Choice and Competition Act, Chapter 28 of Title 66 of the Pennsylvania
Consolidated Statutes, 66 Pa.C.S. ss. 2801, et seq.;
"Delaware Trustee" means a Trustee who is a natural person and who is a
resident of the State of Delaware, or, in all other cases, a trustee has its
principal place of business in the State of Delaware.
"Eligible Investments" shall be the investments so designated from time
to time by any Beneficiary Trustee.
"Fiscal Year" means the calendar year from each January 1 to the
following December 31.
"GAAP" means generally accepted accounting principles in effect from
time to time.
"Grantor" means PECO Energy Company.
"Indenture" means the Indenture, dated as of _______________, 1998
between the Trust and the Bond Trustee as the same may be amended, supplemented
or otherwise modified from time to time.
"Independent Trustee" means a Trustee that is not and has not been for
at least three years from the date of his or her or its appointment (i) a direct
or indirect legal or beneficial owner of the Trust or PECO Energy or any of
their respective Affiliates, (ii) a relative, supplier, employee, officer,
director, manager, contractor or material creditor of the Trust or PECO Energy
or any of their respective Affiliates or (iii) a Person who controls PECO Energy
or its Affiliates.
"Insolvency Event" means the Significant Events described in (a)(i) and
(a)(ii) of that definition.
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"Issuer Trustee" means First Union Trust Company, National Association
or any other Issuer Trustee designated by the Grantor or any Owner from time to
time.
"Liability" means any damage, judgment, amount paid in settlement,
fine, penalty, punitive damages, or cost or expense of any nature (including,
without limitation, attorneys' fees and disbursements).
"Owner" means the Grantor and its successors and permitted assigns as a
beneficial owner (within the meaning of the Business Trust Act) of the Trust.
All references in this Agreement to "any Owner" means each of the Grantor's
successors and permitted assigns as a beneficial owner of the Trust, and not the
Grantor itself.
"PECO Energy" means PECO Energy Company, a Pennsylvania corporation,
its successors and permitted assigns.
"Periodic Filings" means any filings or submissions that the Trust is
required to make with any state or federal regulatory agency or under the Code.
"Person" means any individual, corporation, limited liability company,
partnership, joint venture, association, joint stock company, trust,
unincorporated organization, governmental authority or any other entity of
similar nature.
"Proceeding" means any threatened, pending or completed action, suit,
appeal or other proceeding of any nature, whether civil, criminal,
administrative or investigative, whether formal or informal, and whether brought
by or in the right of the Trust, the Grantor, any Owner or otherwise.
"Series" has the meaning assigned to that term in the Indenture.
"Significant Event" means (a) with respect to the Trust, that the Trust
(i) shall fail to or admit in writing its inability to pay its debts generally
as they become due, or shall commence a voluntary case or other Proceeding under
any applicable bankruptcy, insolvency, reorganization, debt arrangement,
dissolution or other similar law now or hereafter in effect, or shall consent to
the appointment of or taking possession by a receiver, liquidator, assignee,
trustee, custodian, sequestrator (or other similar official) for the Trust or
for any substantial part of its property, or shall make any general assignment
for the benefit of creditors, or shall take any trust, corporate or partnership
action authorizing the taking of any of the foregoing actions or (ii) a case or
other Proceeding shall be commenced without the application or consent of the
Trust, in any court, seeking the liquidation, reorganization, debt arrangement,
dissolution, winding up, or compensation or readjustment of debts of the
Trust, the appointment of a trustee, receiver, custodian, liquidator, assignee,
sequestrator, or the like for the Trust or any substantial part of its assets,
or any similar action with respect to the Trust under any law (foreign or
domestic) relating to bankruptcy, insolvency, reorganization, winding up or
composition or adjustment of debts and such case or Proceeding shall continue
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<PAGE>
undismissed or unstayed and in effect for a period of 90 days; or any of the
actions sought in such petition or Proceeding, including the entering of an
order for relief in respect of the Trust or the appointment of any trustee,
receiver, custodian, liquidator, assignee, sequestrator or the like for the
Trust or any substantial portion of the Trust's property shall be granted or
otherwise occur (each of (i) and (ii) an "Insolvency Event");
(b) The Trust shall become subject to the registration
requirements of the Investment Company Act; or
(c) Any Event of Default as set forth in the Indenture shall have
occurred.
"Supplemental Indenture" means any Supplemental Indenture with respect
to a Series of Transition Bonds as defined in such Supplemental Indenture or
that amends the Indenture.
"Transition Bonds" means the transition bonds issued from time to time
by the Trust pursuant to the Indenture and any Supplemental Indenture.
"Transfer" means the sale, transfer or other assignment of all of the
Grantor's right, title and interest in all or a portion of its beneficial
interest in the Trust.
"Trust" means the Delaware statutory business trust continued under
this Agreement.
"Trustees" means the trustees of the Trust, which, as provided herein,
shall mean the Beneficiary Trustees, the Independent Trustee, the Delaware
Trustee and the Issuer Trustee collectively, not in their respective individual
capacities but solely as trustees under this Agreement, and any successor
trustees hereunder whether designated as Issuer Trustee, Independent Trustee,
Delaware Trustee or a Beneficiary Trustee.
"Trust Property" means all right, title and interest in and to any
property contributed to the Trust by the Grantor or any Owner or otherwise
acquired by the Trust, including, without limitation, all distributions or
payments thereon or proceeds thereof.
"Trust Related Agreements" means any instrument or agreement executed
in connection with or relating to the Trust or the Transition Bonds, including,
but not limited to, the Master Servicing Agreement, dated ______________, 1998
between the Trust and PECO Energy, as Servicer thereunder (the "Master Servicing
Agreement"), the Sale Agreement, dated _____________, 1998 between the Trust and
PECO Energy, as Seller thereunder (the "Sale Agreement"), the Indenture and any
supplemental indentures and any bill of sale, as each may be supplemented or
amended from time to time.
4
<PAGE>
Each of the terms used herein and not defined herein shall have the
meanings given to such terms in the Trust Related Agreements, even after the
termination of such agreements.
ARTICLE II
ORGANIZATION
2.01. Name. The Trust continued hereby shall be known as "PECO Energy
Transition Trust," in which name the Trustees shall conduct the business of the
Trust, make and execute contracts, and sue and be sued.
2.02. Office. The initial office of the Trust shall be in care of the
Issuer Trustee, One Rodney Square, 920 King Street, lst Floor, Wilmington,
Delaware 19801 (telephone number 302-888-7532) or at such other address as the
Trustees may designate by notice to the Grantor, any Owner and the Bond Trustee,
provided that any other office will comply with the provisions of 4.01(c) and
(e).
2.03. Purposes and Powers; Intent. (a) The Trust has been created for
the purpose of purchasing and owning Intangible Transition Property, issuing
Transition Bonds from time to time, pledging its interest in Intangible
Transition Property and other 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 these purposes.
(b) The Grantor has determined that each of (i) the creation
and ownership of the Trust by the Grantor and (ii) the limited purposes of the
Trust is in the best interests of the Grantor and its creditors and represents
a prudent and advisable course of action that does not impair the rights and
interests of the Grantor's creditors. The Grantor has determined that the
transactions contemplated by this Agreement and the Trust Related Agreements
are in the best interests of the Grantor and its creditors and represent a
prudent and advisable course of action that does not impair the rights and
interests of the Grantor's creditors. Such determinations are memorialized in
the corporate records of the Grantor. The Grantor did not create the Trust with
the intent to hinder, delay, or defraud the Grantor's creditors, and any
transfer to the Trust will not render the Grantor insolvent or incapable of
conducting its business in the manner and to the extent presently conducted.
(c) The Trust shall not have the power to (i) incur any debt
other than the Transition Bonds and certain costs and expenses associated
therewith, debt in connection with any credit enhancement required for any
Series of Transition Bonds, or debt which is rated as high as any rating on the
Transition Bonds, which is fully subordinated to the outstanding Transition
Bonds, which is without recourse to the Trust other than cash flows in excess
of the amount necessary to pay the holders of Transition Bonds and which does
not constitute a claim against the Trust to the extent cash flows are
insufficient to pay such
5
<PAGE>
additional debt or (ii) engage in any business or activity other than the
business and activities enumerated in Section 2.03.
(d) The Trust's existence is not dependent on its being a
subsidiary of the Grantor or being affiliated with any Affiliated Entity, and
the Trust's business operations could be maintained even if it were not a
subsidiary of the Grantor or affiliated with any other Affiliated Entity. The
Grantor will not transfer additional Intangible Transition Property to the Trust
for the purpose of mitigating losses on the Intangible Transition Property that
has previously been transferred to the Trust.
(e) The Trust has determinated that the transactions
contemplated by the Trust Related Agreements are in the best interests of the
Trust and its creditors and represent a prudent and advisable course of action
that does not impair the rights and interests of the Trust's creditors.
2.04. Appointment of the Trustees; Initial Trust Property. (a) The
Trust shall have no fewer than one and no more than three trustees (if the
Delaware Trustee and Independent Trustee are the same entity) or five trustees
(if the Delaware Trustee and Independent Trustee are different entities)
appointed from time to time by the Grantor or, in the event of a Transfer, by
the Owner or Owners. The Grantor or, in the event of a Transfer, the Owners may
at any time increase the number of Trustees, subject to the provisions of
Sections 2.04(b), 3.01, 4.01 and 4.03. The Grantor has appointed First Union
Trust Company, National Association as Issuer Trustee, Delaware Trustee and
Independent Trustee, and George Shicora and Diana Moy Kelly as Beneficiary
Trustees of the Trust, which Trustees shall have all the rights, powers and
duties set forth herein.
(b) The Trust shall at all times have as Issuer Trustee a
Person meeting the qualifications of Section 11.01(c) of this Agreement. In
addition, the Trust shall at all times have at least one Trustee which qualifies
as a Delaware Trustee and at least one Trustee which qualifies as an Independent
Trustee. The Issuer Trustee, the Delaware Trustee and the Independent Trustee
may, and will initially, be the same entity.
(c) The Trustees acknowledge receipt in trust from the
Grantor, as of June 23, 1998, of the sum of $5,000, constituting the initial
Trust Property.
2.05. Declaration of Trust. The Trustees hereby declare that they
will hold the Trust Property in trust upon and subject to the conditions set
forth herein for the use and benefit of the Grantor or, in the event of a
Transfer, any Owner, subject to the obligations of the Trustees under the Trust
Related Agreements. It is the intention of the parties hereto that the Trust
constitutes a business trust under the Business Trust Act and that this
Agreement constitutes the governing instrument of the Trust. On June 23, 1998,
the Trustees filed a Certificate of Trust with the Delaware Secretary of State
in accordance with the provisions of the Business Trust Act in substantially
the form attached hereto as Exhibit 2.
6
<PAGE>
2.06. Other Expenses, Liabilities of Trust. None of the Grantor, the
Trustees or any Owner shall be liable for any liabilities or obligations of the
Trust, including but not limited to, the indemnification obligations under
Article IX.
2.07. Situs of Trust. The Trust will be located and administered in the
State of Delaware. All bank accounts maintained by the Trustees on behalf of the
Trust shall be located in the State of Delaware. The Trust shall not have any
employees in any state other than in the State of Delaware. Payments will be
received by the Trust only in the State of Delaware and payments will be made by
the Trust only from the State of Delaware.
2.08. Additional Capital Contributions. The assets of the Trust are
expected to generate a return sufficient to satisfy all obligations of the Trust
under this Agreement and the Trust Related Agreements and any other obligations
of the Trust. It is expected that no capital contributions to the Trust will be
necessary after the purchase of the initial Intangible Transition Property,
except for capital contributions in connection with the issuance of additional
Series of Transition Bonds. In accordance with the private letter ruling
received by the Grantor from the Internal Revenue Service dated December 19,
1997 (the "Private Letter Ruling"), on or prior to the date of issuance of each
Series of Transition Bonds, the Grantor or, in the event of a Transfer, any
Owner, shall make an additional contribution to the Trust in an amount equal to
at least 0.50% of the initial principal amount of such Series or such greater
amount as agreed to by the Grantor in connection with the issuance by the Trust
of any Series of Transition Bonds. No capital contribution by the Grantor or any
Owner, as the case may be, to the Trust will be made for the purpose of
mitigating losses on Transition Property that has previously been transferred to
the Trust. Each capital contribution will be acknowledged by a written receipt
signed by any of the Trustees. The Trustees acknowledge and agree that,
notwithstanding anything in this Agreement to the contrary, such additional
contribution will be managed by an investment manager selected by the Grantor
or, in the event of a transfer, the Owner or Owners and all income earned
thereon shall be allocated or paid by the Bond Trustee in accordance with the
provisions of the Indenture.
2.09. Assignment of Right to Distributions or Payments; Transfers. The
Grantor and any Owner may assign all or any part of their respective rights to
receive distributions or payments hereunder, but such assignment shall effect no
change in the ownership of the Trust. No Transfer of a beneficial interest in
the Trust shall be made by the Grantor, except to an Affiliate or in connection
with the sale or disposition of all or substantially all of the Grantor's
electric generating business, whether by operation of law or otherwise.
7
<PAGE>
ARTICLE III
COMPLIANCE WITH THE CODE
3.01. Trust to be Treated as a Division For Tax Purposes. The Trustees
shall cause the Trust to comply with the applicable provisions of the Code and
the applicable Treasury regulations thereunder in the manner necessary to effect
the intention of the parties that the Trust be treated as a division of PECO
Energy for federal income tax purposes pursuant to Treasury regulation
ss.301.7701-1 et seq. and that the Trust be accorded such treatment until its
termination pursuant to Section 10.01 hereof and shall take, or refrain from
taking, any action required by the Code or Treasury regulations thereunder in
order to maintain such status of the Trust. In addition, the Trust may not claim
any credit on, or make any deduction from the principal and interest payable in
respect of, the Transition Bonds (other than amounts properly withheld under the
Code), or assert any claim against any present or former Transition Bondholder
because of the payment of taxes levied or assessed upon the Trust.
ARTICLE IV
SEPARATE EXISTENCE OF TRUST
4.01. Maintenance of Separate Existence. The Trustees shall take all
steps necessary to continue the identity of the Trust as a separate legal entity
and to make it apparent to third Persons that the Trust is an entity with assets
and liabilities distinct from those of the Grantor, any Owner, the Trustees,
Affiliates of the Grantor or any Owner or any other Person, and that, except for
financial reporting purposes (to the extent required by generally accepted
accounting principles) and for state and federal income and franchise tax
purposes, it is not a division of any of the Affiliated Entities or any other
Person. In that regard, and without limiting the foregoing in any manner, the
Trust shall:
(a) be managed by the Trustees who shall make independent
decisions with respect to the daily operations and business affairs of the Trust
and, except as otherwise provided herein, neither the Trustees nor the Trust
shall be controlled in making such decisions by the Grantor, any Owner, any
Affiliated Entity or any other Person;
(b) maintain at least one Independent Trustee and one
Delaware Trustee (who may be the same Person);
(c) if the office of the Trust is not in the care of the
Issuer Trustee, as provided by 2.02, maintain office space separate and clearly
delineated from the office space of any Affiliated Entity, owned by the Trust or
evidenced by a written lease or sublease (even if located in an office owned or
leased by, or shared with, an Affiliated Entity);
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(d) maintain the assets of the Trust in such a manner that it
is not costly or difficult to segregate, identify or ascertain its individual
assets from those of any other Person, including any Affiliated Entity;
(e) if the office of the Trust is not in the care of the
Issuer Trustee, as provided by 2.02, maintain a separate telephone number which
will be answered only in its own name, and keep and use separate stationary,
checks and other business forms;
(f) conduct all intercompany transactions with Affiliated
Entities on an arm's-length basis and in accordance with Section 4.03;
(g) not guarantee or become obligated for the debts of any
Affiliated Entity or hold the credit of the Trust out as being available to
satisfy the obligations of any Affiliated Entity or other Person, nor have any
of the Trust's obligations guaranteed by any Affiliated Entity or hold the Trust
out as responsible for the debts of any Affiliated Entity or for the decisions
or actions with respect to the business and affairs of any Affiliated Entity,
nor seek or obtain credit or incur any obligation to any third-party based upon
the creditworthiness or assets of any Affiliated Entity or any other Person
(i.e. other than based on the assets of the Trust) nor allow any Affiliated
Entity to do such things based on the credit of the Trust;
(h) except as expressly otherwise permitted hereunder or
under any of the Trust Related Agreements, not permit the commingling or pooling
of the Trust's funds or other assets with the funds or other assets of any
Affiliated Entity;
(i) maintain separate deposit and other bank accounts and
funds to which no Affiliated Entity has any access, which accounts shall be
maintained in the name and tax identification number of the Trust;
(j) maintain full books of accounts and records (financial or
other) and financial statements separate from those of the Affiliated Entities
or any other Person, prepared and maintained in accordance with GAAP,
(including, but not limited to, all resolutions, records, agreements or
instruments underlying or regarding the transactions contemplated by the Trust
Related Agreements or otherwise) and will be audited annually by an independent
accounting firm which shall provide such audit to the Bond Trustee;
(k) compensate (either directly or through reimbursement of
the Trust's allocable share of any shared expenses) all employees, consultants
and agents and Affiliated Entities, to the extent applicable, for services
provided to the Trust by such employees, consultants and agents or Affiliated
Entities, in each case, from the Trust's own funds and maintain a sufficient
number of employees in light of its contemplated operations;
(1) pay for its own account for accounting and payroll
services, rent, lease and other expenses (or the Trust's allocable share of any
such amounts provided by one
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or more other Affiliated Entity) and not have such operating expenses (or the
Trust's allocable share thereof) paid by any Affiliated Entities, provided, that
the Grantor shall be permitted to pay the initial organization expenses of the
Trust;
(m) maintain adequate capitalization in light of the Trust's
business and purpose;
(n) conduct all of the Trust's business (whether in writing
or orally) solely in the name of the Trust through its Trustees, employees and
agents and hold the Trust out as an entity separate from any Affiliated Entity;
(o) not make or declare any distributions of cash or property
to the Grantor or any Owner except in accordance with appropriate trust
formalities and only consistent with sound business judgment to the extent that
it is permitted pursuant to the Trust Related Agreements and not violative of
any applicable law and only if no Significant Event or potential Significant
Event then exists or would result therefrom;
(p) otherwise practice and adhere to all trust procedures and
formalities, such as the holding of regularly scheduled meetings of the
Trustees, to the extent required by such formalities and by this Agreement, the
State of Delaware and all other appropriate constituent documents;
(q) not appoint an Affiliated Entity or any employee of an
Affiliated Entity as an agent of the Trust, except as otherwise permitted in the
Trust Related Agreements (although such Persons can qualify as Beneficiary
Trustees);
(r) not acquire obligations or securities of or make loans or
advances to or pledge its assets for the benefit of the Grantor, any Owner or
any Affiliate of such parties;
(s) not permit the Grantor, any Owner or any Affiliated
Entity to acquire obligations of or make loans or advances to the Trust;
(t) not permit the Grantor, any Owner or any Affiliated
Entity to guarantee, pay or become liable for the debts of the Trust or permit
any such entity to hold out its creditworthiness as being available to pay the
liabilities and expenses of the Trust;
(u) maintain separate minutes of the actions of the Trustees,
including of the transactions contemplated by the Trust Related Agreements.
(v) cause (i) all written and oral communications, including,
without limitation, letters, invoices, purchase orders, and contracts, of the
Trust to be made solely in the name of the Trust, (ii) the Trust to have its own
tax identification number, stationery, and business forms, separate from those
of any Affiliated Entity, (iii) all Affiliated Entities not to
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use the stationery or business forms of the Trust, and for the Trust not to use
the stationery or business forms of any Affiliated Entity, and (iv) all
Affiliated Entities not to conduct business in the name of the Trust, and the
Trust not to conduct business in the name of any Affiliated Entity;
(w) direct creditors of the Trust to send invoices and other
statements of account of the Trust directly to the Trust and not to any
Affiliated Entity and to cause the Affiliated Entities not to direct their
creditors to send invoices and other statements of accounts to the Trust;
(x) cause the Grantor or, in the event of a Transfer, any
Owner to maintain as official records all resolutions, agreements, and other
instruments underlying or regarding the transactions contemplated by the Trust
Related Agreements;
(y) disclose, and cause the Grantor to disclose, in its
financial statements the effects of all transactions between the Grantor
and the Trust in accordance with generally accepted accounting principles, and
in a manner which makes it clear that the assets of the Trust (including the
Transition Property) are not assets of any Affiliated Entity and are not
available to pay creditors of any Affiliated Entity;
(z) treat and cause the Grantor to treat the transfer of
Intangible Transition Property from the Grantor to the Trust as a sale under the
Competition Act;
(aa) if in accordance with GAAP, the assets and liabilities
of the Trust are included in the consolidated financial statements of the
Grantor, including if the Trust is treated as a division of PECO Energy, cause
the Grantor to prominently and clearly disclose, whether in a footnote or in the
notes to such financial statements, that (i) the Trust is a separate legal
entity, (ii) the assets of the Trust are not available to pay the debts of the
Grantor or any other Affiliated Entity and (iii) neither the Grantor nor any
other Affiliated Entity is liable or responsible for the debts of the Trust;
(bb) except as described herein with respect to tax reporting
and financial reporting, describe and cause each Affiliated Entity to describe
the Trust, and hold the Trust out as a separate legal entity and not as a
division or department of any Affiliate Entity, and promptly correct any known
misunderstandings regarding its identity separate from any Affiliated Entity or
any Person;
(cc) treat the Transition Bonds as debt obligations of the
Trust;
(dd) maintain its valid existence in good standing under the
laws of the State of Delaware and maintain its qualification to do business
under the laws of such other jurisdictions as its operations require;
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(ee) comply with all laws applicable to the transactions
contemplated by this Agreement and the Trust Related Agreements; and
(ff) cause PECO Energy to observe in all material respects
all corporate procedures and formalities required by its constituent documents
and the laws of its state of formation and all other appropriate jurisdictions.
4.02. Merger and Other Transactions. As long as the Transition Bonds
are outstanding, the Trust may not consolidate with, merge or convert into
another entity or sell all or substantially all of its assets to another entity
and dissolve, unless: (i) the entity formed by or surviving such consolidation,
merger or conversion or to whom substantially all of such assets are sold is
organized under the laws of the United States, any state thereof or the District
of Columbia, (ii) such entity expressly assumes by a Supplemental Indenture the
Trust's obligation to make due and punctual payments upon the Transition Bonds
and the performance or observance of every agreement and covenant of the Trust
under the Indenture, (iii) no Default or Event of Default will have occurred and
be continuing immediately after such consolidation, merger, conversion or sale
of assets, (iv) the Rating Agency Condition (as defined in the Indenture) will
have been satisfied with respect to such transaction, (v) the Trust has received
an opinion of counsel to the effect that such consolidation, merger, conversion
or sale of assets would have no material adverse tax consequence to the Trust or
any Transition Bondholder and such consolidation, merger, conversion or sale of
assets complies with the Indenture and all conditions precedent therein provided
relating to such transaction, (vi) none of the Intangible Transition Property,
the Qualified Rate Order or PECO Energy's or the Trust's rights under the
Competition Act or the Qualified Rate Order are impaired and (vii) any action
that is necessary to maintain the lien and security interest created by the
Indenture will have been taken. Further, the Trust may not sell, transfer,
exchange or otherwise dispose of any of its assets, except as expressly
permitted by the Indenture, any Supplemental Indenture, the Master Servicing
Agreement or the Sale Agreement.
4.03. Transactions with Affiliates. The Trust will not enter into, or
be a party to, any transaction with any of its Affiliates, except (i) the
transactions contemplated by the Trust Related Agreements and (ii) any other
transactions (including, without limitation, the lease of office space or
computer equipment or software by the Trust from an Affiliate of the Trust and
the sharing of employees and employee resources and benefits) (A) in the
ordinary course of business or as otherwise permitted hereunder, (B) pursuant to
the reasonable requirements and purposes of the Trust's business, (C) upon fair
and reasonable terms (and, to the extent material, pursuant to written
agreements) that are on terms and conditions available at the time to the Trust
for comparable transactions with unaffiliated Persons and (D) not inconsistent
with the terms of Section 4.01. Unless such transactions are in the ordinary
course of business in which case any of the Trustees, acting singly or
collectively, may take all actions necessary to effectuate such transactions,
they will require the approval of a majority of the Trustees, and the
Independent Trustee.
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4.04. Insolvency. As of the date hereof, neither the Grantor nor the
Trust intends to file a voluntary petition for relief under the Bankruptcy Code
or any similar law. None of the Grantor nor any Owner will cause the Trust to
file a voluntary petition for relief under the Bankruptcy Code or similar law.
The Trustees shall not file a bankruptcy or insolvency petition or otherwise
institute insolvency or bankruptcy proceedings without the prior written consent
of all of the Trustees, including the Independent Trustee.
ARTICLE V
INVESTMENT AND APPLICATION OF TRUST FUNDS
5.01. Investment of Trust Funds. The provisions of this Article V apply
only to funds or Trust Property that have been released from the lien of the
Indenture and are permitted to be held or applied by the Trust. Unless otherwise
directed in writing by the Beneficiary Trustees, funds or Trust Property
released by the Bond Trustee to the Trust or funds in the possession of the
Trust shall be invested and reinvested by the Trustees (or by an independent
investment manager appointed in writing by the Beneficiary Trustees) in Eligible
Investments.
5.02. Application of Funds. Income with respect to and proceeds of any
funds or Trust Property held by the Trustees shall be transferred as determined
by the Beneficiary Trustees from time to time.
ARTICLE VI
AUTHORITY AND DUTIES OF THE TRUSTEES
6.01. General Authority. The Trustees are authorized to take all
actions required or permitted to be taken by them pursuant to the terms of this
Agreement and the Trust Related Agreements.
6.02. Specific Authority; Special Authority of Beneficiary Trustees.
(a) Notwithstanding any other provision in this Agreement to the contrary and
without the need for any additional consent of any Person, the Trustees, acting
singly or collectively, are hereby authorized and directed to take the following
action on behalf of the Trust: (i) execute, deliver and perform any agreements
related to the issuance and sale of Transition Bonds, including the Trust
Related Agreements, as necessary, (ii) execute and deliver all certificates and
other documents required by any such agreements and (iii) issue and deliver one
or more series of Transition Bonds in an aggregate principal amount not to
exceed $4,000,000,000 plus the amounts in respect of any Refunding Issuance (as
defined in the Indenture) in accordance with the provisions of such agreements
and the Qualified Rate Order issued on May 14, 1998 and qualify and register the
Transition Bonds for sale in various states. The Trustees, acting
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singly or collectively, are authorized to take all actions necessary or
incidental to the day-to-day operations of the Trust. All non-day-to-day matters
shall be determined by a majority of the then current Trustees, provided that,
such majority must include the Independent Trustee (which may also be the Issuer
Trustee) for all actions specified in Sections 4.02, 4.03 and 4.04 and any
matter that would, if approved by the Trustees, cause the Trust to deviate from
the provisions of Sections 2.03(a), 2.03(c), 2.04(b), 4.01 and 6.06(b) of this
Agreement, subject to the provisions of Section 6.05. For purposes of
determining a majority under this Agreement, each Person that is serving as a
Trustee shall be counted as a single Trustee, even if such Person holds multiple
Trustee positions (i.e., the vote of one Person that acts as both Delaware
Trustee and Independent Trustee shall be counted only once).
(b) The Grantor and the Trustees hereby authorize and direct
the Beneficiary Trustees, acting singly or collectively, (i) to file with the
Securities and Exchange Commission (the "Commission") and execute, in each case
on behalf of the Trust, the Registration Statement on either Form S-3 or Form
S-1 (the "1933 Act Registration Statement"), including any pre-effective or
post-effective amendments to such 1933 Act Registration Statement (including the
prospectus supplement, the prospectus and the exhibits contained therein),
relating to the registration under the Securities Act of 1933, as amended, of
the Transition Bonds, (ii) to file and execute on behalf of the Trust such
applications, reports, surety bonds, irrevocable consents, appointments of
attorney for service of process and other papers and documents as shall be
necessary or desirable to register the Transition Bonds under the securities or
"Blue Sky" laws of such jurisdictions as the Trust may deem necessary or
desirable and (iii) to do or cause to be done all such other acts or things and
to execute and deliver all such instruments and documents that any such
Beneficiary Trustee shall deem necessary or appropriate to carry out the intent
of the foregoing. In the event that any filing referred to above is required by
the rules and regulations of the Commission or state securities or "Blue Sky"
laws, to be executed on behalf of the Trust by the Issuer Trustee, then the
Issuer Trustee, not in its individual capacity, but solely in its capacity as
trustee of the Trust, is hereby authorized and directed to join in any such
filing and to execute on behalf of the Trust any and all of the foregoing. In
connection with all of the foregoing, the Trust hereby constitutes and appoints
each of the Beneficiary Trustees as its true and lawful attorney-in-fact and
agent, with full power of substitution and resubstitution, for the Trust or in
the Trust's name, place and stead, in any and all capacities, to sign any and
all amendments (including post-effective amendments) to the 1933 Act
Registration Statement and any other registration statements and to file the
same, with all exhibits thereto, and other documents in connection therewith,
with the Commission, granting unto said attorney-in-fact and agent full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in connection therewith, as fully to all intents and
purposes as the Trust might or could do in person, hereby ratifying and
confirming all that said attorney-in-fact and agent, or his respective
substitute or substitutes, shall do or cause to be done by virtue hereof.
(c) Meetings of the Trustees for the purpose of establishing
a majority under this Article VI or otherwise may be called at any time by any
of the Trustees upon two days written or oral notice, stating the time, place
and purpose of the meeting, to all Trustees prior
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to the time of the meeting. In addition, any action required or permitted to be
taken at a meeting of the Trustees may be taken without a meeting upon the
written consent of the Trustees who would be necessary to authorize the action
at a meeting at which all Trustees were present and voting or upon the unanimous
written consent of the Trustees. The Issuer Trustee shall maintain the minutes
of all meetings of the Trustees. Any meeting may be held by means of conference
telephone or similar communications equipment by which all persons participating
in the meeting can hear one another. Attendance, whether by telephone or in
person, at any meeting of the Trustees shall constitute a waiver of notice of
such meeting.
6.03. Accounting and Reports to the Grantor, any Owner, the Internal
Revenue Service and Others. The Grantor shall designate, from time to time, a
Trustee which shall, on behalf of the Trust, (i) maintain or cause to be
maintained the books of the Trust on a calendar year basis on the accrual method
of accounting, (ii) deliver to the Grantor and any Owner, within 90 days of the
end of each Fiscal Year, or more often, as may be required by the Code and the
regulations thereunder, a copy of the annual financial statement of the Trust
for such Fiscal Year and a statement in such form and containing such
information as may be required by such regulations, and as is necessary and
appropriate to enable the Grantor and any Owner to prepare its federal and state
income tax returns, (iii) file such tax returns relating to the Trust, cause the
Trust to pay all taxes incurred by it pursuant to the terms of any tax sharing
agreement entered into by the Trust and the Grantor and take all actions
necessary for the Trust to qualify or continue to qualify as a division of PECO
Energy or its designated affiliate for federal income tax purposes, (iv) cause
such tax returns to be signed by the Trust in the manner required by law, and
(v) cause to be mailed to the Grantor and any Owner copies of all such reports
and tax returns of the Trust.
6.04. Signature of Returns. The Trustee designated in Section 6.03
shall sign on behalf of the Trust the tax returns and other periodic filings of
the Trust, unless applicable law requires the Owner to sign such documents, in
which case, so long as the Grantor is the Owner and applicable law allows the
Grantor to sign any such document, the Grantor shall sign such document. At any
time that the Grantor is not the Owner, or is otherwise not allowed by law to
sign any such document, then the party required by law to sign such document
shall sign.
6.05. Right to Receive Instructions. In the event that the Trustees
are unable to decide between alternative courses of action for whatever reason,
or are unsure as to the application of any provision of this Agreement or any
Trust Related Agreement, or such provision is ambiguous as to its application,
or is, or appears to be, in conflict with any other applicable provision, or in
the event that this Agreement or any Trust Related Agreement permits any
determination by the Trustees or is silent or is incomplete as to the course of
action which the Trustees are required to take with respect to a particular set
of facts, any one or more of the Trustees may give notice of such circumstances
(in such form as shall be appropriate under the circumstances) to the Grantor
or, in the event of a Transfer, to the Owner and request instructions from
independent, appropriate legal or other counsel to the Trustees in accordance
with Section 7.03 of this Agreement.
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6.06. No Duties Except as Specified in this Agreement or in
Instructions. The Trustees shall not have any duty or obligation to manage, make
any payment in respect of, register, record, sell, dispose of or otherwise deal
with the Trust Property, or to otherwise take or refrain from taking any action
under, or in connection with, any document contemplated hereby to which the
Trustees are a party, except as expressly provided by the terms of this
Agreement or the Trust Related Agreements and no implied duties or obligations
shall be read into this Agreement or the Trust Related Agreements against the
Trustees. The Trustees nevertheless agree that, in the event that claims are
made against any of the Trustees in their individual capacities that are not
related to the ownership or the administration of the Trust Property or the
transactions contemplated by the Trust Related Agreements, the Trustee against
whom such claims were made shall, at its own cost and expense, promptly take all
action as may be necessary to discharge any liens on any part of the Trust
Property resulting from those claims.
6.07. No Action Except Under Specified Documents or Instructions. The
Trustees shall not manage, control, use, sell, dispose of or otherwise deal with
any part of the Trust Property except in accordance with the powers granted to
and the authority conferred upon the Trustees pursuant to this Agreement and the
Trust Related Agreements.
ARTICLE VII
CONCERNING THE TRUSTEES
7.01. Acceptance of Trusts and Duties. The Trustees accept the trusts
hereby created and agree to perform their respective duties hereunder with
respect to the same but only upon the terms of this Agreement. The Trustees
shall not be personally liable under any circumstances except (i) for their own
willful misconduct or gross negligence, (ii) for liabilities arising from the
failure by any of the Trustees to perform obligations expressly undertaken by
them in Article VI, or (iii) for taxes, fees or other charges on, based on or
measured by any fees, commissions or compensation received by the Trustees in
connection with any of the transactions contemplated by this Agreement or the
Trust Related Agreements. In particular, but not by way of limitation:
(a) The Trustees shall not be personally liable for any error
of judgment made in good faith by any of the Trustees;
(b) The Trustees shall not be personally liable with respect
to any action taken or omitted to be taken by the Trustees in good faith in
accordance with the instructions delivered pursuant to Section 6.05;
(c) No provision Of this Agreement shall require the Trustees
to expend or risk their personal funds or otherwise incur any financial
Liability in the performance of any of their rights or powers hereunder, if the
Trustees shall have reasonable
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grounds for believing that repayment of such funds or adequate indemnity against
such risk or Liability is not reasonably assured or provided to them;
(d) Under no circumstance shall the Trustees be personally
liable for any indebtedness of the Trust under any Trust Related Agreement; and
(e) The Trustees shall not be personally responsible for or
in respect of the validity or sufficiency of this Agreement or for the due
execution hereof by the Grantor, or for the form, character, genuineness,
sufficiency, value or validity of any Collateral, or for or in respect of the
validity or sufficiency of the Trust Related Agreements.
7.02. Furnishing of Documents. The Trustees shall furnish to the
Grantor and any Owner, promptly upon receipt thereof, duplicates or copies of
all material reports, notices, requests, demands, certificates, financial
statements and any other instruments furnished to the Trustees by any party
pursuant to the Trust Related Agreements (other than documents originated by or
otherwise furnished by the Grantor or any Owner).
7.03. Reliance; Advice of Counsel. (a) The Trustees shall incur no
Liability to anyone in acting upon any signature, instrument, notice,
resolution, request, consent, order, certificate, report, opinion, bond or other
document or paper believed by them to be genuine and believed by them to be
signed by the proper party or parties. The Trustees may accept a certified copy
of a resolution of the board of directors or other governing body of any
corporate party as conclusive evidence that such resolution has been duly
adopted by such body and that the same is in full force and effect. As to any
fact or matter the manner of ascertainment of which is not specifically
prescribed herein, the Trustees may for all purposes hereof rely on a
certificate, signed by the president or any vice president or by the treasurer
or any assistant treasurer or the secretary or any assistant secretary of the
relevant party, as to such fact or matter, and such certificate shall constitute
full protection to the Trustees for any action taken or omitted to be taken by
them in good faith in reliance thereon.
(b) In the exercise or administration of the trusts hereunder
and in the performance of their respective duties and obligations under any of
the Trust Related Agreements, the Trustees (i) may act directly or, at the
expense of the Trust in the case of the Issuer Trustee, through agents or
attorneys pursuant to agreements entered into with any of them, and the Trustees
shall not be liable for the default or misconduct of such agents or attorneys if
such agents or attorneys shall have been selected by the Trustees with
reasonable care and (ii) may, at the expense of the Trust in the case of the
Issuer Trustee, consult with counsel, accountants and other skilled persons to
be selected with reasonable care and employed by them, and the Trustees shall
not be liable for anything done, suffered or omitted in good faith by it in
accordance with the advice or opinion of any such counsel, accountants or other
skilled persons.
7.04. Not Acting in Individual Capacity. Except as expressly provided
in this Article VII, in accepting the trusts hereby created the Trustees each
act solely as trustees
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hereunder and not in their respective individual capacities, and all Persons
having any claim against the Trustees by reason of the transactions contemplated
by this Agreement or the Trust Related Agreements shall look only to the Trust
Property for payment or satisfaction thereof.
ARTICLE VIII
COMPENSATION OF TRUSTEES
8.01. Issuer Trustee's Fees and Expenses. The Issuer Trustee shall
receive compensation for its services hereunder as set forth on the fee schedule
attached hereto as Exhibit 1. The Issuer Trustee shall be entitled to be
reimbursed from the Trust Property for its reasonable expenses hereunder,
including, without limitation, the reasonable compensation, expenses and
disbursements of such agents, representatives, experts and counsel as the Issuer
Trustee may employ in connection with the exercise and performance of its rights
and duties under this Agreement and the Trust Related Agreements.
8.02. Benericiary Trustees' Fees and Expenses. The Beneficiary Trustees
shall not be compensated by the Trust for their services performed for or on
behalf of the Trust.
8.03. Fees of Separate Independent Trustee and Delaware Trustee. At
such time as the Independent Trustee and Delaware Trustee are not the same
Person, the Trust shall pay such fees to each of the Independent Trustee and
Delaware Trustee as the majority of the Trustees shall approve.
ARTICLE IX
INDEMNIFICATION OF TRUSTEES
9.01. Scope of Indemnification. To the fullest extent permitted by
law, the Trust shall indemnify the Trustees against any Liability incurred in
connection with any Proceeding in which the Trustees may be involved as a party
or otherwise by reason of the fact that such Trustee is or was serving in its
capacity as a Trustee, unless such Liability is based on or arises in connection
with the Trustee's own wilful misconduct or gross negligence, the failure to
perform the obligations set forth in Article VI, or taxes, fees or other charges
on, based on or measured by any fees, commissions or compensation received by
the Trustees in connection with any of the transactions contemplated by this
Agreement or the Trust Related Agreements.
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ARTICLE X
TERMINATION OF TRUST
10.01. Dissolution of Trust. (a) The Trust shall dissolve and, after
satisfaction of the creditors of the Trust as required by applicable law,
property held by the Trust will be distributed to the Grantor or, in the event
of a Transfer, to any Owner thirty years from the date of its creation or
sooner, at the option and expense, and upon written instruction of the Grantor,
but in no event before payment in full of all Series of Transition Bonds.
(b) The bankruptcy of either the Grantor or any Owner or both
shall not operate to terminate this Agreement, to dissolve, terminate or annul
the Trust, to entitle the Grantor's or any Owner's legal representatives to
claim an accounting or to take any action or Proceeding in any court for a
partition or winding up of the Trust Property, nor otherwise affect the rights,
obligations and liabilities of the parties hereto.
10.02. No Termination by Grantor or Owner. Except as provided in
Section 10.01, neither the Grantor nor any Owner shall be entitled to dissolve
or terminate or revoke the Trust established hereunder.
10.03. Cancellation of Certificate of Trust. Upon completion of the
winding up of the affairs of the Trust after dissolution of the Trust in
accordance with Section 10.01 or otherwise, the Certificate of Trust shall be
canceled by a Beneficiary Trustee's executing and filing a Certificate of
Cancellation with the Secretary of State of Delaware.
ARTICLE XI
SUCCESSOR TRUSTEES AND ADDITIONAL TRUSTEES
11.01. Resignation of Trustee; Appointment of Successor. (a) The
Trustees may resign at any time without cause by giving at least 90 days' prior
written notice to the Grantor and any Owner, such resignation to be effective
upon the acceptance of appointment by a successor Trustee under Section
11.01(b). In addition, the Grantor or, in the event of a Transfer, any Owner may
at any time remove any of the Trustees with or without cause by an instrument in
writing delivered to the Trustee, such removal to be effective upon the
acceptance of appointment by a successor Trustee under Section 11.01(b); except
that, neither the Grantor nor any Owner may remove the Independent Trustee (i)
after an Event of Default under the Indenture or (ii) if the removal of one or
more Trustees would cause the breach of Section 2.04(b). In case of the
resignation or removal of a Trustee, the Grantor or, in the event of a Transfer,
any Owner may appoint a successor Trustee by an instrument signed by the Grantor
or any Owner, as applicable, subject to Section 2.04(b). If the last remaining
Trustee of the Trust resigns or is removed or the Independent Trustee or
Delaware Trustee
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resigns or is removed and a successor Trustee shall not have been appointed
within 30 days after the giving of written notice of such resignation or the
delivery of the written instrument with respect to such removal, such Trustee,
the Grantor or any Owner may apply to any court of competent jurisdiction to
appoint a successor Trustee in compliance with Section 2.04(b) to act until such
time, if any, as a successor Trustee shall have been appointed as provided
above. Any successor Trustee so appointed by such court shall immediately and
without further act be superseded by any successor Trustee appointed as above
provided.
(b) Any successor Trustee, however appointed, shall execute
and deliver to the predecessor Trustee and the Trust an instrument accepting
such appointment, and thereupon such successor Trustee, without further acts,
shall become vested with all the estates, properties, rights, powers, duties and
trusts of the predecessor Trustee in the trusts hereunder with like effect as if
originally named as a Trustee herein; but nevertheless, upon the written request
of such successor Trustee, such predecessor Trustee shall execute and deliver an
instrument transferring to such successor Trustee, upon the trusts herein
expressed, all the estates, properties, rights, powers, duties and trusts of
such predecessor Trustee, and such predecessor Trustee shall duly assign,
transfer, deliver and pay over to such successor Trustee all moneys or other
property then held or subsequently received by such predecessor Trustee upon the
trusts herein expressed.
(c) Any successor Issuer Trustee, however appointed, shall be
a bank or trust company incorporated and doing business within the United States
of America and having a combined capital and surplus of at least $550,000,000.
Any corporation into which the Issuer Trustee may be merged or converted or with
which it may be consolidated, or any corporation resulting from any merger,
conversion or consolidation to which the Issuer Trustee shall be a party, or any
corporation to which substantially all the corporate trust business of the
Issuer Trustee may be transferred, shall, subject to the terms of this
Agreement, be the Issuer Trustee of the Trust under this Agreement without
further act or consent of any Person.
ARTICLE XII
MISCELLANEOUS
12.01. Supplements and Amendments. This Agreement may be amended only
by a written instrument signed by the Grantor, any Owner and a majority of the
Trustees (which majority shall include the Independent Trustee) at the time of
such amendment. No such amendment may be made unless the Rating Agency Condition
is satisfied in connection herewith.
12.02. No Legal Title to Trust Property in Grantor and Owner. Neither
the Grantor nor any Owner shall have legal title to or ownership of any part of
the Trust Property. No transfer, by operation of law or otherwise, of any right,
title and interest of the Grantor or
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any Owner in and to their undivided beneficial interest in the Trust Property
hereunder shall operate to terminate this Agreement or the trusts hereunder, to
dissolve, terminate or annul the Trust or to entitle any successor transferee to
an accounting or to the transfer to it of legal title to any part of the Trust
Property.
12.03. Limitations on Rights of Others. Nothing in this Agreement,
whether express or implied, shall be construed to give to any Person other than
the Trust, the Grantor and any Owner any legal or equitable right, remedy or
claim in the Trust Property or except for the Grantor and any Owner, under or in
respect of this Agreement or any covenants, conditions or provisions contained
herein.
12.04. Notices. Unless otherwise expressly specified or permitted by
the terms hereof, all notices shall be in writing and delivered by hand or
mailed by certified mail, postage prepaid, if to the Trustees, addressed to:
First Union Trust Company, One Rodney Square
National Association 920 King Street, lst Floor
Wilmington, DE 19801
George Shicora c/o First Union Trust Company,
National Association
One Rodney Square
920 King Street, 1st Floor
Wilmington, DE 19801
Diana Moy Kelly c/o First Union Trust Company,
National Association
One Rodney Square
920 King Street, 1st Floor
Wilmington, DE 19801
or to such other addresses as the Trustees may have set forth in a written
notice to the Grantor, any Owner and the Bond Trustee; and if to the Grantor,
addressed to: PECO Energy Company, 2301 Market Street, S21-1, Philadelphia, PA
19101 or to such other address as the Grantor may have set forth in a written
notice to the Trustees and the Bond Trustee. All notices to any Owner shall be
sent care of the Grantor to the Grantor's address set forth above or to such
other address as such Owner may have set forth in a written notice to the
Grantor, the Trustees and the Bond Trustee. Whenever any notice in writing is
required to be given by the Trustees hereunder, such notice shall be deemed
given and such requirement satisfied 72 hours after such notice is mailed by
certified mail, postage prepaid, addressed as provided above; any notice given
by the Grantor or any Owner to the Trustees shall be effective upon receipt.
21
<PAGE>
12.05. Severability. Any provision of this Agreement which is
prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction,
be ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof, and any such prohibition or
unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction.
12.06. Separate Counterparts. This Agreement may be executed by the
parties hereto in separate counterparts, each of which when so executed and
delivered shall be an original, but all such counterparts shall together
constitute but one and the same instrument.
12.07. Successors and Assigns. All covenants and agreements contained
herein shall be binding upon, and inure to the benefit of, the Trustees and
their respective successors and assigns and the Grantor, any Owner and their
respective successors and permitted assigns, all as herein provided. Any
request, notice, direction, consent, waiver or other instrument or action by the
Grantor and any Owner shall bind its successors and permitted assigns.
12.08. Headings. The headings of the various Articles and Sections
herein are for convenience of reference only and shall not define or limit any
of the terms or provisions hereof. Any reference to any Article or Section
contained in this Agreement shall refer to such Article or Section as set forth
in this Agreement, notwithstanding failure to use the term "hereof," "hereto" or
"herein" in connection with such reference.
12.09. Governing Law. This Agreement shall in all respects be governed
by, and construed in accordance with, the laws of the State of Delaware (without
regard to conflict of laws principles), including all matters of construction,
validity and performance.
[Remainder of this page left intentionally blank]
22
<PAGE>
IN WITNESS WHEREOF, the parties hereto have duly executed or caused
this Agreement to be duly executed by their respective officers hereunto duly
authorized, as of the day and year first above written.
PECO ENERGY COMPANY,
as Grantor and Owner
By_____________________________
Name___________________________
Title__________________________
FIRST UNION TRUST COMPANY,
NATIONAL ASSOCIATION, not in its
individual capacity but solely as Issuer
Trustee, Delaware Trustee and Independent
Trustee
By_____________________________
Name___________________________
Title__________________________
GEORGE SHICORA, not in his individual
capacity but solely as a Beneficiary
Trustee
By_____________________________
Name___________________________
DIANA MOY KELLY, not in her
individual capacity but solely as a
Beneficiary Trustee
By_____________________________
Name___________________________
23
<PAGE>
EXHIBIT 1
TRUSTEE FEE SCHEDULE
Exhibit 1
<PAGE>
EXHIBIT 2
CERTIFICATE OF TRUST
OF PECO ENERGY TRANSITION TRUST
THIS Certificate of Trust of PECO Energy Transition Trust (the
"Trust"), dated as of June 23, 1998, is being fully executed and filed by the
undersigned, as trustees, to form a business trust under the Delaware Business
Trust Act (12 Del. C. ss.3801, et seq.).
1. Name. The name of the business trust formed hereby is PECO Energy
Transition Trust.
2. Delaware Trustee. The name and business address of the trustee of
the Trust with its principal place of business in the State of Delaware are
First Union Trust Company, National Association, One Rodney Square, 920 King
Street, First Floor, Wilmington, Delaware 19801, Attention: Corporate Trust
Administration.
3. Effective Date. This Certificate of Trust shall be effective as of
its filing with the Secretary of State of the State of Delaware.
IN WITNESS WHEREOF, the undersigned, being the trustees of the Trust,
have executed this Certificate of Trust as of the date first-above written.
DIANA MOY KELLY, not in her FIRST UNION TRUST COMPANY,
individual capacity, but solely as NATIONAL ASSOCIATION, not in its
trustee of the Trust individual capacity, but solely as
trustee of the Trust
/s/ Diana Moy Kelly
___________________________________
By: /s/ Edward L. Truitt, Jr.
_______________________________
Name: Edward L. Truitt, Jr.
Title: Assistant Vice President
GEORGE SHICORA, not in his
individual capacity, but solely as
trustee of the Trust
/s/ George Shicora
___________________________
Exhibit 2
PECO ENERGY TRANSITION TRUST,
Issuer
and
THE BANK OF NEW YORK,
Bond Trustee
------------------------------
INDENTURE
Dated as of [________] , 1998
------------------------------
Securing Transition Bonds
Issuable in Series
<PAGE>
INDENTURE dated as of [________], 1998, between PECO ENERGY
TRANSITION TRUST, a Delaware statutory business trust (the
"Issuer"), and THE BANK OF NEW YORK, a New York banking
corporation, as trustee (the "Bond Trustee").
The Issuer has duly authorized the execution and delivery of this Indenture
to provide for one or more Series of Transition Bonds, issuable as provided in
this Indenture. Each such Series of Transition Bonds will be issued only under a
separate Series Supplement to this Indenture duly executed and delivered by the
Issuer and the Bond Trustee. The Issuer is entering into this Indenture, and the
Bond Trustee is accepting the trusts created hereby, each for good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged and
each intending to be legally bound hereby.
GRANTING CLAUSE
The Issuer hereby Grants to the Bond Trustee as trustee for the benefit of
the Holders of the Transition Bonds from time to time issued and outstanding,
all of the Issuer's right, title and interest in and to (a) the Intangible
Transition Property transferred by the Seller to the Issuer from time to time
pursuant to the Sale Agreement and all proceeds thereof, (b) the Sale Agreement
except for Section 5.01 thereof solely to the extent such Section provides for
indemnification of the Issuer, (c) all Bills of Sale delivered by the Seller
pursuant to the Sale Agreement, (d) the Servicing Agreement except for Section
[______] thereof solely to the extent such Section provides for indemnification
of the Issuer, (e) the Collection Account and all amounts on deposit therein
from time to time, (f) all other property of whatever kind owned from time to
time by the Issuer, (g) all present and future claims, demands, causes and
choses in action in respect of any or all of the foregoing and (h) all payments
on or under and all proceeds of every kind and nature whatsoever in respect of
any or all of the foregoing, including all proceeds of the conversion, voluntary
or involuntary, into cash or other liquid property, all cash proceeds, accounts,
accounts receivable, notes, drafts, acceptances, chattel paper, checks, deposit
accounts, insurance proceeds, condemnation awards, rights to payment of any and
every kind, and other forms of obligations and receivables, instruments and
other property which at any time constitute all or part of or are included in
the proceeds of any of the foregoing (collectively, the "Collateral").
To have and to hold in trust to secure the payment of principal of and
premium, if any, and interest on, and any other amounts (including all fees,
expenses, counsel fees and other amounts due and owing to the Bond Trustee)
owing in respect of, the Transition Bonds equally and ratably without prejudice,
preference, priority or distinction, except as expressly provided in this
Indenture and to secure performance by the Issuer of all of the Issuer's
obligations under this Indenture with respect to the Transition Bonds, all as
provided in this Indenture.
The Bond Trustee, as trustee on behalf of the Holders of the Transition
Bonds, acknowledges such Grant, accepts the trusts hereunder in accordance with
the provisions hereof and agrees to perform its duties herein required.
<PAGE>
2
ARTICLE I
Definitions and Incorporation by Reference
SECTION 1.01. Definitions. (a) Except as otherwise specified herein or as
the context may otherwise require, each of the following terms has the
respective meaning set forth below for all purposes of this Indenture.
"Act" has the meaning specified in Section 11.03(a).
"Adjustment Date" means, with respect to any Series of Transition Bonds,
the date or dates specified as such in the Series Supplement therefor.
"Affiliate" means, with respect to any specified Person, any other Person
controlling or controlled by or under common control with such specified Person.
For the purposes of this definition, "control" when used with respect to any
specified Person means the power to direct the management and policies of such
Person, directly or indirectly, whether through the ownership of voting
securities, by contract or otherwise; and the terms "controlling" and
"controlled" have meanings correlative to the foregoing.
"Authorized Initial Denominations" means, with respect to any Series of
Transition Bonds, $1,000 and integral multiples thereof, or such other
denominations as may be specified in the Series Supplement therefor.
"Authorized Officer" means, with respect to the Issuer, any trustee of the
Issuer and, with respect to the Issuer Trustee or other corporate trustee of the
Issuer, any officer who is authorized to act for such trustee in matters
relating to the Issuer and who is identified on the list of Authorized Officers
delivered by such trustee to the Bond Trustee as of the date hereof (as such
list may be modified or supplemented from time to time thereafter).
"Basic Documents" means the Certificate of Trust, the Trust Agreement, the
Sale Agreement, the Servicing Agreement and any Bills of Sale.
"Bond Rate" means, with respect to any Series or Class, the rate at which
interest accrues on the principal balance of Transition Bonds of such Series or
Class, as specified in the Series Supplement therefor.
"Bond Trustee" means The Bank of New York, a New York banking corporation
or any successor Bond Trustee under this Indenture.
"Book-Entry Transition Bonds" means beneficial interests in the Transition
Bonds, ownership and transfers of which shall be made through book entries by a
Clearing Agency as described in Section 2.11.
"Business Day" has the meaning specified in the Servicing Agreement.
"Calculated Overcollateralization Level" means, with respect to any Payment
Date, the amount set forth as such in Schedule 1 hereto, as such Schedule has
<PAGE>
3
been adjusted in accordance with Section 3.19 to reflect redemptions or
defeasances of Transition Bonds and issuances of additional Series of Transition
Bonds.
"Calculation Date" means, with respect to any Series of Transition Bonds,
such date or dates specified as such in the Series Supplement therefor.
"Capital Subaccount" has the meaning specified in Section 8.02(a).
"Certificate of Trust" means the certificate of trust of the Issuer
substantially in the form of Exhibit [B] to the Trust Agreement.
"Class" means, with respect to any Series, any one of the classes of
Transition Bonds of that Series.
"Class Termination Date" means, with respect to any Class, the termination
date therefor, as specified in the Series Supplement therefor.
"Clearing Agency" means an organization registered as a "clearing agency"
pursuant to Section 17A of the Exchange Act.
"Clearing Agency Participant" means a broker, dealer, bank, other financial
institution or other Person for whom from time to time a Clearing Agency effects
book-entry transfers and pledges of securities deposited with the Clearing
Agency.
"Code" means the Internal Revenue Code of 1986, as amended from time to
time, and Treasury Regulations promulgated thereunder.
"Collateral" has the meaning specified in the granting clause of this
Indenture.
"Collection Account" has the meaning specified in Section 8.02(a).
"Collection Period" has the meaning specified in the Servicing Agreement.
"Corporate Trust Office" means the principal office of the Bond Trustee at
which at any particular time its corporate trust business shall be administered,
which office at date of the execution of this Indenture is located at 101
Barclay Street, Floor 12 East, New York, NY 10019, Attention: Asset Backed
Finance Unit or at such other address as the Bond Trustee may designate from
time to time by notice to the Transition Bondholders and the Issuer, or the
principal corporate trust office of any successor Bond Trustee (the address of
which the successor Bond Trustee will notify the Transition Bondholders and the
Issuer).
"Covenant Defeasance Option" has the meaning specified in Section 4.01(b).
"Default" means any occurrence that is, or with notice or the lapse of time
or both would become, an Event of Default.
"Defeasance Subaccount" has the meaning specified in Section 8.02(a).
<PAGE>
4
"Definitive Transition Bonds" has the meaning specified in Section 2.11.
"DTC Agreement" means the agreement between the Issuer, the Bond Trustee
and The Depository Trust Company, as the initial Clearing Agency, dated as of
the Closing Date, relating to the Transition Bonds, substantially in the form of
Exhibit C hereto, as the same may be amended and supplemented from time to time.
"Duff" has the meaning specified in the Servicing Agreement.
"Eligible Deposit Account" means either (a) a segregated account with an
Eligible Institution or (b) a segregated trust account with the corporate trust
department of a depository institution organized under the laws of the United
States of America or any State (or any domestic branch of a foreign bank),
having corporate trust powers and acting as trustee for funds deposited in such
account, so long as any of the securities of such depository institution shall
have a credit rating from each Rating Agency in one of its generic rating
categories which signifies investment grade.
"Eligible Guarantor Institution" means a firm or other entity identified in
Rule 17Ad-15 under the Exchange Act as "an eligible guarantor institution,"
including (as such terms are defined therein) (i) a bank; (ii) a broker, dealer,
municipal securities broker or dealer or government securities broker or dealer;
(iii) a credit union; (iv) a national securities exchange, registered securities
association or clearing agency; or (v) a savings association that is a
participant in a securities transfer association.
"Eligible Institution" means (a) the corporate trust department of the Bond
Trustee or (b) 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
(i) has either (A) a long-term unsecured debt rating of "AAA" by Standard &
Poor's and "Al" by Moody's or (B) a certificate of deposit 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 (ii) whose
deposits are insured by the FDIC.
"Eligible Investments" mean book-entry securities, negotiable instruments
or securities represented by instruments in bearer or registered form which
evidence:
(a) direct obligations of, and obligations fully and unconditionally
guaranteed as to the timely payment by, the United States of America;
(b) demand deposits, time deposits or certificates of deposit of any
depository institution or trust company incorporated under the laws of the
United States of America or any State (or any domestic branch of a foreign
bank) and subject to supervision and examination by Federal or State
banking or depository institution authorities; provided, however, that at
the time of the investment or contractual commitment to invest therein, the
commercial paper or other short-term unsecured debt obligations (other than
such obligations the rating of which is based on the credit of the Person
other than such depository institution or trust company) thereof shall have
a credit rating from each of the Rating Agencies in the highest rating
category granted thereby;
<PAGE>
5
(c) commercial paper (other than commercial paper of the Seller or the
Servicer) having, at the time of the investment or contractual commitment
to invest therein, a rating from each of the Rating Agencies in the highest
rating category granted thereby;
(d) investments in money market funds having a rating from each of the
Rating Agencies in the highest rating category granted thereby (including
funds for which the Bond Trustee or any of its Affiliates is investment
manager or advisor);
(e) demand deposits, time deposits and certificates of deposit which
are fully insured by the FDIC;
(f) bankers' acceptances issued by any depository institution or trust
company referred to in clause (b) above;
(g) repurchase obligations with respect to any security that is a
direct obligation of, or fully guaranteed by, the United States of America
or any agency or instrumentality thereof the obligations of which are
backed by the full faith and credit of the United States of America, in
either case entered into with (i) a depository institution or trust company
(acting as principal) described in clause (b) above or (ii) a depository
institution or trust company the deposits of which are insured by FDIC; and
(h) any other investment permitted by each of the Rating Agencies;
provided, however, that (i) any book-entry security, instrument or security
having a maturity of one month or less that would be an Eligible Investment but
for its failure (or the failure of the obligor thereon) to have the rating
specified above shall be an Eligible Investment if such book-entry security,
instrument or security (or the obligor thereon) has a long-term unsecured debt
rating of at least "A2" by Moody's (or the equivalent thereof by the other
Rating Agencies) or a short-term rating of at least "P-1" by Moody's (or the
equivalent thereof by the other Rating Agencies), and (ii) any book-entry
security, instrument or security having a maturity of greater than one month
that would be an Eligible Investment but for its failure (or the failure of the
obligor thereon) to have the rating specified above shall be an Eligible
Investment if such book-entry security, instrument or security (or the obligor
thereon) has a long-term unsecured debt rating of at least "A1" by Moody's (or
the equivalent thereof by the other Rating Agencies) and a short-term rating of
at least "P-1" by Moody's (or the equivalent thereof by the other Rating
Agencies).
"Event of Default" has the meaning specified in Section 5.01.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Executive Officer" means, with respect to any corporation, the Chief
Executive Officer, Chief Operating Officer, Chief Financial Officer, President,
Executive Vice President, any Vice President, the Secretary or the Treasurer of
such corporation; and with respect to any partnership, any general partner
thereof.
<PAGE>
6
"Expected Amortization Schedule" means, with respect to any Series of
Transition Bonds, the expected amortization schedule for principal thereof, as
specified in the Series Supplement therefor.
"Expected Final Payment Date" means, with respect to any Series or Class of
Transition Bonds, the expected final payment date therefor, as specified in the
Series Supplement therefor.
"FDIC" means the Federal Deposit Insurance Corporation or any successor.
"Financing Issuance" means an issuance of a new Series of Transition Bonds
hereunder to provide funds to finance the purchase by the Issuer of Intangible
Transition Property.
"Fitch" has the meaning specified in the Servicing Agreement.
"General Subaccount" has the meaning specified in Section 8.02(a).
"Grant" means mortgage, pledge, bargain, sell, warrant, alienate, remise,
release, convey, assign, transfer, create, and grant a lien upon and a security
interest in and right of set-off against, deposit, set over and confirm pursuant
to this Indenture. A Grant of the Collateral or of any other agreement or
instrument shall include all rights, powers and options (but none of the
obligations) of the Granting party thereunder, including the immediate and
continuing right to claim for, collect, receive and give receipt for principal,
interest and other payments in respect of the Collateral and all other moneys
payable thereunder, to give and receive notices and other communications, to
make waivers or other agreements, to exercise all rights and options, to bring
Proceedings in the name of the Granting party or otherwise and generally to do
and receive anything that the Granting party is or may be entitled to do or
receive thereunder or with respect thereto.
"Holder" or "Transition Bondholder" means the Person in whose name a
Transition Bond is registered on the Transition Bond Register.
"Indemnity Amounts" means any amounts paid by the Seller or the Servicer to
the Bond Trustee, for itself or on behalf of the Transition Bondholders,
pursuant to Section 5.01(b), 5.0l(c)(ii) and 5.01(e) of the Sale Agreement or
Section 5.02(b) of the Servicing Agreement or by the Issuer to the Bond Trustee
pursuant to Section 5.07 of this Indenture; provided, however, that Indemnity
Amounts shall exclude Liquidated Damages paid pursuant to Section 5.01(c)(ii) of
the Sale Agreement.
"Indenture" or "this Indenture" means this instrument as originally
executed and, as from time to time supplemented or amended by one or more
indentures supplemental hereto entered into pursuant to the applicable
provisions hereof, as so supplemented or amended, or both, and shall include the
forms and terms of the Transition Bonds established hereunder.
"Independent" means, when used with respect to any specified Person, that
the Person (a) is in fact independent of the Issuer, any other obligor upon the
Transition
<PAGE>
7
Bonds, the Seller and any Affiliate of any of the foregoing Persons, (b) does
not have any direct financial interest or any material indirect financial
interest in the Issuer, any such other obligor, the Seller or any Affiliate of
any of the foregoing Persons and (c) is not connected with the Issuer, any such
other obligor, the Seller or any Affiliate of any of the foregoing Persons as an
officer, employee, promoter, underwriter, trustee, partner, director or person
performing similar functions.
"Independent Certificate" means a certificate or opinion to be delivered to
the Bond Trustee under the circumstances described in, and otherwise complying
with, the applicable requirements of Section 11.01, made by an Independent
appraiser or other expert appointed by an Issuer Order and approved by the Bond
Trustee in the exercise of reasonable care, and such opinion or certificate
shall state that the signer has read the definition of "Independent" in this
Indenture and that the signer is Independent within the meaning thereof.
"Intangible Transition Charges Adjustment Process" means the process by
which Intangible Transition Charges are adjusted pursuant to the Servicing
Agreement and the Statute.
"Interest" means, with respect to any Monthly Allocation Date for any
Series of Transition Bonds, the sum of, without duplication, (i) an amount that
if deposited to the Series Subaccount therefor would cause the amount on deposit
in such Series Subaccount, without regard to investment income, in respect of
interest to equal the Monthly Allocated Interest Balance for such Series and
such Monthly Allocation Date, (ii) if the maturities of the Transition Bonds
have been accelerated in accordance with Section 5.02, the accrued and unpaid
interest on such Series through the date of acceleration, (iii) with respect to
a Series to be redeemed prior to the next Monthly Allocation Date, the amount of
interest that will be payable as interest on such Series on the Redemption Date
therefor and (iv) any interest due on such Series on a Payment Date therefor or
other date for the payment of interest thereon and not paid and, to the extent
permitted by law, interest thereon.
"Interest Deposit Amounts" means any amounts remitted by the Seller to the
Bond Trustee in respect of interest payments pursuant to (i) a binding agreement
with the Issuer entered into by the Seller pursuant to Section 5.01(d)(i)(B)(i)
of the Sale Agreement or (ii) an escrow arrangement pursuant to Section
5.01(d)(i)(B)(ii) of the Sale Agreement .
"Interest Deposit Subaccount" has the meaning specified in Section 8.02(a).
"Issuer" means the party named as such in this Indenture until a successor
replaces it and, thereafter, means the successor and, for purposes of any
provision contained herein and required by the TIA, each other obligor on the
Transition Bonds.
"Issuer Order" and "Issuer Request" means a written order or request signed
in the name of the Issuer by any one of its Authorized Officers and delivered to
the Bond Trustee.
<PAGE>
8
"Issuer Trustee" means First Union Trust Company, National Association, not
in its individual capacity but solely as Issuer Trustee under the Trust
Agreement, or any successor Issuer Trustee under the Trust Agreement.
"Legal Defeasance Option" has the meaning specified in Section 4.01(b).
"Lien" has the meaning specified in the Servicing Agreement.
"Liquidated Damages" means the Liquidated Damages Amount paid by the Seller
to the Bond Trustee, on behalf of the Transition Bondholders, pursuant to
Section 5.01(c)(ii) or 5.01(d)(i) of the Sale Agreement.
"Liquidated Damages Redemption Date" means the date, not more than [__]
days after receipt of Liquidated Damages by the Issuer, specified by the Issuer
for the redemption of the Transition Bonds as a result of receiving Liquidated
Damages.
"Loss Amounts" means any amounts remitted by the Seller to the Bond Trustee
pursuant to Section 5.01(c)(iii) of the Sale Agreement.
"Loss Subaccount" has the meaning specified in Section 8.02(a).
"Monthly Allocated Interest Balance" means, for any Monthly Allocation Date
for a Series, the balance set forth as such for such Monthly Allocation Date in
Schedule [____] to the Series Supplement for such Series.
"Monthly Allocated Overcollateralization Balance" means, for any Monthly
Allocation Date, the balance set forth as such in Schedule 1 hereto , as such
Schedule has been adjusted in accordance with Section 3.19 to reflect
redemptions or defeasances of Transition Bonds and issuances of additional
Series of Transition Bonds.
"Monthly Allocated Principal Balance" means, for any Monthly Allocation
Date for a Series, the balance set forth as such for such Monthly Allocation
Date in Schedule [____] to the Series Supplement for such Series.
"Monthly Allocation Date" has the meaning specified in the Servicing
Agreement.
"Monthly Servicing Fee" means, with respect to any Series of Transition
Bonds, the fee payable to the Servicer on each Monthly Allocation Date for
services rendered, determined pursuant to Section 5.07 of the Servicing
Agreement.
"Moody's" has the meaning specified in the Servicing Agreement.
"Officer's Certificate" means a certificate signed by any Authorized
Officer of the Issuer, under the circumstances described in, and otherwise
complying with, the applicable requirements of Section 11.01, and delivered to
the Bond Trustee. Unless otherwise specified, any reference in this Indenture to
an Officer's Certificate shall be to an Officer's Certificate of any Authorized
Officer of the Issuer.
<PAGE>
9
"Operating Expenses" means all fees, costs, expenses and indemnity payments
owed by the Issuer, including all amounts owed by the Issuer to the Bond
Trustee, the Monthly Servicing Fee, and legal and accounting fees, costs and
expenses of the Issuer and the Issuer Trustee.
"Opinion of Counsel" means one or more written opinions of counsel who may,
except as otherwise expressly provided in this Indenture, be employees of or
counsel to the Issuer and who shall be reasonably satisfactory to the Bond
Trustee, and which opinion or opinions shall be addressed to the Bond Trustee,
as Bond Trustee, and shall comply with any applicable requirements of Section
11.01, and shall be in a form reasonably satisfactory to the Bond Trustee.
"Outstanding" means, as of the date of determination, all Transition Bonds
theretofore authenticated and delivered under this Indenture except:
(i) Transition Bonds theretofore canceled by the Transition Bond
Registrar or delivered to the Transition Bond Registrar for cancelation;
(ii) Transition Bonds or portions thereof the payment for which money
in the necessary amount has been theretofore deposited with the Bond
Trustee or any Paying Agent in trust for the Holders of such Transition
Bonds; (provided, however, that if such Transition Bonds are to be
redeemed, notice of such redemption has been duly given pursuant to this
Indenture or provision therefor, satisfactory to the Bond Trustee, made);
and
(iii) Transition Bonds in exchange for or in lieu of other Transition
Bonds which have been authenticated and delivered pursuant to this
Indenture unless proof satisfactory to the Bond Trustee is presented that
any such Transition Bonds are held by a bona fide purchaser;
provided that in determining whether the Holders of the requisite Outstanding
Amount of the Transition Bonds or any Series or Class thereof have given any
request, demand, authorization, direction, notice, consent or waiver hereunder
or under any Basic Document, Transition Bonds owned by the Issuer, any other
obligor upon the Transition Bonds, the Seller or any Affiliate of any of the
foregoing Persons shall be disregarded and deemed not to be Outstanding, except
that, in determining whether the Bond Trustee shall be protected in relying upon
any such request, demand, authorization, direction, notice, consent or waiver,
only Transition Bonds that the Bond Trustee knows to be so owned shall be so
disregarded. Transition Bonds so owned that have been pledged in good faith may
be regarded as Outstanding if the pledgee establishes to the satisfaction of the
Bond Trustee the pledgee's right so to act with respect to such Transition Bonds
and that the pledgee is not the Issuer, any other obligor upon the Transition
Bonds, the Seller or any Affiliate of any of the foregoing Persons.
"Outstanding Amount" means the aggregate principal amount of all Transition
Bonds or, if the context requires, all Transition Bonds of a Series or Class
Outstanding at the date of determination.
"Overcollateralization" means, with respect to any Monthly Allocation Date,
an amount that, if deposited to the Overcollateralization Subaccount, would
cause
<PAGE>
10
the balance in such subaccount to equal the Monthly Allocated
Overcollateralization Balance for such Monthly Allocation Date, without regard
to investment earnings.
"Overcollateralization Amount" means, with respect to any Series of
Transition Bonds, the amount specified as such in the Series Supplement
therefor.
"Overcollateralization Subaccount" has the meaning specified in Section
8.02(a).
"Paying Agent" means the Bond Trustee or any other Person that meets the
eligibility standards for the Bond Trustee specified in Section 6.11 and is
authorized by the Issuer to make the payments of principal of or premium, if
any, or interest on the Transition Bonds on behalf of the Issuer.
"Payment Date" means, with respect to any Series or Class, each date or
dates specified as Payment Dates for such Series or Class in the Series
Supplement therefor.
"Person" means any individual, corporation, estate, partnership, joint
venture, association, joint stock company, trust (including any beneficiary
thereof), business trust, unincorporated organization or government or any
agency or political subdivision thereof.
"Predecessor Transition Bond" means, with respect to any particular
Transition Bond, every previous Transition Bond evidencing all or a portion of
the same debt as that evidenced by such particular Transition Bond; and, for the
purpose of this definition, any Transition Bond authenticated and delivered
under Section 2.06 in lieu of a mutilated, lost, destroyed or stolen Transition
Bond shall be deemed to evidence the same debt as the mutilated, lost, destroyed
or stolen Transition Bond.
"Principal" means, with respect to any Monthly Allocation Date for any
Series of Transition Bonds, the sum of, without duplication, (i) an amount that,
if deposited to the Series Subaccount therefor, would cause the amount on
deposit in such Series Subaccount, without regard to investment income, in
respect of principal to equal the Monthly Allocated Principal Balance for such
Series and such Monthly Allocation Date, (ii) if the maturities of the
Transition Bonds have been accelerated in accordance with Section 5.02, the
aggregate outstanding principal amount of such Series of Transition Bonds, (iii)
with respect to a Series to be redeemed prior to the next Monthly Allocation
Date, the amount of principal that will be payable as principal on the
Redemption Date therefor and (iv) any principal due on a Series on a Payment
Date therefor or other date for the payment of principal thereof and not paid.
"Proceeding" means any suit in equity, action at law or other judicial or
administrative proceeding.
"Projected Transition Bond Balance" means, as of any date, the sum of the
amounts provided for in the Expected Amortization Schedules for each outstanding
Series of Transition Bonds and such date.
"Pro Rata" has the meaning specified in Section 8.02(d).
<PAGE>
11
"Rating Agency" means any rating agency rating the Transition Bonds of any
Class or Series at the time of issuance thereof at the request of the Issuer.
If no such organization or successor is any longer in existence, "Rating Agency"
shall be a nationally recognized statistical rating organization or other
comparable Person designated by the Issuer, notice of which designation shall be
given to the Bond Trustee, the Issuer Trustee and the Servicer.
"Rating Agency Condition" means, with respect to any action, the
notification in writing by each Rating Agency to the Seller, the Servicer, the
Bond Trustee and the Issuer that such action will not result in a reduction or
withdrawal of the then current rating by such Rating Agency of any outstanding
Series or Class of Transition Bonds.
"Record Date" means, with respect to any Payment Date for a Series, the
date set forth as such in the Series Supplement therefor.
"Redemption Date" means, with respect to any Series or Class, the date for
the redemption of the Transition Bonds of such Series or Class pursuant to
Sections 10.01 or 10.02 or the Series Supplement for such Series or Class,
including the Liquidated Damages Redemption Date.
"Redemption Price" has the meaning specified in Section 10.01.
"Refunding Issuance" means issuance of a new Series of Transition Bonds
hereunder to pay the cost of refunding, through redemption or payment on the
Expected Final Payment Date for a Series or Class of Transition Bonds, all or
part of the Transition Bonds of such Series or Class to the extent permitted by
the terms thereof.
"Registered Holder" means, as of any date, the Person in whose name a
Transition Bond is registered on the Transition Bond Register on such date.
"Required Capital Amount" means the sum of, for each Outstanding Series of
Transition Bonds, 0.50% of the initial principal amount thereof.
"Reserve Subaccount" has the meaning specified in Section 8.02(a).
"Responsible Officer" means, with respect to the Bond Trustee, any officer
within the Corporate Trust Office of the Bond Trustee, including any Vice
President, Assistant Vice President, Secretary, Assistant Secretary, or any
other officer of the Bond Trustee customarily performing functions similar to
those performed by any of the above designated officers and also, with respect
to a particular matter, any other officer to whom such matter is referred
because of such officer's knowledge of and familiarity with the particular
subject.
"Retiring Bond Trustee" has the meaning specified in Section 6.08.
"Sale Agreement" means the Intangible Transition Property Sale Agreement
dated as of [______], 1998, between the Issuer and the Seller, as amended and
supplemented from time to time.
<PAGE>
12
"Series" means any series of Transition Bonds issued and authenticated
pursuant to this Indenture.
"Series Issuance Date" means, with respect to any Series, the date on which
the Transition Bonds of such Series are to be originally issued in accordance
with Section 2.10 and the Series Supplement for such Series.
"Series Subaccount" has the meaning specified in Section 8.02(a).
"Series Supplement" means an indenture supplemental to this Indenture that
authorizes a particular Series of Transition Bonds.
"Series Termination Date" means, with respect to any Series, the
termination date therefor, as specified in the Series Supplement for such
Series.
"Servicing Agreement" means the Master Servicing Agreement dated as of
[_______], 1998, between the Issuer, the Servicer and such other Persons as may
become parties thereto, as amended and supplemented from time to time.
"Standard & Poor's" has the meaning specified in the Servicing Agreement.
"State" means any one of the 50 states of the United States of America or
the District of Columbia.
"Successor Servicer" has the meaning specified in Section 3.20(h).
"Transition Bond" means any of the transition bonds (as defined in the
Statute) issued and authenticated pursuant to this Indenture.
"Transition Bond Balance" means, as of any date, the aggregate outstanding
principal amount of all Series of Transition Bonds on such date.
"Transition Bond Owner" means, with respect to a Book-Entry Transition
Bond, the Person who is the beneficial owner of such Book-Entry Transition Bond,
as reflected on the books of the Clearing Agency, or on the books of a Person
maintaining an account with such Clearing Agency (directly as a Clearing Agency
Participant or as an indirect participant, in each case in accordance with the
rules of such Clearing Agency).
"Transition Bond Register" and "Transition Bond Registrar" have the
respective meanings specified in Section 2.05.
"Trust Indenture Act" or "TIA" means the Trust Indenture Act of 1939 as in
force on the date hereof, unless otherwise specifically provided.
"UCC" has the meaning specified in the Servicing Agreement.
"U.S. Government Obligations" means direct obligations (or certificates
representing an ownership interest in such obligations) of the United States of
America (including any agency or instrumentality thereof) for the payment of
which the full faith
<PAGE>
13
and credit of the United States of America is pledged and which are not callable
at the issuer's option.
(b) Except as otherwise specified herein or as the context may otherwise
require, each of the following terms has the meaning set forth in the Sale
Agreement for all purposes of this Indenture, and the definitions of such terms
are equally applicable both to the singular and plural forms of such terms:
<TABLE>
<CAPTION>
Term Section of Sale Agreement
---- -------------------------
<S> <C>
Bill of Sale..................................................... Section 1.01(a)
Initial Intangible Transition Property........................... Section 1.01(a)
Intangible Transition Charges.................................... Section 1.01(a)
Intangible Transition Property................................... Section 1.01(a)
ITC Collections.................................................. Section 1.01(a)
Liquidated Damages Amount ....................................... Section 1.01(a)
PUC ............................................................. Section 1.01(a)
Qualified Rate Order ............................................ Section 1.01(a)
Seller .......................................................... Section 1.01(a)
Servicer ........................................................ Section 1.01(a)
Servicer Default ................................................ Section 1.01(a)
Statute ......................................................... Section 1.01(a)
Subsequent Intangible Transition Property........................ Section 1.01(a)
Transferred Intangible Transition Property....................... Section 1.01(a)
Trust Agreement.................................................. Section 1.01(a)
</TABLE>
SECTION 1.02. Incorporation by Reference of Trust Indenture Act. Whenever
this Indenture refers to a provision of the TIA, the provision is incorporated
by reference in and made a part of this Indenture. Each of the following TIA
terms used in this Indenture has the following meaning:
"Commission" means the Securities and Exchange Commission.
"indenture securities" means the Transition Bonds.
"indenture to be qualified" means this Indenture.
"indenture trustee" or "institutional trustee" means the Bond Trustee.
All other TIA terms used in this Indenture that are defined by the TIA,
defined by TIA reference to another statute or defined by Commission rule have
the meaning assigned to them by such definitions.
SECTION 1.03. Rules of Construction. Unless the context otherwise requires:
<PAGE>
14
(i) a term has the meaning assigned to it;
(ii) an accounting term not otherwise defined has the meaning assigned
to it in accordance with generally accepted accounting principles as in
effect from time to time;
(iii) "or" is not exclusive;
(iv) "including" means including without limitation;
(v) words in the singular include the plural and words in the plural
include the singular; and
(vi) the words "herein", "hereof", "hereunder" and other words of
similar import refer to this Indenture as a whole and not to any particular
Article, Section or other subdivision.
ARTICLE II
The Transition Bonds
--------------------
SECTION 2.01. Form. The Transition Bonds and the Bond Trustee's certificate
of authentication shall be in substantially the forms set forth in Exhibit A
hereto, with such appropriate insertions, omissions, substitutions and other
variations as are required or permitted by this Indenture or by the related
Series Supplement and may have such letters, numbers or other marks of
identification and such legends or endorsements placed thereon as may,
consistently herewith, be determined by the Authorized Officers of the Issuer
Trustee executing such Transition Bonds, as evidenced by their execution of such
Transition Bonds. Any portion of the text of any Transition Bond may be set
forth on the reverse thereof, with an appropriate reference thereto on the face
of the Transition Bond. Each Transition Bond shall be dated the date of its
authentication.
The Transition Bonds shall be typewritten, printed, lithographed or
engraved or produced by any combination of these methods (with or without steel
engraved borders), all as determined by the Authorized Officers of the Issuer
Trustee executing such Transition Bonds, as evidenced by their execution of such
Transition Bonds.
Each Transition Bond shall bear upon its face the designation so selected
for the Series or Class to which it belongs. The terms of all Transition Bonds
of the same Series shall be the same, unless such Series is comprised of one or
more Classes, in which case the terms of all Transition Bonds of the same Class
shall be the same.
All Definitive Transition Bonds shall bear the legend set forth in Exhibit
A hereto.
SECTION 2.02. Execution, Authentication and Delivery. The Transition Bonds
shall be executed on behalf of the Issuer by an Authorized Officer of the Issuer
<PAGE>
15
Trustee. The signature of any such Authorized Officer on the Transition Bonds
may be manual or facsimile.
Transition Bonds bearing the manual or facsimile signature of individuals
who were at any time Authorized Officers of the Issuer Trustee shall bind the
Issuer, notwithstanding that such individuals or any of them have ceased to hold
such offices prior to the authentication and delivery of such Transition Bonds
or did not hold such offices at the date of such Transition Bonds.
At any time and from time to time after the execution and delivery of this
Indenture, the Issuer may deliver Transition Bonds executed on behalf of the
Issuer to the Bond Trustee pursuant to an Issuer Order for authentication; and
the Bond Trustee shall authenticate and deliver such Transition Bond as in this
Indenture provided and not otherwise.
No Transition Bond shall be entitled to any benefit under this Indenture or
be valid or obligatory for any purpose, unless there appears on such Transition
Bond a certificate of authentication substantially in the form provided for
herein executed by the Bond Trustee by the manual signature of one of its
authorized signatories, and such certificate upon any Transition Bond shall be
conclusive evidence, and the only evidence, that such Transition Bond has been
duly authenticated and delivered hereunder.
SECTION 2.03. Denominations; Transition Bonds Issuable in Series. The
Transition Bonds of each Series shall be issuable as registered Transition Bonds
in the Authorized Initial Denominations specified in the Series Supplement
therefor.
The Transition Bonds may, at the election of and as authorized by an
Authorized Officer of the Issuer, and set forth in a Series Supplement, be
issued in one or more Series (each comprised of one or more Classes), and shall
be designated generally as the "Transition Bonds" of the Issuer, with such
further particular designations added or incorporated in such title for the
Transition Bonds of any particular Series or Class as an Authorized Officer of
the Issuer may determine and be set forth in the Series Supplement therefor.
Each Series of Transition Bonds shall be created by a Series Supplement
authorized by an Authorized Officer of the Issuer and establishing the terms and
provisions of such Series. The several Series and Classes thereof may differ as
between Series and Classes, in respect of any of the following matters:
(i) designation of the Series and, if applicable, the Classes thereof;
(ii) the aggregate principal amount of the Transition Bonds of the
Series and, if applicable, each Class thereof;
(iii) the Bond Rate of the Series and, if applicable, each Class
thereof or the formula, if any, used to calculate the applicable Bond Rate
or Bond Rates for the Series;
(iv) the Payment Dates for the Series;
<PAGE>
16
(v) the Monthly Allocated Interest Balances for the Series;
(vi) the Monthly Allocated Principal Balances for the Series;
(vii) the Expected Final Payment Date of the Series, and, if
applicable, each Class thereof;
(viii) the Series Termination Date for the Series and, if applicable,
the Class Termination Dates for each Class thereof;
(ix) the Series Issuance Date for the Series;
(x) the place or places for payments with respect to the Series;
(xi) the Authorized Initial Denominations for the Series;
(xii) the provisions, if any, for redemption of the Series by the
Issuer;
(xiii) the Expected Amortization Schedule for the Series;
(xiv) the Overcollateralization Amount with respect to the Series;
(xv) the Calculation Dates and Adjustment Dates for the Series;
(xvi) the credit enhancement applicable to the Series; and
(xvii) any other terms of the Series or Class that are not
inconsistent with the provisions of this Indenture.
SECTION 2.04. Temporary Transition Bonds. Pending the preparation of
definitive Transition Bonds, or by agreement of the purchasers of all Transition
Bonds or, in the case of Transition Bonds held in a book-entry only system by a
Clearing Agency, the Issuer Trustee on behalf of the Issuer may execute, and
upon receipt of an Issuer Order the Bond Trustee shall authenticate and deliver,
temporary Transition Bonds which are printed, lithographed, typewritten,
mimeographed or otherwise produced, of the tenor of the definitive Transition
Bonds in lieu of which they are issued and with such variations not inconsistent
with the terms of this Indenture as the Authorized Officers of the Issuer
Trustee executing such Transition Bonds may determine, as evidenced by their
execution of such Transition Bonds.
If temporary Transition Bonds are issued, the Issuer will cause definitive
Transition Bonds to be prepared without unreasonable delay except where
temporary Transition Bonds are held by a Clearing Agency. After the preparation
of definitive Transition Bonds, the temporary Transition Bonds shall be
exchangeable for definitive Transition Bonds upon surrender of the temporary
Transition Bonds at the office or agency of the Issuer to be maintained as
provided in Section 3.02, without charge to the Holder. Upon surrender for
cancelation of any one or more temporary Transition Bonds, the Issuer Trustee on
behalf of the Issuer shall execute and the Bond Trustee shall authenticate and
deliver in exchange therefor a like initial principal amount of definitive
Transition Bonds in Authorized Initial Denominations. Until so exchanged, the
<PAGE>
17
temporary Transition Bonds shall in all respects be entitled to the same
benefits under this Indenture as definitive Transition Bonds.
SECTION 2.05. Registration; Registration of Transfer and Exchange. The
Issuer shall cause to be kept a register (the "Transition Bond Register") in
which, subject to such reasonable regulations as it may prescribe, the Issuer
shall provide for the registration of Transition Bonds and the registration of
transfers of Transition Bonds. The Bond Trustee shall be "Transition Bond
Registrar" for the purpose of registering Transition Bonds and transfers of
Transition Bonds as herein provided. Upon any resignation of any Transition Bond
Registrar, the Issuer shall promptly appoint a successor or, if it elects not to
make such an appointment, assume the duties of Transition Bond Registrar.
If a Person other than the Bond Trustee is appointed by the Issuer as
Transition Bond Registrar, the Issuer will give the Bond Trustee prompt written
notice of the appointment of such Transition Bond Registrar and of the location,
and any change in the location, of the Transition Bond Register, and the Bond
Trustee shall have the right to inspect the Transition Bond Register at all
reasonable times and to obtain copies thereof, and the Bond Trustee shall have
the right to rely upon a certificate executed on behalf of the Transition Bond
Registrar by an Authorized Officer thereof as to the names and addresses of the
Holders of the Transition Bonds and the principal amounts and number of such
Transition Bonds.
Upon surrender for registration of transfer of any Transition Bond at the
office or agency of the Issuer to be maintained as provided in Section 3.02, the
Issuer Trustee on behalf of the Issuer shall execute, and the Bond Trustee shall
authenticate and the Transition Bondholder shall obtain from the Bond Trustee,
in the name of the designated transferee or transferees, one or more new
Transition Bonds in any Authorized Initial Denominations, of a like Series (and,
if applicable, Class) and aggregate initial principal amount.
At the option of the Holder, Transition Bonds may be exchanged for other
Transition Bonds of a like Series (and, if applicable, Class) and aggregate
initial principal amount in Authorized Initial Denominations, upon surrender of
the Transition Bonds to be exchanged at such office or agency. Whenever any
Transition Bonds are so surrendered for exchange, the Issuer Trustee on behalf
of the Issuer shall execute, and the Bond Trustee shall authenticate and the
Transition Bondholder shall obtain from the Bond Trustee, the Transition Bonds
which the Transition Bondholder making the exchange is entitled to receive.
All Transition Bonds issued upon any registration of transfer or exchange
of Transition Bonds shall be the valid obligations of the Issuer, evidencing the
same debt, and entitled to the same benefits under this Indenture, as the
Transition Bonds surrendered upon such registration of transfer or exchange.
Every Transition Bond presented or surrendered for registration of transfer
or exchange shall be duly endorsed by, or be accompanied by a written instrument
of transfer in the form set forth in Exhibit A hereto or such other form as is
satisfactory to the Bond Trustee duly executed by, the Holder thereof or such
Holder's
<PAGE>
18
attorney duly authorized in writing, with such signature guaranteed by an
Eligible Guarantor Institution in the form set forth in such Transition Bond.
No service charge shall be made to a Holder for any registration of
transfer or exchange of Transition Bonds, but, other than in respect of
exchanges pursuant to Section 2.04 or 9.06 not involving any transfer, the
Issuer may require payment of a sum sufficient to cover any tax or other
governmental charge that may be imposed in connection with any registration of
transfer or exchange of Transition Bonds.
The preceding provisions of this Section notwithstanding, the Issuer shall
not be required to make, and the Transition Bond Registrar need not register,
transfers or exchanges of Transition Bonds selected for redemption or transfers
or exchanges of any Transition Bond for a period of 15 days preceding the date
on which final payment of principal is to be made with respect to such
Transition Bond.
SECTION 2.06. Mutilated, Destroyed, Lost or Stolen Transition Bonds. If (i)
any mutilated Transition Bond is surrendered to the Bond Trustee, or the Bond
Trustee receives evidence to its satisfaction of the destruction, loss or theft
of any Transition Bond, and (ii) there is delivered to the Bond Trustee such
security or indemnity as may be required by it to hold the Issuer and the Bond
Trustee harmless, then, in the absence of notice to the Issuer, the Transition
Bond Registrar or the Bond Trustee that such Transition Bond has been acquired
by a bona fide purchaser, the Issuer Trustee on behalf of the Issuer shall
execute, and upon the Issuer Trustee's request the Bond Trustee shall
authenticate and deliver, in exchange for or in lieu of any such mutilated,
destroyed, lost or stolen Transition Bond, a replacement Transition Bond of like
Series (and, if applicable, Class), tenor and initial principal amount in
Authorized Initial Denominations, bearing a number not contemporaneously
outstanding; provided, however, that if any such destroyed, lost or stolen
Transition Bond, but not a mutilated Transition Bond, shall have become or
within seven days shall be due and payable, or shall have been called for
redemption, instead of issuing a replacement Transition Bond, the Issuer may pay
such destroyed, lost or stolen Transition Bond when so due or payable or upon
the Redemption Date without surrender thereof. If, after the delivery of such
replacement Transition Bond or payment of a destroyed, lost or stolen Transition
Bond pursuant to the proviso to the preceding sentence, a bona fide purchaser of
the original Transition Bond in lieu of which such replacement Transition Bond
was issued presents for payment such original Transition Bond, the Issuer and
the Bond Trustee shall be entitled to recover such replacement Transition Bond
(or such payment) from the Person to whom it was delivered or any Person taking
such replacement Transition Bond from such Person to whom such replacement
Transition Bond was delivered or any assignee of such Person, except a bona fide
purchaser, and shall be entitled to recover upon the security or indemnity
provided therefor to the extent of any loss, damage, cost or expense incurred by
the Issuer or the Bond Trustee in connection therewith.
Upon the issuance of any replacement Transition Bond under this Section,
the Issuer may require the payment by the Holder of such Transition Bond of a
sum sufficient to cover any tax or other governmental charge that may be imposed
in relation thereto and any other reasonable expenses (including the fees and
expenses of the Bond Trustee) connected therewith.
<PAGE>
19
Every replacement Transition Bond issued pursuant to this Section in
replacement of any mutilated, destroyed, lost or stolen Transition Bond shall
constitute an original additional contractual obligation of the Issuer, whether
or not the mutilated, destroyed, lost or stolen Transition Bond shall be at any
time enforceable by anyone, and shall be entitled to all the benefits of this
Indenture equally and proportionately with any and all other Transition Bonds
duly issued hereunder.
The provisions of this Section are exclusive and shall preclude (to the
extent lawful) all other rights and remedies with respect to the replacement or
payment of mutilated, destroyed, lost or stolen Transition Bonds.
SECTION 2.07. Persons Deemed Owner. Prior to due presentment for
registration of transfer of any Transition Bond, the Issuer, the Bond Trustee
and any agent of the Issuer or the Bond Trustee may treat the Person in whose
name any Transition Bond is registered (as of the day of determination) as the
owner of such Transition Bond for the purpose of receiving payments of principal
of and premium, if any, and interest on such Transition Bond and for all other
purposes whatsoever, whether or not such Transition Bond be overdue, and neither
the Issuer, the Bond Trustee nor any agent of the Issuer or the Bond Trustee
shall be affected by notice to the contrary.
SECTION 2.08. Payment of Principal, Premium, if any, and Interest; Interest
on Overdue Principal and Premium, if any; Principal, Premium and Interest Rights
Preserved. (a) The Transition Bonds shall accrue interest as provided in the
form of Transition Bond attached to the Series Supplement for such Transition
Bonds, at the applicable Bond Rate specified therein, and such interest shall be
payable on each Payment Date as specified therein. Any instalment of interest,
principal or premium, if any, payable on any Transition Bond which is punctually
paid or duly provided for by the Issuer on the applicable Payment Date shall be
paid to the Person in whose name such Transition Bond (or one or more
Predecessor Transition Bonds) is registered on the Record Date for such Payment
Date, by check mailed first-class, postage prepaid to such Person's address as
it appears on the Transition Bond Register on such Record Date or in such other
manner as may be provided in the related Series Supplement, except that with
respect to Transition Bonds registered on a Record Date in the name of the
nominee of the Clearing Agency (initially, such nominee to be Cede & Co.),
payments will be made by wire transfer in immediately available funds to the
account designated by such nominee and except for the final instalment of
principal and premium, if any, payable with respect to such Transition Bond on a
Payment Date which shall be payable as provided in clause (b) below. The funds
represented by any such checks returned undelivered shall be held in accordance
with Section 3.03 hereof.
(b) The principal of each Transition Bond of each Series (and, if
applicable, Class) shall be payable in instalments on each Payment Date
specified in the Expected Amortization Schedule included in the form of
Transition Bond attached to the Series Supplement for such Transition Bonds, but
only to the extent that moneys are available for such payment pursuant to
Section 8.02. Failure to pay in accordance with such Expected Amortization
Schedule because moneys are not so available pursuant to Section 8.02 to make
such payments shall not constitute a Default or Event of Default under this
Indenture. Notwithstanding the foregoing, the entire unpaid principal amount of
the Transition Bonds of any Series or Class shall be due and payable, if not
previously paid (i) on the Series Termination Date (or, if applicable, Class
Termination Date)
<PAGE>
20
therefor, (ii) on the date on which the Transition Bonds of all Series have been
declared immediately due and payable in accordance with Section 5.02 or (iii) on
the Redemption Date, if any, therefor. The Bond Trustee shall notify the Person
in whose name a Transition Bond is registered at the close of business on the
Record Date preceding the Payment Date on which the Issuer expects that the
final instalment of principal of and premium, if any, and interest on such
Transition Bond will be paid. Such notice shall be mailed no later than five
days prior to such final Payment Date and shall specify that such final
instalment of principal and premium, if any, will be payable only upon
presentation and surrender of such Transition Bond and shall specify the place
where such Transition Bond may be presented and surrendered for payment of such
instalment. Notices in connection with redemptions of Transition Bonds shall be
mailed to Transition Bondholders as provided in Section 10.03.
(c) If the Issuer defaults in a payment of interest on the Transition Bonds
of any Series, the Issuer shall pay defaulted interest (plus interest on such
defaulted interest at the applicable Bond Rate to the extent lawful) in any
lawful manner. The Issuer may pay such defaulted interest to the Persons who are
Transition Bondholders on a subsequent special record date, which date shall be
at least five Business Days prior to the payment date. The Issuer shall fix or
cause to be fixed any such special record date and payment date, and, at least
15 days before any such special record date, the Issuer shall mail to each
affected Transition Bondholder a notice that states the special record date, the
payment date and the amount of defaulted interest to be paid.
SECTION 2.09. Cancelation. All Transition Bonds surrendered for payment,
registration of transfer, exchange or redemption shall, if surrendered to any
Person other than the Bond Trustee, be delivered to the Bond Trustee and shall
be promptly canceled by the Bond Trustee. The Issuer may at any time deliver to
the Bond Trustee for cancelation any Transition Bonds previously authenticated
and delivered hereunder which the Issuer may have acquired in any manner
whatsoever, and all Transition Bonds so delivered shall be promptly canceled by
the Bond Trustee. No Transition Bonds shall be authenticated in lieu of or in
exchange for any Transition Bonds canceled as provided in this Section, except
as expressly permitted by this Indenture. All canceled Transition Bonds may be
held or disposed of by the Bond Trustee in accordance with its standard
retention or disposal policy as in effect at the time unless the Issuer shall
direct by an Issuer Order that they be destroyed or returned to it; provided
that such Issuer Order is timely and the Transition Bonds have not been
previously disposed of by the Bond Trustee.
SECTION 2.10. Amount; Authentication and Delivery of Transition Bonds. The
aggregate principal amount of Transition Bonds that may be authenticated and
delivered under this Indenture shall not exceed $4 billion plus the amount of
any Refunding Issuance. The Issuer may issue Transition Bonds of a new Series as
a Financing Issuance or a Refunding Issuance.
Transition Bonds of a new Series may from time to time be executed by the
Issuer Trustee on behalf of the Issuer and delivered to the Bond Trustee for
authentication and thereupon the same shall be authenticated and delivered by
the Bond Trustee upon Issuer Request and upon delivery by the Issuer, at the
Issuer's expense, to the Bond Trustee of the following:
<PAGE>
21
(1) Trust Action. An Issuer Order authorizing and directing the
execution, authentication and delivery of the Transition Bonds by the Bond
Trustee and specifying the principal amount of Transition Bonds to be
authenticated.
(2) Authorizations. Either (i) a certificate of authentication or
other official document evidencing the due authorization, approval or
consent of any governmental body or bodies at the time having jurisdiction,
together with an Opinion of Counsel that the Bond Trustee is entitled to
rely on that the authorization, approval, or consent of no other
governmental body is required for the valid issuance, authentication and
delivery of such Transition Bonds, or (ii) an Opinion of Counsel that no
such authorization, approval, or consent of any governmental body is
required, except for, in the case of (i) and (ii), such registrations as
are required under the Blue Sky and securities laws of any State.
(3) Authorizing Certificate. A certified resolution of the Issuer
Trustee on behalf of the Issuer authorizing the execution and delivery of
the Series Supplement for the Transition Bonds applied for and the
execution, authentication and delivery of such Transition Bonds.
(4) A Series Supplement for the Series of Transition Bonds applied
for, which shall set forth the provisions and form of the Transition Bonds
of such Series (and, if applicable, each Class thereof).
(5) Certificates of the Issuer. (a) An Officer's Certificate from the
Issuer, dated as of the Series Issuance Date, stating: (i) that no Default
has occurred and is continuing under this Indenture and that the issuance
of the Transition Bonds applied for will not result in any Default; (ii)
that the Issuer has appointed the firm of independent certified public
accountants as contemplated in Section 8.05; (iii) that attached thereto
are duly executed, true and complete copies of the Sale Agreement and the
Servicing Agreement; (iv) that all filings with the PUC pursuant to the
Statute and all UCC financing statements with respect to the Collateral
which are required to be filed by the terms of the Sale Agreement, the
Servicing Agreement or this Indenture have been filed as required; and (v)
that all conditions precedent provided in the Indenture relating to the
authentication and delivery of the Transition Bonds have been complied
with.
(b) An Officer's Certificate from the Seller, dated as of the Series
Issuance Date, to the effect that, in the case of the Intangible Transition
Property to be transferred to the Issuer on such date immediately prior to
the conveyance thereof to the Issuer pursuant to the Sale Agreement:
(i) the Seller is the sole owner of such Intangible Transition
Property; such Intangible Transition Property has been validly
transferred and sold to the Issuer free and clear of all Liens (other
than Liens created by the Issuer pursuant to this Indenture); the
Seller has the corporate power and authority to own, sell and assign
such Intangible Transition Property to the Issuer; and the Seller has
duly authorized such sale and assignment to the Issuer by all
necessary corporate action; and
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22
(ii) the attached copy of the Qualified Rate Order creating such
Intangible Transition Property is true and correct and is in full
force and effect.
(6) Opinion of Counsel. An Opinion of Counsel, portions of which may
be delivered by counsel for the Issuer and portions of which may be
delivered by counsel for the Seller and the Servicer, dated as of the
Series Issuance Date, to the collective effect that:
(a) the Issuer has the power and authority to execute and deliver
the Series Supplement and this Indenture and to issue the Transition
Bonds applied for, each of the Series Supplement and this Indenture,
and the Transition Bonds applied for have been duly authorized and
executed, and the Issuer is duly organized and in good standing under
the laws of the jurisdiction of its organization;
(b) the Transition Bonds applied for, when authenticated in
accordance with the provisions of the Indenture and delivered, will
constitute valid and binding obligations of the Issuer entitled to the
benefits of the Indenture and the related Series Supplement;
(c) the Indenture (including the related Series Supplement), the
Sale Agreement and the Servicing Agreement are valid and binding
agreements of the Issuer, enforceable in accordance with their
respective terms except as such enforceability may be subject to
bankruptcy, insolvency, reorganization and other similar laws
affecting the rights of creditors generally and general principles of
equity (regardless of whether such enforceability is considered in a
proceeding in equity or at law);
(d) the Sale Agreement is a valid and binding agreement of the
Seller, enforceable against the Seller in accordance with its terms
except as such enforceability may be subject to bankruptcy,
insolvency, reorganization and other similar laws affecting the rights
of creditors generally and general principles of equity (regardless of
whether such enforcement is considered in a proceeding in equity or at
law);
(e) the Servicing Agreement is a valid and binding agreement of
the Servicer, enforceable against the Servicer in accordance with its
terms except as such enforceability may be subject to bankruptcy,
insolvency, reorganization and other similar laws affecting the rights
of creditors generally and general principles of equity (regardless of
whether such enforcement is considered in a proceeding in equity or at
law);
(f) upon the delivery of a fully executed Bill of Sale delivered
to the Issuer pursuant to Section 2.03(i) of the Sale Agreement in
connection with the issuance of Transition Bonds applied for and the
payment of the purchase price of the related Intangible Transition
Property by the Issuer to the Seller pursuant to such Bill of Sale and
the Sale Agreement, then (I) the transfer of the Intangible Transition
Property purported to be conveyed thereby by the Seller to the Issuer
pursuant to such Bill of Sale
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23
and the Sale Agreement conveys all of the Seller's right, title and
interest in such Intangible Transition Property to the Issuer and will
be treated under state law as an absolute transfer of all of the
Seller's right, title, and interest in such Intangible Transition
Property, other than for federal and state income tax purposes, (II)
such transfer of such Intangible Transition Property is perfected,
(III) such transfer has a priority over any other assignment or
transfer of such Intangible Transition Property, and (IV) such
Intangible Transition Property is free and clear of all liens created
prior to its transfer to the Issuer pursuant to such Bill of Sale and
the Sale Agreement;
(g)(I) to the extent that the provisions of Section 2812 of the
Statute apply to the grant of a security interest by the Issuer in the
Collateral pursuant to this Indenture, then upon the giving of value
by the Bond Trustee to the Issuer with respect to the Collateral, (A)
this Indenture creates in favor of the Bond Trustee a security
interest in the rights of the Issuer in the Collateral, (B) such
security interest is valid and enforceable against the Issuer and
third parties (subject to the rights of any third parties holding
security interests in such Collateral perfected in the manner
described in Section 2812 of the Statute), and has attached, (C) such
security interest is perfected, and (D) such perfected security
interest is of first priority; and (II) to the extent that the
provisions of Section 2812 of the Statute do not apply to the grant of
a security interest by the Issuer in the Collateral pursuant to this
Indenture, then upon the giving of value by the Bond Trustee to the
Issuer with respect to the Collateral, (A) this Indenture creates in
favor of the Bond Trustee a security interest in the rights of the
Issuer in the Collateral, and such security interest is enforceable
against the Issuer with respect to such Collateral, (B) such security
interest is perfected, and (C) such perfected security interest is of
first priority;
(h) the Indenture has been duly qualified under the Trust
Indenture Act and either the Series Supplement for the Transition
Bonds applied for has been duly qualified under the Trust Indenture
Act or no such qualification of such Series Supplement is necessary;
(i) all instruments furnished to the Bond Trustee conform to the
requirements of this Indenture and constitute all the documents
required to be delivered hereunder for the Bond Trustee to
authenticate and deliver the Transition Bonds applied for, and all
conditions precedent provided for in this Indenture relating to the
authentication and delivery of the Transition Bonds have been complied
with;
(j) either (A) the registration statement covering the Transition
Bonds is effective under the Securities Act of 1933 and, to the best
of such counsel's knowledge and information, no stop order suspending
the effectiveness of such registration statement has been issued under
the Securities Act of 1933 nor have proceedings therefor been
instituted or threatened by the Commission or (B) the Transition Bonds
are exempt from the registration requirements under the Securities Act
of 1933;
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24
(k) the Indenture (including the related Series Supplement) has
been duly authorized, executed and delivered by the Issuer; and
(l) the Sale Agreement and the Servicing Agreement have been duly
authorized, executed and delivered by the Issuer, the Seller and the
Servicer as applicable.
(7) Accountant's Certificate or Opinion. A certificate or opinion,
addressed to the Issuer and the Bond Trustee complying with the
requirements of Section 11.01 hereof, of a firm of Independent certified
public accountants of recognized national reputation to the effect that (a)
such accountants are Independent with respect to the Issuer within the
meaning of the Indenture, and are independent public accountants within the
meaning of the standards of The American Institute of Certified Public
Accountants, and (b) with respect to the Collateral, they have made such
calculations as they deemed necessary for the purpose and determined 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, and
taking into account amounts on deposit in the Reserve Subaccount, as of the
Series Issuance Date for such Series (after giving effect to the issuance
of such Series and the application of the proceeds therefrom) such
Intangible Transition Charges are sufficient to (a) pay Operating Expenses
when incurred, (b) pay interest on each Series of Transition Bonds at their
respective Bond Rates when due, (c) pay principal of the Transition Bonds
of all Series in accordance with their respective Expected Amortization
Schedules and (d) fund the Calculated Overcollateralization Level as of
each Payment Date.
(8) Rating Agency Condition. The Bond Trustee shall receive written
notice from each Rating Agency that the Rating Agency Condition will be
satisfied with respect to the issuance of such new Series.
(9) Bill of Sale. If the issuance of an additional Series of
Transition Bonds is a Financing Issuance, the Bill of Sale delivered to the
Issuer under the Sale Agreement with respect to the Intangible Transition
Property being purchased with the proceeds of such Financing Issuance.
(10) Moneys for Refunding. If the issuance of a Series of Transition
Bonds is a Refunding Issuance, the amount of money necessary to pay the
outstanding principal balance of, and premium and interest on, the
Transition Bonds being refunded to either the Redemption Date for
Transition Bonds being refunded upon redemption, such money to be deposited
into a separate account with the Bond Trustee.
SECTION 2.11. Book-Entry Transition Bonds. Unless otherwise specified in
the related Series Supplement, each Series of Transition Bonds, upon original
issuance, will be issued in the form of a typewritten Transition Bond or
Transition Bonds representing the Book-Entry Transition Bonds, to be delivered
to The Depository Trust Company, the initial Clearing Agency, by, or on behalf
of, the Issuer. Such Transition Bond shall initially be registered on the
Transition Bond Register in the name of Cede & Co., the
<PAGE>
25
nominee of the initial Clearing Agency, and no Transition Bond Owner will
receive a definitive Transition Bond representing such Transition Bond Owner's
interest in such Transition Bond, except as provided in Section 2.13. Unless and
until definitive, fully registered Transition Bonds (the "Definitive Transition
Bonds") have been issued to Transition Bond Owners pursuant to Section 2.13:
(i) the provisions of this Section shall be in full force and
effect;
(ii) the Transition Bond Registrar and the Bond Trustee shall be
entitled to deal with the Clearing Agency for all purposes of this
Indenture (including the payment of principal of and premium, if any,
and interest on the Transition Bonds and the giving of instructions or
directions hereunder) as the sole holder of the Transition Bonds, and
shall have no obligation to the Transition Bond Owners;
(iii) to the extent that the provisions of this Section conflict
with any other provisions of this Indenture, the provisions of this
Section shall control;
(iv) the rights of Transition Bond Owners shall be exercised only
through the Clearing Agency and shall be limited to those established
by law and agreements between such Transition Bond Owners and the
Clearing Agency or the Clearing Agency Participants. Pursuant to the
DTC Agreement, unless and until Definitive Transition Bonds are issued
pursuant to Section 2.13, the initial Clearing Agency will make
book-entry transfers among the Clearing Agency Participants and
receive and transmit payments of principal of and premium, if any, and
interest on the Transition Bonds to such Clearing Agency Participants;
and
(v) whenever this Indenture requires or permits actions to be
taken based upon instructions or directions of Holders of Transition
Bonds evidencing a specified percentage of the Outstanding Amount of
the Transition Bonds or a Series or Class thereof, the Clearing Agency
shall be deemed to represent such percentage only to the extent that
it has received instructions to such effect from Transition Bond
Owners or Clearing Agency Participants owning or representing,
respectively, such required percentage of the beneficial interest in
the Transition Bonds or such Series or Class and has delivered such
instructions to the Bond Trustee.
SECTION 2.12. Notices to Clearing Agency. Whenever a notice or other
communication to the Transition Bondholders is required under this Indenture,
unless and until Definitive Transition Bonds shall have been issued to
Transition Bond Owners pursuant to Section 2.13, the Bond Trustee shall give all
such notices and communications specified herein to be given to Transition
Bondholders to the Clearing Agency, and shall have no obligation to the
Transition Bond Owners.
SECTION 2.13. Definitive Transition Bonds. If (i) the Issuer advises the
Bond Trustee in writing that the Clearing Agency is no longer willing or able to
properly discharge its responsibilities as depository with respect to any Series
or Class of Transition Bonds and the Issuer is unable to locate a qualified
successor, (ii) the Issuer, at its option, advises the Bond Trustee in writing
that it elects to terminate the book-entry system through the Clearing Agency
with respect to any Series or Class of Transition
<PAGE>
26
Bonds or (iii) after the occurrence of an Event of Default, Transition Bond
Owners representing beneficial interests aggregating at least a majority of the
Outstanding Amount of the Transition Bonds of all Series advise the Bond Trustee
through the Clearing Agency in writing that the continuation of a book-entry
system through the Clearing Agency is no longer in the best interests of the
Transition Bond Owners, then the Clearing Agency shall notify all affected
Transition Bond Owners and the Bond Trustee of the occurrence of any such event
and of the availability of Definitive Transition Bonds to affected Transition
Bond Owners requesting the same. Upon surrender to the Bond Trustee of the
typewritten Transition Bond or Transition Bonds representing the Book-Entry
Transition Bonds by the Clearing Agency, accompanied by registration
instructions, the Issuer Trustee on behalf of the Issuer shall execute and the
Bond Trustee shall authenticate the Definitive Transition Bonds in accordance
with the instructions of the Clearing Agency. None of the Issuer, the Transition
Bond Registrar or the Bond Trustee shall be liable for any delay in delivery of
such instructions and may conclusively rely on, and shall be protected in
relying on, such instructions. Upon the issuance of Definitive Transition Bonds,
the Bond Trustee shall recognize the Holders of the Definitive Transition Bonds
as Transition Bondholders.
ARTICLE III
Covenants
---------
SECTION 3.01. Payment of Principal, Premium, if any, and Interest. The
Issuer will duly and punctually pay the principal of and premium, if any, and
interest on the Transition Bonds in accordance with the terms of the Transition
Bonds and this Indenture; provided that except on the Series Termination Date,
the Class Termination Date or the Redemption Date for a Series or Class of
Transition Bonds or upon the acceleration of the Transition Bonds following the
occurrence of an Event of Default, the Issuer shall only be obligated to pay the
principal of such Transition Bonds on each Payment Date therefor to the extent
moneys are available for such payment pursuant to Section 8.02. Amounts properly
withheld under the Code by any Person from a payment to any Transition
Bondholder of interest or principal or premium, if any, shall be considered as
having been paid by the Issuer to such Transition Bondholder for all purposes of
this Indenture.
SECTION 3.02. Maintenance of Office or Agency. The Issuer will maintain in
the Borough of Manhattan, the City of New York, an office or agency where
Transition Bonds may be surrendered for registration of transfer or exchange,
and where notices and demands to or upon the Issuer in respect of the Transition
Bonds and this Indenture may be served. The Issuer hereby initially appoints the
Bond Trustee to serve as its agent for the foregoing purposes. The Issuer will
give prompt written notice to the Bond Trustee of the location, and of any
change in the location, of any such office or agency. If at any time the Issuer
shall fail to maintain any such office or agency or shall fail to furnish the
Bond Trustee with the address thereof, such surrenders, notices and demands may
be made or served at the Corporate Trust Office, and the Issuer hereby appoints
the Bond Trustee as its agent to receive all such surrenders, notices and
demands.
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27
SECTION 3.03. Money for Payments To Be Held in Trust. As provided in
Section 8.02(a), all payments of principal of, or premium and interest on, the
Transition Bonds that are to be made from amounts withdrawn from the Collection
Account pursuant to Section 8.02(d), (e) or (f) or Section 4.03 shall be made on
behalf of the Issuer by the Bond Trustee or by another Paying Agent, and no
amounts so withdrawn from the Collection Account for payments of Transition
Bonds shall be paid over to the Issuer except as provided in this Section and in
Section 8.02.
The Issuer will cause each Paying Agent other than the Bond Trustee to
execute and deliver to the Bond Trustee an instrument in which such Paying Agent
shall agree with the Bond Trustee (and if the Bond Trustee acts as Paying Agent,
it hereby so agrees), subject to the provisions of this Section, that such
Paying Agent will:
(i) hold all sums held by it for the payment of principal of, or
premium or interest on, the Transition Bonds in trust for the benefit of
the Persons entitled thereto until such sums shall be paid to such Persons
or otherwise disposed of as herein provided and pay such sums to such
Persons as herein provided;
(ii) give the Bond Trustee notice of any Default by the Issuer (or any
other obligor upon the Transition Bonds) of which the Paying Agent has
actual knowledge in the making of any payment required to be made with
respect to the Transition Bonds;
(iii) at any time during the continuance of any such Default, upon the
written request of the Bond Trustee, forthwith pay to the Bond Trustee all
sums so held in trust by such Paying Agent;
(iv) immediately resign as a Paying Agent and forthwith pay to the
Bond Trustee all sums held by the Paying Agent in trust for the payment of
Transition Bonds if at any time the Paying Agent ceases to meet the
standards required to be met by a Paying Agent at the time of its
appointment; and
(v) comply with all requirements of the Code with respect to the
withholding from any payments made by it on any Transition Bonds of any
applicable withholding taxes imposed thereon and with respect to any
applicable reporting requirements in connection therewith.
The Issuer may at any time, for the purpose of obtaining the satisfaction
and discharge of this Indenture or for any other purpose, by Issuer Order direct
any Paying Agent to pay to the Bond Trustee all sums held in trust by such
Paying Agent, such sums to be held by the Bond Trustee upon the same trusts as
those upon which the sums were held by such Paying Agent; and upon such payment
by any Paying Agent to the Bond Trustee, such Paying Agent shall be released
from all further liability with respect to such money.
Subject to applicable laws with respect to escheat of funds, any money held
by the Bond Trustee or any Paying Agent in trust for the payment of any amount
of principal of, premium on, if any, or interest on any Transition Bond and
remaining unclaimed for two years after such amount has become due and payable
shall be discharged from such trust and be paid to the Issuer; and the Holder of
such Transition
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28
Bond shall thereafter, as an unsecured general creditor, look only to the Issuer
for payment thereof (but only to the extent of the amounts so paid to the
Issuer), and all liability of the Bond Trustee or such Paying Agent with respect
to such trust money shall thereupon cease; provided, however, that the Bond
Trustee or such Paying Agent, before being required to make any such repayment,
may at the expense of the Issuer cause to be published once, in a newspaper
published in the English language, customarily published on each Business Day
and of general circulation in the City of New York, notice that such money
remains unclaimed and that, after a date specified therein, which shall not be
less than 30 days from the date of such publication, any unclaimed balance of
such money then remaining will be repaid to the Issuer. The Bond Trustee may
also adopt and employ, at the expense of the Issuer, any other reasonable means
of notification of such repayment (including mailing notice of such repayment to
Holders whose Transition Bonds have been called but have not been surrendered
for redemption or whose right to or interest in moneys due and payable but not
claimed is determinable from the records of the Bond Trustee or of any Paying
Agent, at the last address of record for each such Holder).
SECTION 3.04. Existence. Subject to Section 3.10, the Issuer will keep in
full effect its existence, rights and franchises as a statutory business trust
under the laws of the State of Delaware (unless it becomes, or any successor
Issuer hereunder is or becomes, organized under the laws of any other State or
of the United States of America, in which case the Issuer will keep in full
effect its existence, rights and franchises under the laws of such other
jurisdiction) and will obtain and preserve its qualification to do business in
each jurisdiction in which such qualification is or shall be necessary to
protect the validity and enforceability of this Indenture, the Transition Bonds,
the Collateral and each other instrument or agreement included therein.
SECTION 3.05. Protection of Collateral. The Issuer will from time to time
execute and deliver all such supplements and amendments hereto and all such
filings (including filings with the PUC pursuant to the Statute), financing
statements, continuation statements, instruments of further assurance and other
instruments, and will take such other action necessary or advisable to:
(i) maintain and preserve the lien and security interest (and the
priority thereof) of this Indenture or carry out more effectively the
purposes hereof;
(ii) perfect, publish notice of or protect the validity of any Grant
made or to be made by this Indenture;
(iii) enforce any of the Collateral;
(iv) preserve and defend title to the Collateral and the rights of the
Bond Trustee and the Transition Bondholders in the Collateral against the
claims of all Persons and parties; or
(v) pay any and all taxes levied or assessed up on all or any part of
the Collateral.
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29
The Issuer hereby designates the Bond Trustee its agent and attorney-in-fact to
execute any filing with the PUC, financing statement, continuation statement or
other instrument required by the Bond Trustee pursuant to this Section.
SECTION 3.06. Opinions as to Collateral. (a) On or before [_____] in each
calendar year, beginning at least 3 months after the issuance of the first
Series of the Transition Bonds while any Series is outstanding, the Issuer shall
furnish to the Bond Trustee an Opinion of Counsel either stating that, in the
opinion of such counsel, such action has been taken with respect to the
recording, filing, re-recording and refiling of this Indenture, any indentures
supplemental hereto and any other requisite documents and, with respect to the
execution and filing of any filings with the PUC pursuant to the Statute,
financing statements and continuation statements as is necessary to maintain the
lien and security interest, and the first priority thereof, created by this
Indenture and reciting the details of such action or stating that in the opinion
of such counsel no such action is necessary to maintain such lien and security
interest, and the first priority thereof. Such Opinion of Counsel shall also
describe the recording, filing, re-recording and refiling of this Indenture, any
indentures supplemental hereto and any other requisite documents, and the
execution and filing of any filings with the PUC, financing statements and
continuation statements that will, in the opinion of such counsel, be required
to maintain the lien and security interest of this Indenture until [_____] in
the following calendar year.
(b) Prior to the effectiveness of any amendment to the Sale Agreement or
the Servicing Agreement, the Issuer shall furnish to the Bond Trustee an Opinion
of Counsel either (A) stating that, in the opinion of such counsel, all filings,
including filings with the PUC pursuant to the Statute, have been executed and
filed that are necessary fully to preserve and protect the interest of the
Issuer and the Bond Trustee in the Transferred Intangible Transition Property
and the proceeds thereof, and reciting the details of such filings or referring
to prior Opinions of Counsel in which such details are given, or (B) stating
that, in the opinion of such counsel, no such action shall be necessary to
preserve and protect such interest.
SECTION 3.07. Performance of Obligations. (a) The Issuer (i) will
diligently pursue any and all actions to enforce its rights under each
instrument or agreement included in the Collateral and (ii) will not take any
action and will use its best efforts not to permit any action to be taken by
others that would release any Person from any of such Person's covenants or
obligations under any such instrument or agreement or that would result in the
amendment, hypothecation, subordination, termination or discharge of, or impair
the validity or effectiveness of, any such instrument or agreement, except, in
each case, as expressly provided in this Indenture, the Sale Agreement or the
Servicing Agreement or such other instrument or agreement.
(b) The Issuer may contract with other Persons to assist it in performing
its duties under this Indenture, and any performance of such duties by a Person
identified to the Bond Trustee in an Officer's Certificate of the Issuer shall
be deemed to be action taken by the Issuer. Initially, the Issuer has contracted
with the Servicer to assist the Issuer in performing its duties under this
Indenture.
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30
(c) The Issuer will punctually perform and observe all of its obligations
and agreements contained in the Sale Agreement, the Servicing Agreement and in
all other instruments and agreements included in the Collateral.
(d) Without derogating from the absolute nature of the assignment granted
to the Bond Trustee under this Indenture or the rights of the Bond Trustee
hereunder, but subject to Section 3.20, the Issuer agrees that it will not,
without the prior written consent of the Bond Trustee or the Holders of at least
a majority in Outstanding Amount of the Transition Bonds of all Series, amend,
modify, waive, supplement, terminate or surrender, or agree to any amendment,
modification, supplement, termination, waiver or surrender of, the terms of any
Collateral or the Basic Documents. If any such amendment, modification,
supplement or waiver shall be so consented to by the Bond Trustee or such
Holders, the Issuer agrees to execute and deliver, in its own name and at its
own expense, such agreements, instruments, consents and other documents as shall
be necessary or appropriate in the circumstances. The Issuer agrees that no such
amendment, modification, supplement or waiver shall adversely affect the rights
of the Holders of the Transition Bonds outstanding at the time of any such
amendment, modification, supplement or waiver.
SECTION 3.08. Negative Covenants. The Issuer shall not:
(i) except as expressly permitted by this Indenture or the Sale
Agreement or the 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 Article V;
(ii) 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 from such payments under the Code) or
assert any claim against any present or former Transition Bondholder by
reason of the payment of taxes levied or assessed upon the Issuer or any
part of the Collateral;
(iii)(A) permit the validity or effectiveness of this Indenture to be
impaired, or permit the lien of this Indenture to be amended, hypothecated,
subordinated, terminated or discharged, or permit any Person to be released
from any covenants or obligations with respect to the Transition Bonds
under this Indenture except as may be expressly permitted hereby, (B)
permit any lien, charge, excise, claim, security interest, mortgage or
other encumbrance (other than the lien and security interest created by
this Indenture) to be created on or extend to or otherwise arise upon or
burden the Collateral or any part thereof or any interest therein or the
proceeds thereof or (C) permit the lien of this Indenture not to constitute
a continuing valid first priority security interest in the Collateral.
SECTION 3.09. Annual Statement as to Compliance. The Issuer will deliver to
the Bond Trustee, within 120 days after the end of each fiscal year of the
Issuer
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31
(commencing with the fiscal year 1998), an Officer's Certificate stating, as to
the Authorized Officer signing such Officer's Certificate, that
(i) a review of the activities of the Issuer during such year (or
relevant portion thereof) and of performance under this Indenture has been
made under such Authorized Officer's supervision; and
(ii) to the best of such Authorized Officer's knowledge, based on such
review, the Issuer has complied with all conditions and covenants under
this Indenture throughout such calendar year (or relevant portion thereof),
or, if there has been a default in complying with any such condition or
covenant, describing each such default and the nature and status thereof.
SECTION 3.10. Issuer May Consolidate, etc., Only on Certain Terms. The
Issuer shall not consolidate or merge with or into any other Person or sell
substantially all of its assets to any other Person, unless:
(i) the Person (if other than the Issuer) formed by or surviving such
consolidation or merger or to whom substantially all of such assets are
sold shall be a Person organized and existing under the laws of the United
States of America or any State and shall expressly assume by an indenture
supplemental hereto, executed and delivered to the Bond Trustee, in form
satisfactory to the Bond Trustee, the due and punctual payment of the
principal of and premium, if any, and interest on all Transition Bonds and
the performance or observance of every agreement and covenant of this
Indenture on the part of the Issuer to be performed or observed, all as
provided herein and in the applicable Series Supplement or Series
Supplements;
(ii) the Person (if other than the Issuer) formed by or surviving such
consolidation or merger or to whom substantially all of such assets are
sold shall expressly assume all obligations and succeed to all rights of
the Issuer under the Sale Agreement and the Servicing Agreement pursuant to
an assignment and assumption agreement executed and delivered to the Bond
Trustee, in form satisfactory to the Bond Trustee;
(iii) immediately after giving effect to such consolidation or merger
or sale, no Default or Event of Default shall have occurred and be
continuing;
(iv) the Rating Agency Condition shall have been satisfied with
respect to such consolidation or merger or sale;
(v) the Issuer shall have received an Opinion of Counsel (and shall
have delivered copies thereof to the Bond Trustee) to the effect that such
consolidation or merger or sale (a) will not have any material adverse tax
consequence to the Issuer or any Transition Bondholder, (b) complies with
this Indenture and all of the conditions precedent herein relating to such
transaction and (c) will result in the Bond Trustee maintaining a
continuing valid first priority security interest in the Collateral;
(vi) none of the Intangible Transition Property, the Qualified Rate
Order, the Seller's, the Servicer's or the Issuer's rights under the
Statute or the Qualified Rate Order are impaired thereby; and
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(vii) any action as is necessary to maintain the lien and security
interest created by this Indenture shall have been taken.
SECTION 3.11. Successor or Transferee. (a) Upon any consolidation or merger
of the Issuer in accordance with Section 3.10, the Person formed by or surviving
such consolidation or merger (if other than the Issuer) shall succeed to, and be
substituted for, and may exercise every right and power of, the Issuer under
this Indenture with the same effect as if such Person had been named as the
Issuer herein.
(b) Upon any sale by the Issuer of substantially all of its assets in a
sale which complies with Section 3.10, PECO Energy Transition Trust will be
released from every covenant and agreement of this Indenture to be observed or
performed on the part of the Issuer with respect to the Transition Bonds and
from every covenant and agreement of the Sale Agreement and the Servicing
Agreement to be observed or performed on the part of the Issuer.
SECTION 3.12. No Other Business. The Issuer shall not engage in any
business other than purchasing and owning Intangible Transition Property,
issuing Transition Bonds from time to time, pledging its interest in the
Collateral to the Bond Trustee under this Indenture in order to secure the
Transition Bonds and performing activities that are necessary, suitable or
convenient to accomplish these purposes or are incidental thereto.
SECTION 3.13. No Borrowing. The Issuer shall not issue, incur, assume,
guarantee or otherwise become liable, directly or indirectly, for any
indebtedness except for the Transition Bonds.
SECTION 3.14. Guarantees, Loans, Advances and Other Liabilities. Except as
contemplated by the Sale Agreement, the Servicing Agreement, this Indenture or
the Trust Agreement, the Issuer shall not make any loan or advance or credit to,
or guarantee (directly or indirectly or by an instrument having the effect of
assuring another's payment or performance on any obligation or capability of so
doing or otherwise), endorse or otherwise become contingently liable, directly
or indirectly, 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.
SECTION 3.15. Capital Expenditures. The Issuer shall 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 pursuant to, and in accordance with, the Sale
Agreement.
SECTION 3.16. Restricted Payments. The Issuer shall not, directly or
indirectly, (i) pay any dividend or make any distribution (by reduction of
capital or otherwise), whether in cash, property, securities or a combination
thereof, to any owner of a beneficial interest in the Issuer or otherwise with
respect to any ownership or equity interest in, or ownership security of, the
Issuer, (ii) redeem, purchase, retire or otherwise acquire for value any such
ownership or equity interest or security or (iii) set aside or otherwise
segregate any amounts for any such purpose; provided, however, that if no Event
of Default shall have occurred and be continuing, the Issuer may make, or cause
to
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33
be made, any such distributions to any owner of a beneficial interest in the
Issuer or otherwise with respect to any ownership or equity interest or security
in or of the Issuer using funds distributed to the Issuer pursuant to Section
8.02(d) or (e) to the extent that such distributions would not cause the book
value of the remaining equity in the Issuer to decline below 0.5% of the
original principal amount of all Series of Transition Bonds which remain
outstanding. The Issuer will not, directly or indirectly, make payments to or
distributions from the Collection Account except in accordance with this
Indenture and the Basic Documents.
SECTION 3.17. Notice of Events of Default. The Issuer agrees to deliver to
the Bond Trustee and the Rating Agencies written notice in the form of an
Officer's Certificate of any Default or Event of Default hereunder, its status
and what action the Issuer is taking or proposes to take with respect thereto
within five days after the occurrence thereof.
SECTION 3.18. Inspection. The Issuer agrees that, on reasonable prior
notice, it will permit any representative of the Bond Trustee, during the
Issuer's normal business hours, to examine all the books of account, records,
reports, and other papers of the Issuer, to make copies and extracts therefrom,
to cause such books to be audited annually by Independent certified public
accountants, and to discuss the Issuer's affairs, finances and accounts with the
Issuer's officers, employees, and Independent certified public accountants, all
at such reasonable times and as often as may be reasonably requested. The Bond
Trustee shall and shall cause its representatives to hold in confidence all such
information except to the extent disclosure may be required by law (and all
reasonable applications for confidential treatment are unavailing) and except to
the extent that the Bond Trustee may reasonably determine that such disclosure
is consistent with its obligations hereunder.
SECTION 3.19. Adjusted Monthly Overcollateralization Balance Schedules. Not
later than the date on which a new Series of Transition Bonds is issued or any
outstanding Series of Transition Bonds is redeemed or defeased, the Issuer shall
deliver to the Bond Trustee a replacement Schedule 1 hereto, adjusted to reflect
such issuance, redemption or defeasance and setting forth the Calculated
Overcollateralization Level for each Payment Date and the Monthly Allocated
Overcollateralization Balance for each Monthly Allocation Date.
SECTION 3.20. Sale Agreement and Servicing Agreement Covenants. (a) The
Issuer agrees to take all such lawful actions to enforce its rights under the
Sale Agreement and the Servicing Agreement and to compel or secure the
performance and observance by the Seller and the Servicer, of each of their
obligations to the Issuer under or in connection with the Sale Agreement and the
Servicing Agreement, respectively, in accordance with the terms thereof. So long
as no Event of Default occurs and is continuing, but subject to Section 3.20(f),
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 Servicing Agreement.
(b) If an Event of Default occurs and is continuing, the Bond Trustee may,
and, at the direction (which direction shall be in writing or by telephone
(confirmed in writing promptly thereafter)) of the Holders of a majority of the
Outstanding Amount of the Transition Bonds of all Series shall, exercise all
right, remedies, powers, privileges
<PAGE>
34
and claims of the Issuer against the Seller or the Servicer under or in
connection with the Sale Agreement and the Servicing Agreement, respectively,
including the right or power to take any action to compel or secure performance
or observance by the Seller or the Servicer of each of their obligations to the
Issuer thereunder and to give any consent, request, notice, direction, approval,
extension or waiver under the Sale Agreement and the Servicing Agreement, and
any right of the Issuer to take such action shall be suspended.
(c) With the consent of the Bond Trustee, the Sale Agreement and the
Servicing Agreement may be amended, so long as the Rating Agency Condition is
satisfied in connection therewith, at any time and from time to time, without
the consent of the Transition Bondholders, provided that such amendment shall
not, as evidenced by an Opinion of Counsel, adversely affect the interest of any
Transition Bondholder or change the Intangible Transition Charges Adjustment
Process.
(d) If the Issuer, the Seller or the Servicer proposes to amend, modify,
waive, supplement, terminate or surrender, or agree to any amendment,
modification, supplement, termination, waiver or surrender of, the terms of the
Sale Agreement or the Servicing Agreement, or waive timely performance or
observance by the Servicer or the Seller under the Sale Agreement or the
Servicing Agreement, respectively, in each case in such a way as would adversely
affect the interests of Transition Bondholders, the Issuer shall first notify
the Rating Agencies of the proposed amendment and, upon receiving notification
regarding the Rating Agency Condition, thereafter shall notify the Bond Trustee
and the Bond Trustee shall notify the Transition Bondholders of the proposed
amendment and whether the Rating Agency Condition has been satisfied with
respect thereto. The Bond Trustee shall consent to such proposed amendment,
modification, supplement or waiver [only with the consent of the Holders of at
least a majority of the Outstanding Amount of the Transition Bonds of each
Series or Class].(1) If any such amendment, modification, supplement or waiver
shall be so consented to by the Bond Trustee [or such Holders], the Issuer
agrees to execute and deliver, in its own name and at its own expense, such
agreements, instruments, consents and other documents as shall be necessary or
appropriate in the circumstances.
(e) If the Issuer and the Seller or Servicer propose to amend, modify,
waive, supplement, terminate or surrender, or agree to any amendment,
modification, supplement, termination, waiver or surrender of, the ITC
Adjustment process, the Issuer shall notify the Bond Trustee and the Bond
Trustee shall notify Transition Bondholders of such proposal and the Bond
Trustee shall consent thereto only with the consent of the Holder of each
Outstanding Transition Bond of each Series or Class affected thereby.
(f) Promptly following a default by either the Seller or Servicer under the
Sale Agreement or the Servicing Agreement, respectively, and at the Issuer's
expense, the Issuer agrees to take all such lawful actions as the Bond Trustee
may request to compel or secure the performance and observance by the Seller or
the Servicer, as applicable, of each of their obligations to the Issuer under or
in connection with the Sale Agreement or the Servicing Agreement in accordance
with the terms thereof, and to exercise any and all rights, remedies, powers and
privileges lawfully available to the Issuer under or in
- ----------------------------
(1) To be discussed.
<PAGE>
35
connection with the Sale Agreement or the Servicing Agreement to the extent and
in the manner directed by the Bond Trustee, including the transmission of
notices of default on the part of the Seller or the Servicer thereunder and the
institution of legal or administrative actions or proceedings to compel or
secure performance by the Seller or the Servicer of each of their obligations
under the Sale Agreement and the Servicing Agreement.
(g) If the Issuer shall have knowledge of the occurrence of a Servicer
Default under the Servicing Agreement, the Issuer shall promptly give written
notice thereof to the Bond Trustee and the Rating Agencies, and shall specify in
such notice the action, if any, the Issuer is taking with respect to such
default. If a Servicer Default shall arise from the failure of the Servicer to
perform any of its duties or obligations under the Servicing Agreement with
respect to the Intangible Transition Property or the Intangible Transition
Charges, the Issuer shall take all reasonable steps available to it to remedy
such failure. The Issuer shall not take any action to terminate the Servicer's
rights and powers under the Servicing Agreement following a Servicer Default
without the prior written consent of the Bond Trustee or of the Holders of
Transition Bonds evidencing not less than 25% of the Outstanding Amount of the
Transition Bonds of all Series.
(h) As promptly as possible after the giving of notice of termination to
the Servicer and the Rating Agencies of the Servicer's rights and powers
pursuant to Section 6.01 of the Servicing Agreement, the Bond Trustee shall,
together with such other Persons, if any, as are specified in Section 6.01 of
the Servicing Agreement, appoint a successor Servicer (the "Successor
Servicer"), and such Successor Servicer shall accept its appointment by a
written assumption in a form acceptable to the Issuer and the Bond Trustee. A
person shall qualify as a Successor Servicer only if such Person satisfies the
requirements of Section 6.04 of the Servicing Agreement. If within 30 days after
the delivery of the notice referred to above, a Successor Servicer shall not
have been appointed and accepted its appointment as such, the Bond Trustee may
petition the PUC or a court of competent jurisdiction to appoint a Successor
Servicer. In connection with any such appointment, the Issuer may make such
arrangements for the compensation of such Successor Servicer as it and such
Successor Servicer shall agree, subject to the limitations set forth below and
in the Servicing Agreement, and in accordance with Section 6.04 of the Servicing
Agreement, the Issuer shall enter into an agreement with such Successor Servicer
for the servicing of the Intangible Transition Property (such agreement to be in
form and substance satisfactory to the Bond Trustee).
(i) Upon termination of the Servicer's rights and powers pursuant to the
Servicing Agreement, the Bond Trustee shall promptly notify the Issuer, the
Transition Bondholders and the Rating Agencies. As soon as a Successor Servicer
is appointed, the Issuer shall notify the Bond Trustee, the Transition
Bondholders and the Rating Agencies of such appointment, specifying in such
notice the name and address of such Successor Servicer.
SECTION 3.21. Taxes. So long as any of the Transition Bonds are
outstanding, the Issuer shall pay all material taxes, including gross receipts
taxes, assessments and governmental charges imposed upon it or any of its
properties or assets or with respect to any of its franchises, business, income
or property before any penalty accrues thereon if the failure to pay any such
taxes, assessments and governmental
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36
charges would, after any applicable grace periods, notices or other similar
requirements, result in a Lien on the Collateral.
ARTICLE IV
Satisfaction and Discharge; Defeasance
--------------------------------------
SECTION 4.01. Satisfaction and Discharge of Indenture; Defeasance. (a) The
Transition Bonds of any Series, all moneys payable with respect thereto and this
Indenture as it applies to such Series shall cease to be of further effect and
the lien hereunder shall be released with respect to such Series, interest shall
cease to accrue on the Transition Bonds of such Series and the Bond Trustee, on
demand of and at the expense of the Issuer, shall execute proper instruments
acknowledging satisfaction and discharge of this Indenture with respect to the
Transition Bonds of such Series, when
(A) either
(1) all Transition Bonds of such Series theretofore authenticated
and delivered (other than (i) Transition Bonds that have been
destroyed, lost or stolen and that have been replaced or paid as
provided in Section 2.06 and (ii) Transition Bonds for whose payment
money has theretofore been deposited in trust or segregated and held
in trust by the Issuer and thereafter repaid to the Issuer or
discharged from such trust, as provided in Section 3.03) have been
delivered to the Bond Trustee for cancelation; or
(2) the Expected Final Payment Date or Redemption Date has
occurred with respect to all Transition Bonds of such Series not
theretofore delivered to the Bond Trustee for cancelation, and the
Issuer has irrevocably deposited or caused to be irrevocably deposited
with the Bond Trustee cash, in trust for such purpose, in an amount
sufficient to pay and discharge the entire indebtedness on such
Transition Bonds not theretofore delivered to the Bond Trustee on the
Expected Final Payment Date or Redemption Date, as applicable,
therefor;
(B) the Issuer has paid or caused to be paid all other sums payable
hereunder by the Issuer with respect to such Series; and
(C) the Issuer has delivered to the Bond Trustee an Officer's
Certificate, an Opinion of Counsel and (if required by the TIA or the Bond
Trustee) an Independent Certificate from a firm of certified public
accountants, each meeting the applicable requirements of Section 11.01 and
each stating that all conditions precedent herein provided for relating to
the satisfaction and discharge of this Indenture with respect to Transition
Bonds of such Series have been complied with.
(b) Subject to Sections 4.01(c) and 4.02, the Issuer at any time may
terminate (i) all its obligations under this Indenture with respect to the
Transition Bonds of any Series ("Legal Defeasance Option") or (ii) its
obligations under Sections 3.04,
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37
3.05, 3.06, 3.07, 3.08, 3.09, 3.10, 3.12, 3.13, 3.14, 3.15, 3.16, 3.17, 3.18,
3.19 and 3.20 and the operation of Section 5.01(iv) ("Covenant Defeasance
Option") with respect to any Series of Transition Bonds. 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 such Series.
If the Issuer exercises the Legal Defeasance Option with respect to any
Series, the maturity of the Transition Bonds of such Series may not be (a)
accelerated because of an Event of Default or (b) except as provided in Section
4.02, redeemed. If the Issuer exercises the Covenant Defeasance Option with
respect to any Series, the maturity of the Transition Bonds of such Series may
not be accelerated because of an Event of Default specified in Section 5.01(iv).
Upon satisfaction of the conditions set forth herein to the exercise of the
Legal Defeasance Option or the Covenant Defeasance Option with respect to any
Series of Transition Bonds, the Bond Trustee, on demand of and at the expense of
the Issuer, shall execute proper instruments acknowledging satisfaction and
discharge of the obligations that are terminated pursuant to such exercise.
(c) Notwithstanding Sections 4.01(a) and 4.01(b) above, (i) rights of
registration of transfer and exchange, (ii) rights of substitution of mutilated,
destroyed, lost or stolen Transition Bonds, (iii) rights of Transition
Bondholders to receive payments of principal, premium, if any, and interest, but
only from the amounts deposited with the Bond Trustee for such payments, (iv)
Sections 4.03 and 4.04, (v) the rights, obligations and immunities of the Bond
Trustee hereunder (including the rights of the Bond Trustee under Section 6.07
and the obligations of the Bond Trustee under Section 4.03) and (vi) the rights
of Transition Bondholders under this Indenture with respect to the property
deposited with the Bond Trustee payable to all or any of them, shall survive
until the Transition Bonds of the Series as to which this Indenture or certain
obligations hereunder have be satisfied and discharged pursuant to Section
4.01(a) or 4.01(b) and have been paid in full. Thereafter, the obligations in
Sections 6.07 and 4.04 with respect to such Series shall survive.
SECTION 4.02. Conditions to Defeasance. The Issuer may exercise the Legal
Defeasance Option or the Covenant Defeasance Option with respect to any Series
of Transition Bonds only if:
(a) 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 such Transition Bonds
to the Expected Payment Date or Redemption Date therefor, as applicable,
such deposit to be made in the Defeasance Subaccount for such Series of
Transition Bonds;
(b) 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 on the deposited U.S. Government Obligations plus any
deposited cash without investment will provide cash at such times and in
such amounts (but, in the case of the Legal Defeasance Option only, not
more than such amounts) as will be sufficient to pay in respect of the
Transition Bonds of such Series (i) subject to
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clause (ii), principal in accordance with the Expected Amortization
Schedule therefor, (ii) if such Series is to be redeemed, the
Redemption Price therefor on the Redemption Date therefor and (iii)
interest when due;
(c) in the case of the Legal Defeasance Option, 95 days pass after the
deposit is made and during the 95-day period no Default specified in
Section 5.01(v) or (vi) occurs which is continuing at the end of the
period;
(d) no Default has occurred and is continuing on the day of such
deposit and after giving effect thereto;
(e) in the case of the Legal Defeasance Option, the Issuer delivers to
the Bond Trustee an Opinion of Counsel stating that (i) the Issuer has
received from, or there has been published by, the Internal Revenue Service
a ruling, or (ii) since the date of execution of this Indenture, there has
been a change in the applicable Federal income tax law, in either case to
the effect that, and based thereon such opinion shall confirm that, the
Holders of the Transition Bonds of such Series will not recognize income,
gain or loss for Federal income tax purposes as a result of the exercise of
such 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 such Legal Defeasance had not occurred;
(f) 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 such Series will not recognize income, gain or loss
for Federal income tax purposes as a result of the exercise of such
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 such Covenant Defeasance had not occurred; and
(g) the Issuer delivers to the Bond Trustee an Officer's Certificate
and an Opinion of Counsel, each stating that all conditions precedent to
the satisfaction and discharge of the Transition Bonds of such Series to
the extent contemplated by this Article IV have been complied with.
Notwithstanding any other provision of this Section 4.02 to the contrary,
no delivery of cash or U.S. Government Obligations to the Bond Trustee under
this Section shall terminate any obligations of the Issuer under this Indenture
with respect of any Transition Bonds which are to be redeemed prior to the
Expected Final Payment Date therefor until such Transition Bonds shall have been
irrevocably called or designated for redemption on a date thereafter on which
such Transition Bonds may be redeemed in accordance with the provisions of this
Indenture and proper notice of such redemption shall have been given in
accordance with the provisions of this Indenture or the Issuer shall have given
the Bond Trustee, in form satisfactory to the Bond Trustee, irrevocable
instructions to give, in the manner and at the times prescribed herein, notice
of redemption of such Series.
SECTION 4.03. Application of Trust Money. All moneys or U.S. Government
Obligations deposited with the Bond Trustee pursuant to Section 4.01 or 4.02
hereof with respect to any Series of Transition Bonds shall be held in trust in
the
<PAGE>
39
Defeasance Subaccount for such Series and applied by it, in accordance with the
provisions of the Transition Bonds and this Indenture, to the payment, either
directly or through any Paying Agent, as the Bond Trustee may determine, to the
Holders of the particular Transition Bonds for the payment or redemption of
which such moneys have been deposited with the Bond Trustee, of all sums due and
to become due thereon for principal, premium, if any, and interest. Such moneys
will be segregated and held apart solely for paying such Transition Bonds and
such Transition Bonds shall not entitled to any amounts on deposit in the
Collection Account other than amounts on deposit in the Defeasance Subaccount
for such Transition Bonds.
SECTION 4.04. Repayment of Moneys Held by Paying Agent. In connection with
the satisfaction and discharge of this Indenture or the Covenant Defeasance
Option or Legal Defeasance Option with respect to the Transition Bonds of any
Series, all moneys then held by any Paying Agent other than the Bond Trustee
under the provisions of this Indenture with respect to such Transition Bonds
shall, upon demand of the Issuer, be paid to the Bond Trustee to be held and
applied according to Section 3.03 and thereupon such Paying Agent shall be
released from all further liability with respect to such moneys.
ARTICLE V
Remedies
--------
SECTION 5.01. Events of Default. "Event of Default" wherever used herein,
means any one of the following events (whatever the reason for such Event of
Default and whether it shall be voluntary or involuntary or be effected by
operation of law or pursuant to any judgment, decree or order of any court or
any order, rule or regulation of any administrative or governmental body):
(i) default in the payment of any interest on any Transition Bond when
the same becomes due and payable, and such default shall continue for a
period of five days;
(ii) default in the payment of the then unpaid principal of any
Transition Bond of any Series on the Series Termination Date for such
Series or, if applicable, any Class on the Class Termination Date for such
Class;
(iii) default in the payment of the Redemption Price for any
Transition Bond on the Redemption Date therefor;
(iv) default in the observance or performance of any covenant or
agreement of the Issuer made in this Indenture (other than a covenant or
agreement, a default in the observance or performance of which is
specifically dealt with in clause (i), (ii) or (iii) above), and such
default shall continue or not be cured, for a period of 30 days after there
shall have been given, by registered or certified mail, to the Issuer by
the Bond Trustee or to the Issuer and the Bond Trustee by the Holders of at
least 25% of the Outstanding Amount of the Transition Bonds of any Series,
a written notice specifying such default or incorrect representation or
warranty and
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40
requiring it to be remedied and stating that such notice is a "Notice of
Default" hereunder;
(v) the filing of a decree or order for relief by a court having
jurisdiction in the premises in respect of the Issuer or any substantial
part of the Collateral in an involuntary case under any applicable Federal
or state bankruptcy, insolvency or other similar law now or hereafter in
effect, or appointing a receiver, liquidator, assignee, custodian, trustee,
sequestrator or similar official of the Issuer or for any substantial part
of the Collateral, or ordering the winding-up or liquidation of the
Issuer's affairs, and such decree or order shall remain unstayed and in
effect for a period of 90 consecutive days; or
(vi) the commencement by the Issuer of a voluntary case under any
applicable Federal or state bankruptcy, insolvency or other similar law now
or hereafter in effect, or the consent by the Issuer to the entry of an
order for relief in an involuntary case under any such law, or the consent
by the Issuer to the appointment or taking possession by a receiver,
liquidator, assignee, custodian, trustee, sequestrator or similar official
of the Issuer or for any substantial part of the Collateral, or the making
by the Issuer of any general assignment for the benefit of creditors, or
the failure by the Issuer generally to pay its debts as such debts become
due, or the taking of action by the Issuer in furtherance of any of the
foregoing.
SECTION 5.02. Acceleration of Maturity; Rescission and Annulment. If an
Event of Default occurs and is continuing, then and in every such case either
the Bond Trustee or the Holders of Transition Bonds representing not less than a
majority of the Outstanding Amount of the Transition Bonds of all Series may,
but need not, declare all the Transition Bonds to be immediately due and
payable, by a notice in writing to the Issuer (and to the Bond Trustee if given
by Transition Bondholders), and upon any such declaration the unpaid principal
amount of the Transition Bonds of all Series, together with accrued and unpaid
interest thereon through the date of acceleration, shall become immediately due
and payable.
At any time after such declaration of acceleration of maturity has been
made and before a judgment or decree for payment of the money due has been
obtained by the Bond Trustee as hereinafter in this Article V provided, the
Holders of Transition Bonds representing a majority of the Outstanding Amount of
the Transition Bonds of all Series, by written notice to the Issuer and the Bond
Trustee, may rescind and annul such declaration and its consequences if:
(i) the Issuer has paid or deposited with the Bond Trustee, for
deposit in the General Subaccount of the Collection Account, a sum
sufficient to pay
(A) all payments of principal of and premium, if any, and
interest on all Transition Bonds of all Series and all other amounts
that would then be due hereunder or upon such Transition Bonds if the
Event of Default giving rise to such acceleration had not occurred;
and
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41
(B) all sums paid or advanced by the Bond Trustee hereunder and
the reasonable compensation, expenses, disbursements and advances of
the Bond Trustee and its agents and counsel; and
(ii) all Events of Default, other than the nonpayment of the principal
of the Transition Bonds of all Series that has become due solely by such
acceleration, have been cured or waived as provided in Section 5.12.
No such rescission shall affect any subsequent Default or impair any right
consequent thereto.
SECTION 5.03. Collection of Indebtedness and Suits for Enforcement by Bond
Trustee. (a) The Issuer covenants that if (i) Default is made in the payment of
any interest on any Transition Bond when such interest becomes due and payable
and such Default continues for a period of five days, (ii) Default is made in
the payment of the then unpaid principal of any Transition Bond on the Series
Termination Date or Class Termination Date, as applicable, therefor (iii)
Default is made in the payment of the Redemption Price or for any Transition
Bond on the Redemption Date therefor, the Issuer will, upon demand of the Bond
Trustee, pay to it, for the benefit of the Holders of the Transition Bonds of
such Series, such amount as shall be sufficient to cover the costs and expenses
of collection, including the reasonable compensation, expenses, disbursements
and advances of the Bond Trustee and its agents and counsel and the whole amount
then due and payable on such Transition Bonds for principal, premium, if any,
and interest, with interest upon the overdue principal and premium, if any, and,
to the extent payment at such rate of interest shall be legally enforceable,
upon overdue instalments of interest, at the respective Bond Rate of such Series
or the applicable Class of such Series.
(b) In case the Issuer shall fail forthwith to pay the amounts specified in
clause (a) above upon such demand, the Bond Trustee, in its own name and as
trustee of an express trust, may institute a Proceeding for the collection of
the sums so due and unpaid, and may prosecute such Proceeding to judgment or
final decree, and may enforce the same against the Issuer or other obligor upon
such Transition Bonds and collect in the manner provided by law out of the
property of the Issuer or other obligor upon such Transition Bonds, wherever
situated, the moneys adjudged or decreed to be payable.
(c) If an Event of Default occurs and is continuing, the Bond Trustee may,
as more particularly provided in Section 5.04, in its discretion, proceed to
protect and enforce its rights and the rights of the Transition Bondholders, by
such appropriate Proceedings as the Bond Trustee shall deem most effective to
protect and enforce any such rights, whether for the specific enforcement of any
covenant or agreement in this Indenture or in aid of the exercise of any power
granted herein, or to enforce any other proper remedy or legal or equitable
right vested in the Bond Trustee by this Indenture or by law including
foreclosing or otherwise enforcing the lien on the Intangible Transition
Property securing the Transition Bonds or applying to the PUC for sequestration
of revenues arising with respect to such Intangible Transition Property.
(d) In case there shall be pending, relative to the Issuer or any other
obligor upon the Transition Bonds or any Person having or claiming an ownership
interest in the Collateral, Proceedings under Title 11 of the United States Code
or any
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42
other applicable Federal or state bankruptcy, insolvency or other similar law,
or in case a receiver, assignee or trustee in bankruptcy or reorganization,
liquidator, sequestrator or similar official shall have been appointed for or
taken possession of the Issuer or its property or such other obligor or Person,
or in case of any other comparable judicial Proceedings relative to the Issuer
or other obligor upon the Transition Bonds, or to the creditors or property of
the Issuer or such other obligor, the Bond Trustee, irrespective of whether the
principal of any Transition Bonds shall then be due and payable as therein
expressed or by declaration or otherwise and irrespective of whether the Bond
Trustee shall have made any demand pursuant to the provisions of this Section,
shall be entitled and empowered, by intervention in such Proceedings or
otherwise:
(i) to file and prove a claim or claims for the whole amount of
principal, premium, if any, and interest owing and unpaid in respect of the
Transition Bonds and to file such other papers or documents as may be
necessary or advisable in order to have the claims of the Bond Trustee
(including any claim for reasonable compensation to the Bond Trustee and
each predecessor Bond Trustee, and their respective agents, attorneys and
counsel, and for reimbursement of all expenses and liabilities incurred,
and all advances made, by the Bond Trustee and each predecessor Bond
Trustee, except as a result of negligence or bad faith) and of the
Transition Bondholders allowed in such Proceedings;
(ii) unless prohibited by applicable law and regulations, to vote on
behalf of the Holders of Transition Bonds in any election of a trustee, a
standby trustee or Person performing similar functions in any such
Proceedings;
(iii) to collect and receive any moneys or other property payable or
deliverable on any such claims and to distribute all amounts received with
respect to the claims of the Transition Bondholders and of the Bond Trustee
on their behalf; and
(iv) to file such proofs of claim and other papers or documents as may
be necessary or advisable in order to have the claims of the Bond Trustee
or the Holders of Transition Bonds allowed in any judicial proceedings
relative to the Issuer, its creditors and its property;
and any trustee, receiver, liquidator, custodian or other similar official in
any such Proceeding is hereby authorized by each of such Transition Bondholders
to make payments to the Bond Trustee, and, in the event that the Bond Trustee
shall consent to the making of payments directly to such Transition Bondholders,
to pay to the Bond Trustee such amounts as shall be sufficient to cover
reasonable compensation to the Bond Trustee, each predecessor Bond Trustee and
their respective agents, attorneys and counsel, and all other expenses and
liabilities incurred, and all advances made, by the Bond Trustee and each
predecessor Bond Trustee except as a result of negligence or bad faith.
(e) Nothing herein contained shall be deemed to authorize the Bond Trustee
to authorize or consent to or vote for or accept or adopt on behalf of any
Transition Bondholder any plan of reorganization, arrangement, adjustment or
composition affecting the Transition Bonds or the rights of any Holder thereof
or to authorize the Bond Trustee to vote in respect of the claim of any
Transition Bondholder
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43
in any such proceeding except, as aforesaid, to vote for the election of a
trustee in bankruptcy or similar Person.
(f) All rights of action and of asserting claims under this Indenture, or
under any of the Transition Bonds, may be enforced by the Bond Trustee without
the possession of any of the Transition Bonds or the production thereof in any
trial or other Proceedings relative thereto, and any such action or proceedings
instituted by the Bond Trustee shall be brought in its own name as trustee of an
express trust, and any recovery of judgment, subject to the payment of the
expenses, disbursements and compensation of the Bond Trustee, each predecessor
Bond Trustee and their respective agents and attorneys, shall be for the ratable
benefit of the Holders of the Transition Bonds.
(g) In any Proceedings brought by the Bond Trustee (and also any
Proceedings involving the interpretation of any provision of this Indenture to
which the Bond Trustee shall be a party), the Bond Trustee shall be held to
represent all the Holders of the Transition Bonds, and it shall not be necessary
to make any Transition Bondholder a party to any such Proceedings.
SECTION 5.04. Remedies; Priorities. If an Event of Default occurs and is
continuing, the Bond Trustee may do one or more of the following (subject to
Section 5.05):
(i) institute Proceedings in its own name and as trustee of an express
trust for the collection of all amounts then payable on the Transition
Bonds or under this Indenture with respect thereto, whether by declaration
or otherwise, enforce any judgment obtained, and collect from the Issuer
and any other obligor upon such Transition Bonds moneys adjudged due;
(ii) institute Proceedings from time to time for the complete or
partial foreclosure of this Indenture with respect to the Collateral;
(iii) exercise any remedies of a secured party under the UCC or the
Statute or any other applicable law and take any other appropriate action
to protect and enforce the rights and remedies of the Bond Trustee and the
Holders of the Transition Bonds of such Series;
(iv) sell the Collateral or any portion thereof or rights or interest
therein, at one or more public or private sales called and conducted in any
manner permitted by law; and
(v) 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 or the Servicing Agreement as provided in Section
3.20(b);
provided, however, that the Bond Trustee may not sell or otherwise liquidate any
portion of the Collateral following an Event of Default, other than an Event of
Default described in Section 5.01(i), (ii) or (iii), with respect to any Series
unless (A) the Holders of 100% of the Outstanding Amount of the Transition Bonds
of all Series consent thereto, (B) the proceeds of such sale or liquidation
distributable to the Transition Bondholders of all Series are sufficient to
discharge in full all amounts then due and unpaid upon such
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44
Transition Bonds for principal, premium, if any, and interest or (C) the Bond
Trustee determines that the Collateral will not continue to provide sufficient
funds for all payments on the Transition Bonds of all Series as they would have
become due if the Transition Bonds had not been declared due and payable, and
the Bond Trustee obtains the consent of Holders of 66-2/3% of the Outstanding
Amount of the Transition Bonds of all Series. In determining such sufficiency or
insufficiency with respect to clause (B) and (C), the Bond Trustee may, but need
not, obtain and rely upon an opinion of an Independent investment banking or
accounting firm of national reputation as to the feasibility of such proposed
action and as to the sufficiency of the Collateral for such purpose.
SECTION 5.05. Optional Preservation of the Collateral. If the Transition
Bonds have been declared to be due and payable under Section 5.02 following an
Event of Default and such declaration and its consequences have not been
rescinded and annulled, the Bond Trustee may, but need not, elect, as provided
in Section 5.11(iii), to maintain possession of the Collateral and not sell or
liquidate the same. It is the desire of the parties hereto and the Transition
Bondholders that there be at all times sufficient funds for the payment of
principal of and premium, if any, and interest on the Transition Bonds, and the
Bond Trustee shall take such desire into account when determining whether or not
to maintain possession of the Collateral or sell or liquidate the same. In
determining whether to maintain possession of the Collateral or sell or
liquidate the same, the Bond Trustee may, but need not, obtain and rely upon an
opinion of an Independent investment banking or accounting firm of national
reputation as to the feasibility of such proposed action and as to the
sufficiency of the Collateral for such purpose.
SECTION 5.06. Limitation of Proceedings. No Holder of any Transition Bond
of any Series shall have any right to institute any Proceeding, judicial or
otherwise, or to avail itself of the remedies provided in Section 2812(d)(3)(v)
of the Statute, with respect to this Indenture, or for the appointment of a
receiver or trustee, or for any other remedy hereunder, unless:
(i) such Holder has previously given written notice to the Bond
Trustee of a continuing Event of Default;
(ii) the Holders of not less than 25% of the Outstanding Amount of the
Transition Bonds of all Series have made written request to the Bond
Trustee to institute such Proceeding in respect of such Event of Default in
its own name as Bond Trustee hereunder;
(iii) such Holder or Holders have offered to the Bond Trustee security
or indemnity reasonably satisfactory to the Bond Trustee against the costs,
expenses and liabilities to be incurred in complying with such request;
(iv) the Bond Trustee for 60 days after its receipt of such notice,
request and offer of indemnity has failed to institute such Proceedings;
and
(v) no direction inconsistent with such written request has been given
to the Bond Trustee during such 60-day period by the Holders of a majority
of the Outstanding Amount of the Transition Bonds of all Series;
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45
it being understood and intended that no one or more Holders of Transition Bonds
shall have any right in any manner whatever by virtue of, or by availing of, any
provision of this Indenture to affect, disturb or prejudice the rights of any
other Holders of Transition Bonds or to obtain or to seek to obtain priority or
preference over any other Holders or to enforce any right under this Indenture,
except in the manner herein provided.
In the event the Bond Trustee shall receive conflicting or inconsistent
requests and indemnity from two or more groups of Holders of Transition Bonds,
each representing less than a majority of the Outstanding Amount of the
Transition Bonds of all Series, the Bond Trustee in its sole discretion may
determine what action, if any, shall be taken, notwithstanding any other
provisions of this Indenture.
SECTION 5.07. Unconditional Rights of Transition Bondholders To Receive
Principal, Premium, if any, and Interest. Notwithstanding any other provisions
in this Indenture, the Holder of any Transition Bond shall have the right, which
is absolute and unconditional, (a) to receive payment of (i) the interest, if
any, on such Transition Bond on or after the due dates thereof expressed in such
Transition Bond or in this Indenture, (ii) the unpaid principal, if any, of such
Transition Bonds on or after the Series Termination Date or Class Termination
Date therefor or (iii) in the case of redemption, receive payment of the unpaid
principal, if any, of and premium, if any, and interest, if any, on such
Transition Bond on or after the Redemption Date therefor and (b) to institute
suit for the enforcement of any such payment, and such right shall not be
impaired without the consent of such Holder.
SECTION 5.08. Restoration of Rights and Remedies. If the Bond Trustee or
any Transition Bondholder has instituted any Proceeding to enforce any right or
remedy under this Indenture and such Proceeding has been discontinued or
abandoned for any reason or has been determined adversely to the Bond Trustee or
to such Transition Bondholder, then and in every such case the Issuer, the Bond
Trustee and the Transition Bondholders shall, subject to any determination in
such Proceeding, be restored severally and respectively to their former
positions hereunder, and thereafter all rights and remedies of the Bond Trustee
and the Transition Bondholders shall continue as though no such Proceeding had
been instituted.
SECTION 5.09. Rights and Remedies Cumulative. No right or remedy herein
conferred upon or reserved to the Bond Trustee or to the Transition Bondholders
is intended to be exclusive of any other right or remedy, and every right and
remedy shall, to the extent permitted by law, be cumulative and in addition to
every other right and remedy given hereunder or now or hereafter existing at law
or in equity or otherwise. The assertion or employment of any right or remedy
hereunder, or otherwise, shall not prevent the concurrent assertion or
employment of any other appropriate right or remedy.
SECTION 5.10. Delay or Omission Not a Waiver. No delay or omission of the
Bond Trustee or any Transition Bondholder to exercise any right or remedy
accruing upon any Default or Event of Default shall impair any such right or
remedy or constitute a waiver of any such Default or Event of Default or an
acquiescence therein. Every right and remedy given by this Article V or by law
to the Bond Trustee or to the Transition Bondholders may be exercised from time
to time, and as often as may be deemed expedient, by the Bond Trustee or by the
Transition Bondholders, as the case may be.
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46
SECTION 5.11. Control by Transition Bondholders. The Holders of a majority
of the Outstanding Amount of the Transition Bonds of all Series (or, if less
than all Series or Classes are affected, the affected Series or Class or
Classes) shall have the right to direct the time, method and place of conducting
any Proceeding for any remedy available to the Bond Trustee with respect to the
Transition Bonds of such Series or Class or Classes or exercising any trust or
power conferred on the Bond Trustee with respect to such Series or Class or
Classes; provided that
(i) such direction shall not be in conflict with any rule of law or
with this Indenture;
(ii) subject to the express terms of Section 5.04, any direction to
the Bond Trustee to sell or liquidate the Collateral shall be by the
Holders of Transition Bonds representing not less than 100% of the
Outstanding Amount of the Transition Bonds of all Series;
(iii) if the conditions set forth in Section 5.05 have been satisfied
and the Bond Trustee elects to retain the Collateral pursuant to such
Section and not sell or liquidate the same, 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 shall be of no force and effect; and
(iv) the Bond Trustee may take any other action deemed proper by the
Bond Trustee that is not inconsistent with such direction;
provided, however, that, subject to Section 6.01, the Bond Trustee need not take
any action that it determines might involve it in liability or might materially
adversely affect the rights of any Transition Bondholders not consenting to such
action.
SECTION 5.12. Waiver of Past Defaults. Prior to the declaration of the
acceleration of the maturity of the Transition Bonds of all Series as provided
in Section 5.02, the Holders of not less than a majority of the Outstanding
Amount of the Transition Bonds of all Series may waive any past Default or Event
of Default and its consequences except a Default (i) in payment of principal of
or premium, if any, or interest on any of the Transition Bonds or (ii) in
respect of a covenant or provision hereof which cannot be modified or amended
without the consent of the Holder of each Transition Bond of all Series or
Classes affected. In the case of any such waiver, the Issuer, the Bond Trustee
and the Holders of the Transition Bonds shall be restored to their former
positions and rights hereunder, respectively; but no such waiver shall extend to
any subsequent or other Default or impair any right consequent thereto.
Upon any such waiver, such Default shall cease to exist and be deemed to
have been cured and not to have occurred, and any Event of Default arising
therefrom shall be deemed to have been cured and not to have occurred, for every
purpose of this Indenture; but no such waiver shall extend to any subsequent or
other Default or Event of Default or impair any right consequent thereto.
SECTION 5.13. Undertaking for Costs. All parties to this Indenture agree,
and each Holder of any Transition Bond by such Holder's acceptance thereof shall
<PAGE>
47
be deemed to have agreed, that any court may in its discretion require, in any
suit for the enforcement of any right or remedy under this Indenture, or in any
suit against the Bond Trustee for any action taken, suffered or omitted by it as
Bond Trustee, the filing by any party litigant in such suit of an undertaking to
pay the costs of such suit, and that such court may in its discretion assess
reasonable costs, including reasonable attorneys' fees, against any party
litigant in such suit, having due regard to the merits and good faith of the
claims or defenses made by such party litigant; but the provisions of this
Section shall not apply to (a) any suit instituted by the Bond Trustee, (b) any
suit instituted by any Transition Bondholder, or group of Transition
Bondholders, in each case holding in the aggregate more than 10% of the
Outstanding Amount of the Transition Bonds of a Series or (c) any suit
instituted by any Transition Bondholder for the enforcement of the payment of
(i) interest on any Transition Bond on or after the due dates expressed in such
Transition Bond and in this Indenture, (ii) the unpaid principal, if any, of any
Transition Bond on or after the Series Termination Date or Class Termination
Date, if applicable, therefor or (iii) in the case of redemption, the unpaid
principal of and premium, if any, and interest on any Transition Bond on or
after the Redemption Date therefor.
SECTION 5.14. Waiver of Stay or Extension Laws. The Issuer covenants (to
the extent that it may lawfully do so) that it will not at any time insist upon,
or plead or in any manner whatsoever, claim or take the benefit or advantage of,
any stay or extension law wherever enacted, now or at any time hereafter in
force, that may affect the covenants or the performance of this Indenture; and
the Issuer (to the extent that it may lawfully do so) hereby expressly waives
all benefit or advantage of any such law, and covenants that it will not hinder,
delay or impede the execution of any power herein granted to the Bond Trustee,
but will suffer and permit the execution of every such power as though no such
law had been enacted.
SECTION 5.15. Action on Transition Bonds. The Bond Trustee's right to seek
and recover judgment on the Transition Bonds or under this Indenture shall not
be affected by the seeking, obtaining or application of any other relief under
or with respect to this Indenture. Neither the lien of this Indenture nor any
rights or remedies of the Bond Trustee or the Transition Bondholders shall be
impaired by the recovery of any judgment by the Bond Trustee against the Issuer
or by the levy of any execution under such judgment upon any portion of the
Collateral or upon any of the assets of the Issuer.
ARTICLE VI
The Bond Trustee
SECTION 6.01. Duties and Liabilities of Bond Trustee. (a) If an Event of
Default has occurred and is continuing, the Bond Trustee shall exercise the
rights and powers vested in it by this Indenture and use the same degree of care
and skill in their exercise as a prudent Person would exercise or use under the
circumstances in the conduct of such Person's own affairs.
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(b) Except during the continuance of an Event of Default:
(i) the Bond Trustee undertakes to perform such duties and only such
duties as are specifically set forth in this Indenture and no implied
covenants or obligations shall be read into this Indenture against the Bond
Trustee; and
(ii) in the absence of bad faith on its part, the Bond Trustee may
conclusively rely, as to the truth of the statements and the correctness of
the opinions expressed therein, upon certificates or opinions furnished to
the Bond Trustee and conforming to the requirements of this Indenture.
(c) The Bond Trustee may not be relieved from liability for its own
negligent action, its own negligent failure to act or its own wilful misconduct,
except that:
(i) this paragraph does not limit the effect of paragraph (b) of this
Section;
(ii) the Bond Trustee shall not be liable for any error of judgment
made in good faith by a Responsible Officer unless it is proved that the
Bond Trustee was negligent in ascertaining the pertinent facts; and
(iii) the Bond Trustee shall not be liable with respect to any action
it takes or omits to take in good faith in accordance with a direction
received by it pursuant to Section 5.11.
(d) Every provision of this Indenture that in any way relates to the Bond
Trustee is subject to paragraphs (a), (b) and (c) of this Section 6.01.
(e) The Bond Trustee shall not be liable for interest on any money received
by it except as the Bond Trustee may agree in writing with the Issuer.
(f) Money held in trust by the Bond Trustee need not be segregated from
other funds except to the extent required by law or the terms of this Indenture
or the Sale Agreement or the Servicing Agreement.
(g) No provision of this Indenture shall require the Bond Trustee to expend
or risk its own funds or otherwise incur financial liability in the performance
of any of its duties hereunder or in the exercise of any of its rights or
powers, if it shall have reasonable grounds to believe that repayments of such
funds or adequate indemnity against such risk or liability is not reasonably
assured to it.
(h) Every provision of this Indenture relating to the conduct or affecting
the liability of or affording protection to the Bond Trustee shall be subject to
the provisions of this Section and to the provisions of the TIA.
(i) Under no circumstances shall the Bond Trustee be liable for any
indebtedness evidenced by or arising under the Transition Bonds or any Basic
Document.
SECTION 6.02. Rights of Bond Trustee. (a) The Bond Trustee may rely on any
document believed by it to be genuine and to have been signed or presented by
the proper Person. The Bond Trustee need not investigate any fact or matter
stated in the document.
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49
(b) Before the Bond Trustee acts or refrains from acting, it may require an
Officer's Certificate or an Opinion of Counsel. The Bond Trustee shall not be
liable for any action it takes or omits to take in good faith in reliance on an
Officer's Certificate or an Opinion of Counsel.
(c) The Bond Trustee may execute any of the trusts or powers hereunder or
perform any duties hereunder either directly or by or through agents or
attorneys or a custodian or nominee, and the Bond Trustee shall not be
responsible for any misconduct or negligence on the part of, or for the
supervision of, any such agent, attorney, custodian or nominee appointed with
due care by it hereunder.
(d) The Bond Trustee shall not be liable for any action it takes or omits
to take in good faith which it believes to be authorized or within its rights or
powers; provided, however, that the Bond Trustee's conduct does not constitute
wilful misconduct, negligence or bad faith.
(e) The Bond Trustee may consult with counsel, and the advice or opinion of
counsel with respect to legal matters relating to this Indenture and the
Transition Bonds shall be full and complete authorization and protection from
liability in respect to any action taken, omitted or suffered by it hereunder in
good faith and in accordance with the advice or opinion of such counsel.
SECTION 6.03. Individual Rights of Bond Trustee. The Bond Trustee in its
individual or any other capacity may become the owner or pledgee of Transition
Bonds and may otherwise deal with the Issuer or its affiliates with the same
rights it would have if it were not Bond Trustee. Any Paying Agent, Transition
Bond Registrar, co-registrar or co-paying agent may do the same with like
rights. However, the Bond Trustee must comply with Sections 6.11 and 6.12.
SECTION 6.04. Bond Trustee's Disclaimer. The Bond Trustee shall not be
responsible for and makes no representation as to the validity or adequacy of
this Indenture or the Transition Bonds. The Bond Trustee shall not be
accountable for the Issuer's use of the proceeds from the Transition Bonds, and
the Bond Trustee shall not be responsible for any statement of the Issuer in the
Indenture or in any document issued in connection with the sale of the
Transition Bonds or in the Transition Bonds other than the Bond Trustee's
certificate of authentication. The Bond Trustee shall not be responsible for the
form, character, genuineness, sufficiency, value or validity of any of the
Collateral, or for or in respect of the validity or sufficiency of the
Transition Bonds (other than the certificate of authentication for the
Transition Bonds) or the Basic Documents and the Bond Trustee shall in no event
assume or incur any liability, duty or obligation to any Holder of a Transition
Bond, other than is expressly provided for in this Indenture. The Bond Trustee
shall not be liable for the default or misconduct of the Issuer, the Seller, the
Servicer or the Issuer Trustee under any Basic Document or otherwise and the
Bond Trustee shall have no obligation or liability to perform the obligations of
the Issuer.
SECTION 6.05. Notice of Defaults. If a Default occurs and is continuing
with respect to any Series and if it is known to a Responsible Officer of the
Bond Trustee, the Bond Trustee shall mail to each Holder of Transition Bonds of
all Series notice of the Default within 90 days after it occurs. Except in the
case of a Default in payment of principal of or premium, if any, or interest on
any Transition Bond, the Bond Trustee may
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50
withhold the notice if and so long as a committee of its Responsible Officers in
good faith determines that withholding the notice is in the interests of
Transition Bondholders.
SECTION 6.06. Reports by Bond Trustee to Holders. (a) The Bond Trustee
shall deliver to each Holder of Transition Bonds such information as may be
required to enable such Holder to prepare its Federal and state income tax
returns.
(b) With respect to each Series of Transition Bonds, on or prior to each
Payment Date therefor, the Bond Trustee will deliver a statement prepared by the
Bond Trustee to each Holder of Transition Bonds which will include (to the
extent applicable) the following information (and any other information so
specified in the Series Supplement for such Series) as to the Transition Bonds
of such Series with respect to such Payment Date or the period since the
previous Payment Date, as applicable:
(i) the amount paid to Holders of such Transition Bonds in respect of
principal;
(ii) the amount paid to Holders of such Transition Bonds in respect of
interest;
(iii) the Transition Bond Balance and the Projected Transition Bond
Balance, in each case for such Series and as of the most recent Payment
Date;
(iv) 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;
(v) the amount on deposit in the Capital Subaccount as of the most
recent Payment Date; and
(vi) the amount, if any, on deposit in the Reserve Subaccount as of
the most recent Payment Date.
(c) The Bond Trustee's responsibility for disbursing the information
described in subsection (b) above to Holders of Transition Bonds is limited to
the availability, timeliness and accuracy of the information provided by the
Servicer pursuant to Section 3.04 and Annex 1 of the Servicing Agreement.
SECTION 6.07. Compensation and Indemnity. The Issuer shall pay to the Bond
Trustee from time to time reasonable compensation for its services. The Bond
Trustee's compensation shall not be limited by any law on compensation of a
trustee of an express trust. The Issuer shall reimburse the Bond Trustee for all
reasonable out-of-pocket expenses, disbursements and advances incurred or made
by it, including costs of collection, in addition to the compensation for its
services. Such expenses shall include the reasonable compensation and expenses,
disbursements and advances of the Bond Trustee's agents, counsel, accountants
and experts. The Issuer shall indemnify and hold harmless the Bond Trustee from
and against any and all costs, damages, expenses, losses, liabilities or other
amounts whatsoever (including counsel fees) incurred by the Bond Trustee in
connection with the administration of this trust, the enforcement of this trust
and all of the Bond Trustee's rights, powers and duties under this Indenture and
the
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51
performance by the Bond Trustee of the duties and obligations of the Bond
Trustee under or pursuant to this Indenture. The Bond Trustee shall notify the
Issuer promptly of any claim for which it may seek indemnity. Failure by the
Bond Trustee to so notify the Issuer shall not relieve the Issuer of its
obligations hereunder. The Issuer shall defend the claim and the Bond Trustee
may have separate counsel and the Issuer shall pay the fees and expenses of such
counsel. The Issuer need not reimburse any expense or indemnify against any
loss, liability or expense incurred by the Bond Trustee (i) through the Bond
Trustee's own wilful misconduct, negligence or bad faith or (ii) to the extent
the Bond Trustee was reimbursed for or indemnified against any such loss,
liability or expense by the Seller pursuant to the Sale Agreement or by the
Servicer pursuant to the Servicing Agreement.
When the Bond Trustee incurs expenses after the occurrence of a Default
specified in Section 5.01(v) or (vi) with respect to the Issuer, the expenses
are intended to constitute expenses of administration under Title 11 of the
United States Code or any other applicable Federal or state bankruptcy,
insolvency or similar law.
SECTION 6.08. Replacement of Bond Trustee. The Bond Trustee may resign at
any time by so notifying the Issuer. The Holders of a majority in Outstanding
Amount of the Transition Bonds of all Series may remove the Bond Trustee by so
notifying the Issuer and the Bond Trustee and may appoint a successor Bond
Trustee. The Issuer shall remove the Bond Trustee if:
(i) the Bond Trustee fails to comply with Section 6.11;
(ii) the Bond Trustee is adjudged a bankrupt or insolvent;
(iii) a receiver or other public officer takes charge of the Bond
Trustee or its property; or
(iv) the Bond Trustee otherwise becomes incapable of acting.
If the Bond Trustee resigns or is removed or if a vacancy exists in the
office of Bond Trustee for any reason (the Bond Trustee in such event being
referred to herein as the "Retiring Bond Trustee"), the Issuer shall promptly
appoint a successor Bond Trustee.
A successor Bond Trustee shall deliver a written acceptance of its
appointment to the Retiring Bond Trustee and to the Issuer. Thereupon the
resignation or removal of the Retiring Bond Trustee shall become effective, and
the successor Bond Trustee shall have all the rights, powers and duties of the
Bond Trustee under this Indenture. The successor Bond Trustee shall mail a
notice of its succession to Transition Bondholders. The Retiring Bond Trustee
shall promptly transfer all property held by it as Bond Trustee to the successor
Bond Trustee.
If a successor Bond Trustee does not take office within 60 days after the
Retiring Bond Trustee resigns or is removed, the Retiring Bond Trustee, the
Issuer or the Holders of a majority in Outstanding Amount of the Transition
Bonds of all Series may petition any court of competent jurisdiction for the
appointment of a successor Bond Trustee.
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52
If the Bond Trustee fails to comply with Section 6.11, any Transition
Bondholder may petition any court of competent jurisdiction for the removal of
the Bond Trustee and the appointment of a successor Bond Trustee.
Notwithstanding the replacement of the Bond Trustee pursuant to this
Section 6.08, the Issuer's obligations under Section 6.07 shall continue for the
benefit of the Retiring Bond Trustee.
SECTION 6.09. Successor Bond Trustee by Merger. If the Bond Trustee
consolidates with, merges or converts into, or transfers all or substantially
all its corporate trust business or assets to, another corporation or banking
association, the resulting, surviving or transferee corporation or banking
association shall, without any further act be the successor Bond Trustee.
In case at the time such successor or successors by merger, conversion
consolidation or transfer shall succeed to the trusts created by this Indenture
any of the Transition Bonds shall have been authenticated but not delivered, any
such successor to the Bond Trustee may adopt the certificate of authentication
of any Retiring Bond Trustee, and deliver such Transition Bonds so
authenticated; and in case at that time any of the Transition Bonds shall not
have been authenticated, any successor to the Bond Trustee may authenticate such
Transition Bonds either in the name of any Retiring Bond Trustee hereunder or in
the name of the successor to the Bond Trustee; and in all such cases such
certificates shall have the full force which it is anywhere in the Transition
Bonds or in this Indenture provided that the certificate of the Bond Trustee
shall have.
SECTION 6.10. Appointment of Co-Trustee or Separate Trustee. (a)
Notwithstanding any other provisions of this Indenture, at any time, for the
purpose of meeting any legal requirement of any jurisdiction in which any part
of the Collateral may at the time be located, the Bond Trustee shall have the
power and may execute and deliver all instruments to appoint one or more Persons
to act as a co-trustee or co-trustees, or separate trustee or separate trustees,
of all or any part of the Collateral, and to vest in such Person or Persons, in
such capacity and for the benefit of the Transition Bondholders, such title to
the Collateral, or any part hereof, and, subject to the other provisions of this
Section, such powers, duties, obligations, rights and trusts as the Bond Trustee
may consider necessary or desirable. No co-trustee or separate trustee hereunder
shall be required to meet the terms of eligibility as a successor trustee under
Section 6.11 and no notice to Transition Bondholders of the appointment of any
co-trustee or separate trustee shall be required under Section 6.08 hereof.
(b) Every separate trustee and co-trustee shall, to the extent permitted by
law, be appointed and act subject to the following provisions and conditions:
(i) all rights, powers, duties and obligations conferred or imposed
upon the Bond Trustee shall be conferred or imposed upon and exercised or
performed by the Bond Trustee and such separate trustee or co-trustee
jointly (it being understood that such separate trustee or co-trustee is
not authorized to act separately without the Bond Trustee joining in such
act), except to the extent that under any law of any jurisdiction in which
any particular act or acts are to be performed the Bond Trustee shall be
incompetent or unqualified to perform such act or acts, in which event such
rights, powers, duties and obligations (including
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53
the holding of title to the Collateral or any portion thereof in any such
jurisdiction) shall be exercised and performed singly by such separate
trustee or co-trustee, but solely at the direction of the Bond Trustee;
(ii) no trustee hereunder shall be personally liable by reason of any
act or omission of any other trustee hereunder; and
(iii) the Bond Trustee may at any time accept the resignation of or
remove any separate trustee or co-trustee.
(c) Any notice, request or other writing given to the Bond Trustee shall be
deemed to have been given to each of the then separate trustees and co-trustees,
as effectively as if given to each of them. Every instrument appointing any
separate trustee or co-trustee shall refer to this Indenture and the conditions
of this Article VI. Each separate trustee and co-trustee, upon its acceptance of
the trusts conferred, shall be vested with the estates or property specified in
its instrument of appointment, either jointly with the Bond Trustee or
separately, as may be provided therein, subject to all the provisions of this
Indenture, specifically including every provision of this Indenture relating to
the conduct of, affecting the liability of, or affording protection to, the Bond
Trustee. Every such instrument shall be filed with the Bond Trustee.
(d) Any separate trustee or co-trustee may at any time constitute the Bond
Trustee, its agent or attorney-in-fact with full power and authority, to the
extent not prohibited by law, to do any lawful act under or in respect of this
Agreement on its behalf and in its name. If any separate trustee or co-trustee
shall die, become incapable of acting, resign or be removed, all of its estates,
properties, rights, remedies and trusts shall vest in and be exercised by the
Bond Trustee, to the extent permitted by law, without the appointment of a new
or successor trustee.
SECTION 6.11. Eligibility; Disqualification. The Bond Trustee shall at all
times satisfy the requirements of TIA ss.310(a). The Bond Trustee shall have a
combined capital and surplus of at least $50,000,000 as set forth in its most
recent published annual report of condition and it shall have a long term debt
rating of "Baa3" or better by Moody's. The Bond Trustee shall comply with TIA
ss.310(b), including the optional provision permitted by the second sentence of
TIA ss.310(b)(9); provided, however, that there shall be excluded from the
operation of TIA ss.310(b)(1) any indenture or indentures under which other
securities of the Issuer are outstanding if the requirements for such exclusion
set forth in TIA ss.310(b)(1) are met.
SECTION 6.12. Preferential Collection of Claims Against Issuer. The Bond
Trustee shall comply with TIA ss.311(a), excluding any creditor relationship
listed in TIA ss.311(b). A Bond Trustee who has resigned or been removed shall
be subject to TIA ss.311(a) to the extent indicated.
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54
ARTICLE VII
Transition Bondholders' Lists and Reports
-----------------------------------------
SECTION 7.01. Issuer To Furnish Bond Trustee Names and Addresses of
Transition Bondholders. The Issuer will furnish or cause to be furnished to the
Bond Trustee (a) not more than five days after the earlier of (i) each Record
Date with respect to each Series and (ii) three months after the last Record
Date with respect to each Series, a list, in such form as the Bond Trustee may
reasonably require, of the names and addresses of the Holders of Transition
Bonds of such Series as of such Record Date, (b) at such other times as the Bond
Trustee may request in writing, within 30 days after receipt by the Issuer of
any such request, a list of similar form and content as of a date not more than
10 days prior to the time such list is furnished; provided, however, that so
long as the Bond Trustee is the Transition Bond Registrar, no such list shall be
required to be furnished.
SECTION 7.02. Preservation of Information; Communications to Transition
Bondholders. (a) The Bond Trustee shall preserve, in as current a form as is
reasonably practicable, the names and addresses of the Holders of Transition
Bonds contained in the most recent list furnished to the Bond Trustee as
provided in Section 7.01 and the names and addresses of Holders of Transition
Bonds received by the Bond Trustee in its capacity as Transition Bond Registrar.
The Bond Trustee may destroy any list furnished to it as provided in such
Section 7.01 upon receipt of a new list so furnished.
(b) Transition Bondholders may communicate pursuant to TIA ss.312(b) with
other Transition Bondholders with respect to their rights under this Indenture
or under the Transition Bonds.
(c) The Issuer, the Bond Trustee and the Transition Bond Registrar shall
have the protection of TIA ss.312(c).
SECTION 7.03. Reports by Issuer. (a) The Issuer shall:
(i) file with the Bond Trustee, within 15 days after the Issuer is
required to file the same with the Commission, copies of the annual reports
and of the information, documents and other reports (or copies of such
portions of any of the foregoing as the Commission may from time to time by
rules and regulations prescribe) which the Issuer may be required to file
with the Commission pursuant to Section 13 or 15(d) of the Exchange Act;
(ii) file with the Bond Trustee and the Commission in accordance with
rules and regulations prescribed from time to time by the Commission such
additional information, documents and reports with respect to compliance by
the Issuer with the conditions and covenants of this Indenture as may be
required from time to time by such rules and regulations; and
(iii) supply to the Bond Trustee (and the Bond Trustee shall transmit
by mail to all Transition Bondholders described in TIA ss.313(c)) such
summaries of any information, documents and reports required to be filed by
the Issuer pursuant to clauses (i) and (ii) of this Section 7.03(a) as may
be required by rules and regulations prescribed from time to time by the
Commission.
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55
(b) Unless the Issuer otherwise determines, the fiscal year of the Issuer
shall end on December 31 of each year.
SECTION 7.04. Reports by Bond Trustee. If required by TIA ss.313(a),
within 60 days after [______] of each year, commencing with the year after the
issuance of the Transition Bonds of any Series, the Bond Trustee shall mail to
each Holder of Transition Bonds of such Series as required by TIA ss.313(c) a
brief report dated as of such date that complies with TIA ss.313(a). The Bond
Trustee also shall comply with TIA ss.313(b); provided, however, that the
initial report so issued shall be delivered not more than 12 months after the
initial issuance of each Series.
A copy of each report at the time of its mailing to Transition Bondholders
shall be filed by the Bond Trustee with the Commission and each stock exchange,
if any, on which the Transition Bonds are listed. The Issuer shall notify the
Bond Trustee if and when the Transition Bonds are listed on any stock exchange.
SECTION 7.05. Provision of Servicer Reports. Upon the written request of
any Transition Bondholder to the Bond Trustee addressed to the Corporate Trust
Office, the Bond Trustee shall provide such Transition Bondholder with a copy of
the Officer's Certificate referred to in Section 3.05 of the Servicing Agreement
and the Annual Accountant's Report referred to in Section 3.06 of the Servicing
Agreement.
ARTICLE VIII
Accounts, Disbursements and Releases
------------------------------------
SECTION 8.01. Collection of Money. Except as otherwise expressly provided
herein, the Bond Trustee may demand payment or delivery of, and shall receive
and collect, directly and without intervention or assistance of any fiscal agent
or other intermediary, all money and other property payable to or receivable by
the Bond Trustee pursuant to this Indenture. The Bond Trustee shall apply all
such money received by it as provided in this Indenture. Except as otherwise
expressly provided in this Indenture, if any default occurs in the making of any
payment or performance under any agreement or instrument that is part of the
Collateral, the Bond Trustee may take such action as may be appropriate to
enforce such payment or performance, including the institution and prosecution
of appropriate Proceedings. Any such action shall be without prejudice to any
right to claim a Default or Event of Default under this Indenture and any right
to proceed thereafter as provided in Article V.
SECTION 8.02. Collection Account. (a) On or prior to the Series Issuance
Date for the first Series issued hereunder, the Issuer shall open, at the Bond
Trustee's Corporate Trust Office, or at another Eligible Institution, one or
more segregated trust accounts in the Bond Trustee's name (collectively, the
"Collection Account"). The Collection Account will initially be divided into
subaccounts, which need not be separate bank accounts: a general subaccount (the
"General Subaccount"), an Overcollateralization subaccount (the
"Overcollateralization Subaccount"), a capital subaccount (the "Capital
Subaccount"), a reserve subaccount (the "Reserve Subaccount"), and a series
subaccount for each Series of Transition Bonds issued on such date (each a
"Series Subaccount"). On or prior to the Series Issuance Date for each Series
issued after
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56
the Series Issuance Date for the first Series issued hereunder, the Issuer shall
establish a Series Subaccount therefor as a subaccount of the Collection
Account. Prior to depositing funds or U.S. Government Obligations in the
Collection Account pursuant to Sections 4.01 or 4.02, the Issuer shall establish
defeasance subaccounts (each a "Defeasance Subaccount") for each Series for
which funds shall be deposited, as subaccounts of the Collection Account. Prior
to any Loss Amounts or Interest Deposit Amounts being deposited in the
Collection Account, the Issuer shall establish a loss subaccount (the "Loss
Subaccount") or an interest deposit subaccount (the "Interest Deposit
Subaccount"), as applicable, as a subaccount of the Collection Account. All
amounts in the Collection Account not allocated to any other subaccount shall be
allocated to the General Subaccount. Prior to the initial Monthly Allocation
Date, all amounts in the Collection Account (other than funds deposited into the
Capital Subaccount, up to the Required Capital Amount) shall be allocated to the
General Subaccount. All references to the Collection Account shall be deemed to
include reference to all subaccounts contained therein. Withdrawals from and
deposits to each of the foregoing subaccounts of the Collection Account shall be
made as set forth in Sections 4.01, 4.02, 4.03 and 8.02(d), (e) and (f). The
Collection Account shall at all times be maintained in an Eligible Deposit
Account and only the Bond Trustee shall have access to the Collection Account
for the purpose of making deposits in and withdrawals from the Collection
Account in accordance with this Indenture. Funds in the Collection Account shall
not be commingled with any other moneys. All moneys deposited from time to time
in the Collection Account, all deposits therein pursuant to this Indenture, and
all investments made in Eligible Investments with such moneys, including all
income or other gain from such investments, shall be held by the Bond Trustee in
the Collection Account as part of the Collateral as herein provided.
(b) So long as no Default or Event of Default has occurred and is
continuing, all or a portion of the funds in the Collection Account shall be
invested in Eligible Investments and reinvested by the Bond Trustee upon Issuer
Order; provided, however, that (i) such Eligible Investments shall not mature
later than the Business Day prior to (x) with respect to funds in the General
Subaccount, the Overcollateralization Subaccount, the Capital Subaccount, the
Reserve Subaccount, the Loss Subaccount and the Interest Deposit Subaccount, the
next Monthly Allocation Date or (y) with respect to funds in the Series
Subaccount for any Series of Transition Bonds, the next Payment Date for such
Series, (ii) such Eligible Investments shall not be sold, liquidated or
otherwise disposed of at a loss prior to the maturity thereof, and (iii) no
funds in the Defeasance Subaccount for any Series of Transition Bonds shall be
invested in Eligible Investments or otherwise, except that U.S. Government
Obligations deposited by the Issuer with the Bond Trustee pursuant to Sections
4.01 or 4.02 shall remain as such. All income or other gain from investments of
moneys deposited in the Collection Account shall be deposited by the Bond
Trustee in the Collection Account, and any loss resulting from such investments
shall be charged to the Collection Account. The Issuer will not direct the Bond
Trustee to make any investment of any funds or to sell any investment held in
the Collection Account unless the security interest granted and perfected in
such account will continue to be perfected in such investment or the proceeds of
such sale, in either case without any further action by any Person, and, in
connection with any direction to the Bond Trustee to make any such investment or
sale, if requested by the Bond Trustee, the Issuer shall deliver to the Bond
Trustee an Opinion of Counsel, acceptable to the Bond Trustee, to such effect.
Subject to Section 6.01(c), the Bond Trustee shall not in any way be held liable
for the selection of Eligible Investments or for investment losses incurred
<PAGE>
57
thereon except for losses attributable to the Bond Trustee's failure to make
payments on such Eligible Investments issued by the Bond Trustee, in its
commercial capacity as principal obligor and not as Bond Trustee, in accordance
with their terms. The Bond Trustee shall have no liability in respect of losses
incurred as a result of the liquidation of any Eligible Investment prior to its
stated maturity or the failure of the Issuer to provide timely written
investment direction. The Bond Trustee shall have no obligation to invest or
reinvest any amounts held hereunder in the absence of written investment
direction pursuant to an Issuer Order, however, if (i) the Issuer shall have
failed to give investment directions for any funds on deposit in the Collection
Account to the Bond Trustee by 11:00 a.m. Eastern Time (or such other time as
may be agreed by the Issuer and Bond Trustee) on any Business Day; or (ii) a
Default or Event of Default shall have occurred and be continuing but the
Transition Bonds shall not have been declared due and payable pursuant to
Section 5.02; then the Bond Trustee shall, to the fullest extent practicable,
invest and reinvest funds in the Collection Account in one or more Eligible
Investments.
(c) ITC Collections remitted by the Servicer to the Bond Trustee,
Liquidated Damages remitted by the Seller to the Bond Trustee and Indemnity
Amounts remitted to the Bond Trustee by the Seller or the Servicer or otherwise
received by the Bond Trustee or the Issuer shall be deposited in the General
Subaccount. Loss Amounts remitted by the Seller to the Bond Trustee shall 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.
(d) On each Monthly Allocation Date, the Bond Trustee shall by 12:00 noon
(New York City time) apply all amounts on deposit in the General Subaccount of
the Collection Account and any investment earnings thereon in the following
priority:
(i) all amounts owed to the Bond Trustee (including legal fees and
expenses, Indemnity Amounts and Loss Amounts) shall be paid to the Bond
Trustee;
(ii) all amounts owed to the Issuer Trustee (including legal fees and
expenses, Indemnity Amounts and Loss Amounts) shall be paid to the Issuer
Trustee;
(iii) the Monthly Servicing Fee and all unpaid Monthly Servicing Fees
from prior Monthly Allocation Dates shall be paid to the Servicer;
(iv) so long as no Event of Default has occurred and is continuing or
would be caused by such payment, all Operating Expenses other than (i),
(ii) and (iii) above shall be paid to the Persons entitled thereto,
provided that the amount paid on any Monthly Allocation Date pursuant to
this clause (iv) may not exceed $33,000 in the aggregate for all Series;
(v) an amount equal to Interest with respect to each Series of
Transition Bonds for such Monthly Allocation Date shall be transferred on a
Pro Rata basis to the Series Subaccount for such Series;
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(vi) an amount equal to any Principal of any Series or Class of
Transition Bonds payable as a result of acceleration pursuant to Section
5.02, 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 shall be
transferred to the Series Subaccount for such Series, taking into account
amounts on deposit therein in respect of Principal as of such Monthly
Allocation Date;
(vii) an amount equal to Principal with respect to each Series of
Transition Bonds for such Monthly Allocation Date not provided for pursuant
to clause (vi) above shall be transferred on a Pro Rata basis to the Series
Subaccount for such Series;
(viii) all unpaid Operating Expenses, Indemnity Amounts and Loss
Amounts shall be paid to the Persons entitled thereto;
(ix) Overcollateralization with respect to all Series of Transition
Bonds for such Monthly Allocation Date shall be transferred to the
Overcollateralization Subaccount;
(x) provided no Event of Default has occurred and is continuing, an
amount up to the amount of net investment earnings on amounts in the
Collection Account since the previous Monthly Allocation Date will be
released to the Issuer, free from the lien of this Indenture;
(xi) the balance, if any, will be allocated to the Reserve Subaccount;
and
(xii) following repayment of all outstanding Series of Transition
Bonds, the balance, if any, will be released to the Issuer, free from the
lien of this Indenture.
"Pro Rata" means with respect to any Series of Transition Bonds a ratio,
(i) in the case of clause (v) above, the numerator of which is the Monthly
Allocated Interest Balance with respect to such Series for such Monthly
Allocation Date and the denominator of which is the sum of Monthly Allocated
Interest Balances with respect to all Series for such Monthly Allocation Date
and (ii) in the case of clause (vii) above, the numerator of which is the
Monthly Allocated Principal Balance with respect to such Series for such Monthly
Allocation Date and the denominator of which is the sum of Monthly Allocated
Principal Balances with respect to all Series for such Monthly Allocation Date.
If, on any Monthly Allocation Date funds on deposit in the General
Subaccount are insufficient to make the payments or transfers contemplated by
clauses (i) through (viii) 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 such payments and transfers:
(i) from the Interest Deposit Subaccount, with respect to the payments
or transfers contemplated by clause (v) above only;
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59
(ii) then from the Loss Subaccount, with respect to the payments or
transfers contemplated by clauses (i) through (vii) above only; and
(iii) thereafter, from the Reserve Subaccount, then from the
Overcollateralization Subaccount and finally from the Capital Subaccount.
(e) On each Payment Date for any Series, the amounts on deposit in the
Series Subaccount (other than net income or other gain thereon, which, so long
as no Event of Default has occurred and is continuing, shall be released to the
Issuer free of the lien of the Indenture) for that Series will be applied as
follows (in the priority indicated): (i) interest due and payable on the
Transition Bonds of such Series, together with any overdue interest and, to the
extent permitted by law, interest thereon, will be paid to the Holders of
Transition Bonds of such Series, (ii) the balance, if any, up to the principal
amount of the Transition Bonds of such Series that is scheduled to be paid by
such Payment Date in accordance with the Expected Amortization Schedule therefor
or, with respect to any Series of Transition Bonds payable as a result of
acceleration pursuant to Section 5.02 or to be redeemed pursuant to the
Indenture, the outstanding principal amount of such Series and premium, if any,
will be paid to the Holders of Transition Bonds of such Series in respect of
principal of and premium, if any, on the Transition Bonds of such Series and
(iii) the balance, if any, will be transferred to the General Subaccount for
allocation on the next Monthly Allocation Date.
All payments to the Transition Bondholders of a Series pursuant to clauses
(i) and (ii) of the preceding paragraph shall be made pro rata based on the
respective principal amounts of Transition Bonds of such Series held by such
Holders, unless, in the case of a Series comprised of two or more Classes, the
Series Supplement for such Series provides otherwise. All payments to Transition
Bondholders of a Class pursuant to clause (i) or (ii) of the preceding paragraph
shall be made pro rata based on the respective principal amounts of Transition
Bonds of such Class held by such Holders.
(f) On the Liquidated Damages Redemption Date, the Bond Trustee shall by
12:00 noon (New York City time) apply all amounts on deposit in the Collection
Account and any investment earnings thereon since the immediately preceding
Monthly Allocation Date to pay the following amounts in the following priority:
(i) 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;
(ii) the Monthly Servicing Fee or the portion thereof 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;
(iii) all other Operating Expenses shall be paid to the Persons
entitled thereto;
(iv) the Redemption Price and accrued interest for each Series of
Transition Bonds shall be paid to Transition Bondholders of such Series;
and
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(v) the balance, if any, will be released to the Issuer, free from the
lien of this Indenture.
SECTION 8.03. Release of Collateral. (a) All money and other property
withdrawn from the Collection Account by the Bond Trustee for payment to the
Issuer as provided in this Indenture in accordance with Section 8.02 hereof
shall be deemed released from the Indenture when so withdrawn and applied in
accordance with the provisions of Article VIII, without further notice to, or
release or consent by, the Bond Trustee.
(b) So long as the Issuer is not in default hereunder, the Issuer, through
the Servicer, may collect, liquidate, sell or otherwise dispose of the
Transferred Intangible Transition Property, at any time and from time to time,
without any notice to, or release or consent by, the Bond Trustee, but only as
and to the extent permitted by the Basic Documents; provided, however, that any
and all proceeds of such dispositions shall become Collateral and be deposited
to the General Subaccount immediately upon receipt thereof by the Issuer or any
other Person, including the Servicer.
(c) Other than as provided for in clauses (a) and (b) above, the Bond
Trustee shall release property from the lien of this Indenture only upon receipt
of an Issuer Request accompanied by an Officer's Certificate, an Opinion of
Counsel and Independent Certificates in accordance with TIA ss.ss. 314(c) and
314(d)(1) meeting the applicable requirements of Section 11.01 or an Opinion of
Counsel in lieu of such Independent Certificates to the effect that the TIA does
not require any such Independent Certificate.
(d) Subject to the payment of its fees and expenses pursuant to Section
6.07, the Bond Trustee may, and when required by the provisions of this
Indenture shall, execute instruments to release property from the lien of this
Indenture, or convey the Bond Trustee's interest in the same, in a manner and
under circumstances that are not inconsistent with the provisions of this
Indenture. No party relying upon an instrument executed by the Bond Trustee as
provided in this Article VIII shall be bound to ascertain the Bond Trustee's
authority, inquire into the satisfaction of any conditions precedent or see to
the application of any moneys.
(e) Subject to Section 8.03(c), the Bond Trustee shall, at such time as
there are no Transition Bonds Outstanding and all sums due the Bond Trustee
pursuant to Section 6.07 have been paid, release any remaining portion of the
Collateral that secured the Transition Bonds from the lien of this Indenture and
release to the Issuer or any other Person entitled thereto any funds then on
deposit in the Collection Account.
SECTION 8.04. Opinion of Counsel. The Bond Trustee shall receive at least
five days notice when requested by the Issuer to take any action pursuant to
Section 8.03, accompanied by copies of any instruments involved, and the Bond
Trustee shall also require, as a condition to such action, an Opinion of
Counsel, in form and substance satisfactory to the Bond Trustee, stating the
legal effect of any such action, outlining the steps required to complete the
same, and concluding that all conditions precedent to the taking of such action
have been complied with and such action will not materially and adversely impair
the security for the Transition Bonds or the rights of the
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61
Transition Bondholders in contravention of the provisions of this Indenture;
provided, however, that such Opinion of Counsel shall not be required to express
an opinion as to the fair value of the Collateral. Counsel rendering any such
opinion may rely, without independent investigation, on the accuracy and
validity of any certificate or other instrument delivered to the Bond Trustee in
connection with any such action.
SECTION 8.05. Reports by Independent Accountants. The Issuer shall appoint
a firm of Independent certified public accountants of recognized national
reputation for purposes of preparing and delivering the reports or certificates
of such accountants required by this Indenture and the related Series
Supplements. Upon any resignation by such firm the Issuer shall promptly appoint
a successor thereto that shall also be a firm of Independent certified public
accountants of recognized national reputation. If the Issuer shall fail to
appoint a successor to a firm of Independent certified public accountants that
has resigned within 15 days after such resignation, the Bond Trustee shall
promptly notify the Issuer of such failure in writing. If the Issuer shall not
have appointed a successor within 10 days thereafter the Bond Trustee shall
promptly appoint a successor firm of Independent certified public accountants of
recognized national reputation. The fees of such firm of Independent certified
public accountants and its successor shall be payable by the Issuer.
ARTICLE IX
Supplemental Indentures
-----------------------
SECTION 9.01. Supplemental Indentures Without Consent of Transition
Bondholders. (a) Without the consent of the Holders of any Transition Bonds but
with prior notice to the Rating Agencies, the Issuer and the Bond Trustee, when
authorized by an Issuer Order, at any time and from time to time, may enter into
one or more indentures supplemental hereto (which shall conform to the
provisions of the Trust Indenture Act as in force at the date of the execution
thereof), in form satisfactory to the Bond Trustee, for any of the following
purposes:
(i) to correct or amplify the description of the Collateral, or better
to assure, convey and confirm unto the Bond Trustee the Collateral, or to
subject to the lien of this Indenture additional property;
(ii) to evidence the succession, in compliance with the applicable
provisions hereof, of another person to the Issuer, and the assumption by
any such successor of the covenants of the Issuer contained herein and in
the Transition Bonds;
(iii) 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 herein
conferred upon the Issuer;
(iv) to convey, transfer, assign, mortgage or pledge any property to
or with the Bond Trustee;
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(v) to cure any ambiguity, to correct or supplement any provision
herein or in any supplemental indenture which may be inconsistent with any
other provision herein or in any supplemental indenture or to make any
other provisions with respect to matters or questions arising under this
Indenture or in any supplemental indenture; provided, however, that (i)
such action shall not, as evidenced by an Opinion of Counsel, adversely
affect in any material respect the interests of any Transition Bondholder
and (ii) the Rating Agency Condition shall have been satisfied with respect
thereto;
(vi) to evidence and provide for the acceptance of the appointment
hereunder by a successor bond trustee with respect to the Transition Bonds
and to add to or change any of the provisions of this Indenture as shall be
necessary to facilitate the administration of the trusts hereunder by more
than one bond trustee, pursuant to the requirements of Article VI;
(vii) to modify, eliminate or add to the provisions of this Indenture
to such extent as shall be necessary to effect the qualification of this
Indenture under the TIA or under any similar Federal statute hereafter
enacted and to add to this Indenture such other provisions as may be
expressly required by the TIA; or
(viii) to set forth the terms of any Series that has not theretofore
been authorized by a Series Supplement.
The Bond Trustee is hereby authorized to join in the execution of any such
supplemental indenture and to make any further appropriate agreements and
stipulations that may be therein contained.
(b) The Issuer and the Bond Trustee, when authorized by an Issuer Order,
may, also without the consent of any of the Holders of the Transition Bonds,
enter into an indenture or indentures supplemental hereto for the purpose of
adding any provisions to, or changing in any manner or eliminating any of the
provisions of, this Indenture or of modifying in any manner the rights of the
Holders of the Transition Bonds under this Indenture; provided, however, that
(i) such action shall not, as evidenced by an Opinion of Counsel, adversely
affect in any material respect the interests of any Transition Bondholder and
(ii) the Rating Agency Condition shall have been satisfied with respect thereto.
SECTION 9.02. Supplemental Indentures with Consent of Transition
Bondholders. The Issuer and the Bond Trustee, when authorized by an Issuer
Order, 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, by Act of such Holders
delivered to the Issuer and the Bond Trustee, enter into an indenture or
indentures supplemental hereto for the purpose of adding any provisions to, or
changing in any manner or eliminating any of the provisions of, this Indenture
or of modifying in any manner the rights of the Holders of the Transition Bonds
under this Indenture; provided, however, that no such supplemental indenture
shall, without the consent of the Holder of each Outstanding Transition Bond of
each Series or Class affected thereby:
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(i) change the date of payment of any instalment of principal of or
premium, if any, or interest on any Transition Bond, or reduce the
principal amount thereof, the interest rate thereon or the redemption price
or the premium, if any, with respect thereto, change the provisions of this
Indenture and the related applicable Series Supplement relating to the
application of collections on, or the proceeds of the sale 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 the interest thereon is payable;
(ii) impair the right to institute suit for the enforcement of the
provisions of this Indenture requiring the application of funds available
therefor, as provided in Article V, to the payment of any such amount due
on the Transition Bonds on or after the respective due dates thereof (or,
in the case of redemption, on or after the Redemption Date);
(iii) reduce the percentage of the Outstanding Amount of the
Transition Bonds or of a Series or Class thereof, the consent of the
Holders of which is required for any such supplemental indenture, or the
consent of the Holders of which is required for any waiver of compliance
with certain provisions of this Indenture or certain defaults hereunder and
their consequences provided for in this Indenture or modify or alter the
provisions of the proviso to the definition of the term "Outstanding";
(iv) 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 pursuant to Section 5.04;
(v) modify any provision of this Section except to increase any
percentage specified herein or to provide that certain additional
provisions of this Indenture or the Basic Documents cannot be modified or
waived without the consent of the Holder of each Outstanding Transition
Bond affected thereby;
(vi) modify any of the provisions of this Indenture in such 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 the Holders of Transition Bonds to the benefit of any provisions
for the mandatory redemption of the Transition Bonds contained herein or
change the Redemption Dates, Expected Amortization Schedules or Series
Termination Dates or Class Termination Dates of any Transition Bonds;
(vii) decrease the Overcollateralization Amount or Required Capital
Amount with respect to any Series or the Calculated Overcollateralization
Level with respect to any Payment Date;
(viii) modify or alter the provisions of this 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;
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64
(ix) decrease the percentage of the aggregate principal amount of
Transition Bonds required to amend the sections of this Indenture which
specify the applicable percentage of the aggregate principal amount of the
Transition Bonds necessary to amend this Indenture or certain other related
agreements; or
(x) permit the creation of any lien ranking prior to or on a parity
with the lien of this Indenture with respect to any part of the Collateral
or, except as otherwise permitted or contemplated herein, terminate the
lien of this Indenture on any property at any time subject hereto or
deprive the Holder of any Transition Bond of the security provided by the
lien of this Indenture.
It shall not be necessary for any Act of Transition Bondholders under this
Section to approve the particular form of any proposed supplemental indenture,
but it shall be sufficient if such Act shall approve the substance thereof.
Promptly after the execution by the Issuer and the Bond Trustee of any
supplemental indenture pursuant to this Section, the Bond Trustee shall mail to
the Holders of the Transition Bonds to which such amendment or supplemental
indenture relates a notice setting forth in general terms the substance of such
supplemental indenture. Any failure of the Bond Trustee to mail such notice, or
any defect therein, shall not, however, in any way impair or affect the validity
of any such supplemental indenture.
SECTION 9.03. Execution of Supplemental Indentures. In executing, or
permitting the additional trusts created by, any supplemental indenture
permitted by this Article IX or the modifications thereby of the trusts created
by this Indenture, the Bond Trustee shall be entitled to receive, and subject to
Sections 6.01 and 6.02, shall be fully protected in relying upon, an Opinion of
Counsel stating that the execution of such supplemental indenture is authorized
or permitted by this Indenture. The Bond Trustee may, but shall not be obligated
to, enter into any such supplemental indenture that affects the Bond Trustee's
own rights, duties, liabilities or immunities under this Indenture or otherwise.
SECTION 9.04. Effect of Supplemental Indenture. Upon the execution of any
supplemental indenture pursuant to the provisions hereof, this Indenture shall
be and be deemed to be modified and amended in accordance therewith with respect
to each Series or Class of Transition Bonds affected thereby, and the respective
rights, limitations of rights, obligations, duties, liabilities and immunities
under this Indenture of the Bond Trustee, the Issuer and the Holders of the
Transition Bonds shall thereafter be determined, exercised and enforced
hereunder subject in all respects to such modifications and amendments, and all
the terms and conditions of any such supplemental indenture shall be and be
deemed to be part of the terms and conditions of this Indenture for any and all
purposes.
SECTION 9.05. Conformity with Trust Indenture Act. Every amendment of this
Indenture and every supplemental indenture executed pursuant to this Article IX
shall conform to the requirements of the TIA as then in effect so long as this
Indenture shall then be qualified under the TIA.
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SECTION 9.06. Reference in Transition Bonds to Supplemental Indentures.
Transition Bonds authenticated and delivered after the execution of any
supplemental indenture pursuant to this Article IX may, and if required by the
Bond Trustee shall, bear a notation in form approved by the Bond Trustee as to
any matter provided for in such supplemental indenture. If the Issuer or the
Bond Trustee shall so determine, new Transition Bonds so modified as to conform,
in the opinion of the Bond Trustee and the Issuer, to any such supplemental
indenture may be prepared and executed by the Issuer and authenticated and
delivered by the Bond Trustee in exchange for Outstanding Transition Bonds.
ARTICLE X
Redemption of Transition Bonds;
-------------------------------
SECTION 10.01. Optional Redemption by Issuer. The Issuer may, at its
option, redeem the Transition Bonds of a Series, in whole or from time to time
in part, as permitted by the related Series Supplement on any Redemption Date at
a price specified in such Series Supplement (such price being called the
"Redemption Price") plus interest accrued on the Transition Bonds to be redeemed
to such Redemption Date. If the Issuer shall elect to redeem the Transition
Bonds of a Series pursuant to this Section 10.01, it shall furnish notice of
such election to the Bond Trustee not later than 25 days prior to the Redemption
Date for such redemption and shall deposit with the Bond Trustee the Redemption
Price of the Transition Bonds to be redeemed plus interest accrued thereon to
such Redemption Date on or prior to such Redemption Date whereupon all such
Transition Bonds shall be due and payable on such Redemption Date upon the
furnishing of a notice complying with Section 10.03 hereof to each Holder of the
Transition Bonds of such Series pursuant to this Section 10.01.
SECTION 10.02. Mandatory Redemption by Issuer. The Issuer shall redeem (i)
the Transition Bonds of a Series on the Redemption Date or Dates, if any, in the
amounts required, if any, and at the Redemption Price specified in the Series
Supplement for such Series plus accrued interest thereon to such Redemption Date
and (ii) the Transition Bonds of all Series if the Issuer receives Liquidated
Damages on the Liquidated Damages Redemption Date at a Redemption Price that
shall be equal to the then outstanding principal amount of the Transition Bonds
as of the Liquidated Damages Redemption Date plus accrued interest to such
Redemption Date. If the Issuer is required to redeem the Transition Bonds of a
Series pursuant to this Section 10.02, it shall furnish notice of such
requirement to the Bond Trustee not later than 25 days prior to the Redemption
Date for such redemption and shall deposit with the Bond Trustee the Redemption
Price of the Transition Bonds to be redeemed whereupon all such Transition Bonds
shall be due and payable on the Redemption Date upon the furnishing of a notice
complying with Section 10.03 hereof to each Holder of the Transition Bonds of
such Series pursuant to this Section 10.02.
SECTION 10.03. Form of Redemption Notice. Unless otherwise specified in the
Series Supplement relating to a Series of Transition Bonds, notice of redemption
under Section 10.01 or 10.02 hereof shall be given by the Bond Trustee by
first-class mail, postage prepaid, mailed not less than five days nor more than
45 days prior to the applicable Redemption Date to each Holder of Transition
Bonds to be
<PAGE>
66
redeemed, as of the close of business on the Record Date preceding the
applicable Redemption Date at such Holder's address appearing in the Transition
Bond Register.
All notices of redemption shall state:
(1) the Redemption Date;
(2) the amount of such Transition Bonds to be redeemed;
(3) the Redemption Price; and
(4) the place where such Transition Bonds are to be surrendered for
payment of the Redemption Price and accrued interest (which shall be the
office or agency of the Issuer to be maintained as provided in Section 3.02
hereof).
Notice of redemption of the Transition Bonds to be redeemed shall be given
by the Bond Trustee in the name and at the expense of the Issuer. Failure to
give notice of redemption, or any defect therein, to any Holder of any
Transition Bond selected for redemption shall not impair or affect the validity
of the redemption of any other Transition Bond. Any notice of optional
redemption may be conditioned upon the deposit of sufficient moneys to pay the
Redemption Price and accrued interest with the Bond Trustee before the date
fixed for redemption and such notice shall be of no effect unless such moneys
are so deposited.
SECTION 10.04. Payment of Redemption Price. If (a) unconditional notice of
redemption has been duly mailed or duly waived by the Holders of all Transition
Bonds called for redemption or (b) conditional notice of redemption has been so
mailed or waived and the redemption moneys have been duly deposited with the
Bond Trustee, then in either case the Transition Bonds called for redemption
shall be payable on the applicable Redemption Date at the applicable Redemption
Price. No further interest will accrue on the principal amount of any Transition
Bonds called for redemption after the Redemption Date for such redemption if
payment of the Redemption Price thereof has been duly provided for, and the
Holder of such Transition Bonds will have no rights with respect thereto, except
to receive payment of the Redemption Price thereof and unpaid interest accrued
to the Redemption Date. Payment of the Redemption Price together with accrued
interest shall be made by the Bond Trustee to or upon the order of the Holders
of the Transition Bonds called for redemption upon surrender of such Transition
Bonds, and the Transition Bonds so redeemed shall cease to be of further effect
and the Lien hereunder shall be released with respect to such Transition Bonds.
ARTICLE XI
Miscellaneous
-------------
SECTION 11.01. Compliance Certificates and Opinions, etc. Upon any
application or request by the Issuer to the Bond Trustee to take any action
under any provision of this Indenture, the Issuer shall furnish to the Bond
Trustee (i) an Officer's Certificate stating that all conditions precedent, if
any, provided for in this Indenture relating to the proposed action have been
complied with, (ii) an Opinion of Counsel
<PAGE>
67
stating that in the opinion of such counsel all such conditions precedent, if
any, have been complied with and (iii) (if required by the TIA) an Independent
Certificate from a firm of certified public accountants meeting the applicable
requirements of this Section, except that, in the case of any such application
or request as to which the furnishing of such documents is specifically required
by any provision of this Indenture, no additional certificate or opinion need be
furnished.
Every certificate or opinion with respect to compliance with a condition or
covenant provided for in this Indenture shall include:
(a) statement that each signatory of such certificate or opinion has read
or has caused to be read such covenant or condition and the definitions herein
relating thereto;
(b) a brief statement as to the nature and scope of the examination or
investigation upon which the statements or opinions contained in such
certificate or opinion are based;
(c) a statement that, in the opinion of each such signatory, such signatory
has made such examination or investigation as is necessary to enable such
signatory to express an informed opinion as to whether or not such covenant or
condition has been complied with; and
(d) a statement as to whether, in the opinion of each such signatory, such
condition or covenant has been complied with.
SECTION 11.02. Form of Documents Delivered to Bond Trustee. In any case
where several matters are required to be certified by, or covered by an opinion
of, any specified Person, it is not necessary that all such matters be certified
by, or covered by the opinion of, only one such Person, or that they be so
certified or covered by only one document, but one such Person may certify or
give an opinion with respect to some matters and one or more other such Persons
as to other matters, and any such Person may certify or give an opinion as to
such matters in one or several documents.
Any certificate or opinion of an Authorized Officer of the Issuer may be
based, insofar as it relates to legal matters, upon a certificate or opinion of,
or representations by, counsel, unless such officer knows, or in the exercise of
reasonable care should know, that the certificate or opinion or representations
with respect to the matters upon which his certificate or opinion is based are
erroneous. Any such certificate of an Authorized Officer or Opinion of Counsel
may be based, insofar as it relates to factual matters, upon a certificate or
opinion of, or representations by, an officer or officers of the Servicer, the
Seller or the Issuer, stating that the information with respect to such factual
matters is in the possession of the Servicer, the Seller or the Issuer, unless
such Authorized Officer or counsel knows, or in the exercise of reasonable care
should know, that the certificate or opinion or representations with respect to
such matters are erroneous.
Where any Person is required to make, give or execute two or more
applications, requests, consents, certificates, statements, opinions or other
instruments under this Indenture, they may, but need not, be consolidated and
form one instrument.
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68
Whenever in this Indenture, in connection with any application or
certificate or report to the Bond Trustee, it is provided that the Issuer shall
deliver any document as a condition of the granting of such application, or as
evidence of the Issuer's compliance with any term hereof, it is intended that
the truth and accuracy, at the time of the granting of such application or at
the effective date of such certificate or report (as the case may be), of the
facts and opinions stated in such document shall in such case be conditions
precedent to the right of the Issuer to have such application granted or to the
sufficiency of such certificate or report. The foregoing shall not, however, be
construed to affect the Bond Trustee's right to rely upon the truth and accuracy
of any statement or opinion contained in any such document as provided in
Article VI.
SECTION 11.03. Acts of Transition Bondholders. (a) Any request, demand,
authorization, direction, notice, consent, waiver or other action provided by
this Indenture to be given or taken by Transition Bondholders may be embodied in
and evidenced by one or more instruments of substantially similar tenor signed
by such Transition Bondholders in person or by agents duly appointed in writing;
and except as herein otherwise expressly provided such action shall become
effective when such instrument or instruments are delivered to the Bond Trustee,
and, where it is hereby expressly required, to the Issuer. Such instrument or
instruments (and the action embodied therein and evidenced thereby) are herein
sometimes referred to as the "Act" of the Transition Bondholders signing such
instrument or instruments. Proof of execution of any such instrument or of a
writing appointing any such agent shall be sufficient for any purpose of this
Indenture and (subject to Section 6.01) conclusive in favor of the Bond Trustee
and the Issuer, if made in the manner provided in this Section.
(b) The fact and date of the execution by any person of any such instrument
or writing may be proved in any manner that the Bond Trustee deems sufficient.
(c) The ownership of Transition Bonds shall be proved by the Transition
Bond Register.
(d) Any request, demand, authorization, direction, notice, consent, waiver
or other action by the Holder of any Transition Bonds shall bind the Holder of
every Transition Bond issued upon the registration thereof or in exchange
therefor or in lieu thereof, in respect of anything done, omitted or suffered to
be done by the Bond Trustee or the Issuer in reliance thereon, whether or not
notation of such action is made upon such Transition Bond.
SECTION 11.04. Notices, etc., to Bond Trustee, Issuer and Rating Agencies.
Any request, demand, authorization, direction, notice, consent, waiver or Act of
Transition Bondholders or other documents provided or permitted by this
Indenture to be made upon, given or furnished to or filed with:
(a) the Bond Trustee by any Transition Bondholder or by the Issuer
shall be sufficient for every purpose hereunder if made, given, furnished
or filed in writing, delivered personally, via facsimile transmission, by
reputable overnight courier or by first-class mail, postage prepaid, to the
Bond Trustee at its Corporate Trust Office, or
<PAGE>
69
(b) the Issuer by the Bond Trustee or by any Transition Bondholder
shall be sufficient for every purpose hereunder if in writing, delivered
personally, via facsimile transmission, by reputable overnight courier or
by first-class mail, postage prepaid, to the Issuer addressed to: [_____],
[_____], Attention: Corporate Trustee Administration Department, or at any
other address previously furnished in writing to the Bond Trustee by the
Issuer. The Issuer shall promptly transmit any notice received by it from
the Transition Bondholders to the Bond Trustee.
Notices required to be given to the Rating Agencies by the Issuer, the Bond
Trustee or the Issuer Trustee shall be in writing, delivered personally, via
facsimile transmission, by reputable overnight courier or by first-class mail,
postage prepaid, to (i) in the case of Duff, at the following address:
[_______], (ii) in the case of Fitch, at the following address: [_______], (iii)
in the case of Moody's, at the following address: Moody's Investors Service,
Inc., Attention: ABS Monitoring Department, 99 Church Street, New York, New York
10007 and (iv) in the case of Standard & Poor's, at the following address:
Standard & Poor's Corporation, 26 Broadway (15th Floor), New York, New York
10004, Attention: Asset Backed Surveillance Department.
SECTION 11.05. Notices to Transition Bondholders; Waiver. Where this
Indenture provides for notice to Transition Bondholders of any event, such
notice shall be sufficiently given (unless otherwise herein expressly provided)
if in writing and delivered by first-class mail, postage prepaid, to each
Transition Bondholder affected by such event, at their address as it appears on
the Transition Bond Register, not later than the latest date, and not earlier
than the earliest date, prescribed for the giving of such notice. In any case
where notice to Transition Bondholders is given by mail, neither the failure to
mail such notice nor any defect in any notice so mailed to any particular
Transition Bondholder shall affect the sufficiency of such notice with respect
to other Transition Bondholders, and any notice that is mailed in the manner
herein provided shall conclusively be presumed to have been duly given.
Where this Indenture provides for notice in any manner, such notice may be
waived in writing by any Person entitled to receive such notice, either before
or after the event, and such waiver shall be the equivalent of such notice.
Waivers of notice by Transition Bondholders shall be filed with the Bond Trustee
but such filing shall not be a condition precedent to the validity of any action
taken in reliance upon such a waiver.
In case it shall be impractical to deliver notice in accordance with the
first paragraph of this Section 11.05 to the Holders of Transition Bonds when
such notice is required to be given pursuant to any provision of this Indenture,
then any manner of giving such notice as shall be satisfactory to the Bond
Trustee shall be deemed to be a sufficient giving of such notice.
Where this Indenture provides for notice to the Rating Agencies, failure to
give such notice shall not affect any other rights or obligations created
hereunder, and shall not under any circumstance constitute a Default or Event of
Default.
SECTION 11.06. Alternate Payment and Notice Provisions. Notwithstanding any
provision of this Indenture or any of the Transition Bonds to the contrary, the
Issuer may enter into any agreement with any Holder of a Transition Bond
<PAGE>
70
providing for a method of payment, or notice by the Bond Trustee or any Paying
Agent to such Holder, that is different from the methods provided for in this
Indenture for such payments or notices. The Issuer will furnish to the Bond
Trustee a copy of each such agreement and the Bond Trustee will cause payments
to be made and notices to be given in accordance with such agreements.
SECTION 11.07. Conflict with Trust Indenture Act. If any provision hereof
limits, qualifies or conflicts with another provision hereof that is required to
be included in this Indenture by any of the provisions of the TIA, such required
provision shall control.
The provisions of TIA ss.ss. 310 through 317 that impose duties on any
person (including the provisions automatically deemed included herein unless
expressly excluded by this Indenture) are a part of and govern this Indenture,
whether or not physically contained herein.
SECTION 11.08. Effect of Headings and Table of Contents. The Article and
Section headings herein and the Table of Contents are for convenience only and
shall not affect the construction hereof.
SECTION 11.09. Successors and Assigns. All covenants and agreements in this
Indenture and the Transition Bonds by the Issuer shall bind its successors and
permitted assigns, whether so expressed or not.
All agreements of the Bond Trustee in this Indenture shall bind its
successors.
SECTION 11.10. Separability. In case any provision in this Indenture or in
the Transition Bonds shall be invalid, illegal or unenforceable, the validity,
legality, and enforceability of the remaining provisions shall not in any way be
affected or impaired thereby.
SECTION 11.11. Benefits of Indenture. Nothing in this Indenture or in the
Transition Bonds, express or implied, shall give to any Person, other than the
parties hereto and their successors hereunder, and the Transition Bondholders,
and any other party secured hereunder, and any other Person with an ownership
interest in any part of the Collateral, any benefit or any legal or equitable
right, remedy or claim under this Indenture.
SECTION 11.12. Legal Holidays. In any case where the date on which any
payment is due shall not be a Business Day, then (notwithstanding any other
provision of the Transition Bonds or this Indenture) payment need not be made on
such date, but may be made on the next succeeding Business Day with the same
force and effect as if made on the date on which nominally due, and no interest
shall accrue for the period from and after any such nominal date.
SECTION 11.13. GOVERNING LAW. THIS INDENTURE SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE COMMONWEALTH OF PENNSYLVANIA,
WITHOUT REFERENCE TO ITS CONFLICT OF LAW PROVISIONS, AND THE OBLIGATIONS, RIGHTS
AND
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71
REMEDIES OF THE PARTIES HEREUNDER SHALL BE DETERMINED IN ACCORDANCE WITH SUCH
LAWS.
SECTION 11.14. Counterparts. This Indenture may be executed in any number
of counterparts, each of which so executed shall be deemed to be an original,
but all such counterparts shall together constitute but one and the same
instrument.
SECTION 11.15. Issuer Obligation. No recourse may be taken, directly or
indirectly, with respect to the obligations of the Issuer or the Bond Trustee on
the Transition Bonds or under this Indenture or any certificate or other writing
delivered in connection herewith or therewith, against (i) any owner of a
beneficial interest in the Issuer or (ii) any partner, owner, beneficiary,
agent, officer, director, employee or agent of the Bond Trustee, any holder of a
beneficial interest in the Issuer or the Bond Trustee or of any successor or
assign of the Bond Trustee, except as any such Person may have expressly agreed
(it being understood that all of the Bond Trustee's obligations are in its
individual capacity).
SECTION 11.16. No Petition. The Bond Trustee, by entering into this
Indenture, and each Transition Bondholder, by accepting a Transition Bond,
hereby covenant and agree that they will not at any time institute against the
Issuer, or join in any institution against the Issuer of, any bankruptcy,
reorganization, arrangement, insolvency or liquidation proceedings, or other
proceedings under any United States Federal or state bankruptcy or similar law
in connection with any obligations relating to the Transition Bonds, this
Indenture or any of the Basic Documents.
IN WITNESS WHEREOF, the Issuer and the Bond Trustee have caused this
Indenture to be duly executed by their respective officers, thereunto duly
authorized and duly attested, all as of the day and year first above written.
[_____________________],
by First Union Trust Company,
National Association,
not in its individual capacity but
solely as Issuer Trustee,
by
_________________________________________
Name:
Title:
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72
THE BANK OF NEW YORK,
not in its individual capacity but
solely as Bond Trustee,
by
___________________________________________
Name:
Title:
<PAGE>
TABLE OF CONTENTS
<TABLE>
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ARTICLE I
Definitions and Incorporation by Reference
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SECTION 1.01. Definitions...............................................................................2
SECTION 1.02. Incorporation by Reference of Trust Indenture Act........................................13
SECTION 1.03. Rules of Construction....................................................................13
ARTICLE II
The Transition Bonds
SECTION 2.01. Form.....................................................................................14
SECTION 2.02. Execution, Authentication and Delivery...................................................14
SECTION 2.03. Denominations; Transition Bonds Issuable in Series.......................................15
SECTION 2.04. Temporary Transition Bonds...............................................................16
SECTION 2.05. Registration; Registration of Transfer and Exchange......................................17
SECTION 2.06. Mutilated, Destroyed, Lost or Stolen Transition Bonds....................................18
SECTION 2.07. Persons Deemed Owner.....................................................................19
SECTION 2.08. Payment of Principal, Premium, if any, and Interest; Interest on
Overdue Principal and Premium, if any; Principal, Premium and Interest Rights Preserved.................19
SECTION 2.09. Cancelation..............................................................................20
SECTION 2.10. Amount; Authentication and Delivery of Transition Bonds..................................20
SECTION 2.11. Book-Entry Transition Bonds..............................................................24
SECTION 2.12. Notices to Clearing Agency...............................................................25
SECTION 2.13. Definitive Transition Bonds..............................................................25
ARTICLE III
Covenants
SECTION 3.01. Payment of Principal, Premium, if any, and Interest......................................26
SECTION 3.02. Maintenance of Office or Agency..........................................................26
SECTION 3.03. Money for Payments To Be Held in Trust...................................................27
SECTION 3.04. Existence................................................................................28
SECTION 3.05. Protection of Collateral.................................................................28
SECTION 3.06. Opinions as to Collateral................................................................29
SECTION 3.07. Performance of Obligations...............................................................29
SECTION 3.08. Negative Covenants.......................................................................30
SECTION 3.09. Annual Statement as to Compliance........................................................30
SECTION 3.10. Issuer May Consolidate, etc., Only on Certain Terms......................................31
SECTION 3.11. Successor or Transferee..................................................................32
SECTION 3.12. No Other Business........................................................................32
SECTION 3.13. No Borrowing.............................................................................32
SECTION 3.14. Guarantees, Loans, Advances and Other Liabilities........................................32
</TABLE>
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<TABLE>
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SECTION 3.15. Capital Expenditures.....................................................................32
SECTION 3.16. Restricted Payments......................................................................32
SECTION 3.17. Notice of Events of Default..............................................................33
SECTION 3.18. Inspection...............................................................................33
SECTION 3.19. Adjusted Monthly Overcollateralization Balance Schedules.................................33
ARTICLE IV
Satisfaction and Discharge; Defeasance
SECTION 4.01. Satisfaction and Discharge of Indenture; Defeasance......................................36
SECTION 4.02. Conditions to Defeasance.................................................................37
SECTION 4.03. Application of Trust Money...............................................................38
SECTION 4.04. Repayment of Moneys Held by Paying Agent.................................................39
ARTICLE V
Remedies
SECTION 5.01. Events of Default........................................................................39
SECTION 5.02. Acceleration of Maturity; Rescission and Annulment.......................................40
SECTION 5.03. Collection of Indebtedness and Suits for Enforcement by Bond Trustee.....................41
SECTION 5.04. Remedies; Priorities.....................................................................43
SECTION 5.05. Optional Preservation of the Collateral..................................................44
SECTION 5.06. Limitation of Proceedings................................................................44
SECTION 5.07. Unconditional Rights of Transition Bondholders To Receive Principal,
Premium, if any, and Interest...........................................................................45
SECTION 5.08. Restoration of Rights and Remedies.......................................................45
SECTION 5.09. Rights and Remedies Cumulative...........................................................45
SECTION 5.10. Delay or Omission Not a Waiver...........................................................45
SECTION 5.11. Control by Transition Bondholders........................................................46
SECTION 5.12. Waiver of Past Defaults..................................................................46
SECTION 5.13. Undertaking for Costs....................................................................46
SECTION 5.14. Waiver of Stay or Extension Laws.........................................................47
SECTION 5.15. Action on Transition Bonds...............................................................47
ARTICLE VI
The Bond Trustee
SECTION 6.01. Duties and Liabilities of Bond Trustee...................................................47
SECTION 6.02. Rights of Bond Trustee...................................................................48
SECTION 6.03. Individual Rights of Bond Trustee........................................................49
SECTION 6.04. Bond Trustee's Disclaimer................................................................49
SECTION 6.05. Notice of Defaults.......................................................................49
SECTION 6.06. Reports by Bond Trustee to Holders.......................................................50
SECTION 6.07. Compensation and Indemnity...............................................................50
SECTION 6.08. Replacement of Bond Trustee..............................................................51
SECTION 6.09. Successor Bond Trustee by Merger.........................................................52
</TABLE>
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<TABLE>
<S> <C> <C>
SECTION 6.10. Appointment of Co-Trustee or Separate Trustee............................................52
SECTION 6.11. Eligibility; Disqualification............................................................53
SECTION 6.12. Preferential Collection of Claims Against Issuer.........................................53
ARTICLE VII
Transition Bondholders' Lists and Reports
SECTION 7.01. Issuer To Furnish Bond Trustee Names and Addresses of Transition
Bondholders.............................................................................................54
SECTION 7.02. Preservation of Information; Communications to Transition
Bondholders.............................................................................................54
SECTION 7.03. Reports by Issuer........................................................................54
SECTION 7.04. Reports by Bond Trustee..................................................................55
SECTION 7.05. Provision of Servicer Reports............................................................55
ARTICLE VIII
Accounts, Disbursements and Releases
SECTION 8.01. Collection of Money......................................................................55
SECTION 8.02. Collection Account.......................................................................55
SECTION 8.03. Release of Collateral....................................................................60
SECTION 8.04. Opinion of Counsel.......................................................................60
SECTION 8.05. Reports by Independent Accountants.......................................................61
ARTICLE IX
Supplemental Indentures
SECTION 9.01. Supplemental Indentures Without Consent of Transition Bondholders........................61
SECTION 9.02. Supplemental Indentures with Consent of Transition Bondholders...........................62
SECTION 9.03. Execution of Supplemental Indentures.....................................................64
SECTION 9.04. Effect of Supplemental Indenture.........................................................64
SECTION 9.05. Conformity with Trust Indenture Act......................................................64
SECTION 9.06. Reference in Transition Bonds to Supplemental Indentures.................................65
ARTICLE X
Redemption of Transition Bonds;
SECTION 10.01. Optional Redemption by Issuer...........................................................65
SECTION 10.03. Form of Redemption Notice...............................................................65
SECTION 10.04. Payment of Redemption Price.............................................................65
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<TABLE>
ARTICLE XI
Miscellaneous
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SECTION 11.01. Compliance Certificates and Opinions, etc...............................................66
SECTION 11.02. Form of Documents Delivered to Bond Trustee.............................................67
SECTION 11.03. Acts of Transition Bondholders..........................................................68
SECTION 11.04. Notices, etc., to Bond Trustee, Issuer and Rating Agencies..............................68
SECTION 11.05. Notices to Transition Bondholders; Waiver...............................................69
SECTION 11.06. Alternate Payment and Notice Provisions.................................................69
SECTION 11.07. Conflict with Trust Indenture Act.......................................................70
SECTION 11.08. Effect of Headings and Table of Contents................................................70
SECTION 11.09. Successors and Assigns..................................................................70
SECTION 11.10. Separability............................................................................70
SECTION 11.11. Benefits of Indenture...................................................................70
SECTION 11.12. Legal Holidays..........................................................................70
SECTION 11.13. GOVERNING LAW...........................................................................70
SECTION 11.14. Counterparts............................................................................71
SECTION 11.15. Issuer Obligation.......................................................................71
SECTION 11.16. No Petition.............................................................................71
</TABLE>
Exhibit A Form of Transition Bonds
Exhibit B Form of Series Supplement
Exhibit C Form of DTC Agreement
Schedule 1 Overcollateralization
Exhibit 5.1
[Letterhead of Richards, Layton & Finger, P.A.]
September 18, 1998
PECO Energy Transition Trust
c/o First Union Trust Company, National Association
One Rodney Square
920 King Street, First Floor
Wilmington, Delaware 19801
Re: PECO Energy Transition Trust
----------------------------
Ladies and Gentlemen:
We have acted as special Delaware counsel for PECO Energy Company, a
Pennsylvania corporation (the "Company"), and PECO Energy Transition Trust, a
Delaware business trust (the "Trust"), in connection with the matters set forth
herein. At your request, this opinion is being furnished to you.
For purposes of giving the opinions hereinafter set forth, our
examination of documents has been limited to the examination of originals or
copies of the following:
(a) The Certificate of Trust of the Trust, dated as June 23, 1998 (the
"Certificate"), as filed in the office of the Secretary of State of the State of
Delaware (the "Secretary of State") on June 23, 1998;
(b) The Trust Agreement of the Trust, dated as of June 23, 1998, among
the Company and the trustees of the Trust named therein;
(c) Amendment No. 1 to the Registration Statement (the "Registration
Statement") on Form S-3, including a preliminary prospectus (the "Prospectus")
and prospectus supplement, relating to the __% Transition Bonds, Series 199_-_
of the Trust (the "Transition Bonds"), as proposed to be filed by the Trust with
the Securities and Exchange Commission on or about September 18, 1998;
<PAGE>
PECO Energy Transition Trust
September 18, 1998
Page 2
(d) A form of Amended and Restated Trust Agreement of the Trust, to be
entered into among the Company, as grantor and owner, and the trustees of the
Trust named therein (including Exhibits 1 and 2 thereto) (the "Trust
Agreement"), attached as an exhibit to the Registration Statement;
(e) A form of Indenture, to be entered into between the Trust and the
trustee to be named therein, attached as an exhibit to the Registration
Statement pursuant to which the Transition bonds are to be issued; and
(f) A Certificate of Good Standing for the Trust, dated September 18,
1998, obtained from the Secretary of State.
Capitalized terms used herein and not otherwise defined are used as
defined in the Trust Agreement.
For purposes of this opinion, we have not reviewed any documents other
than the documents listed in paragraphs (a) through (f) above. In particular, we
have not reviewed any document (other than the documents listed in paragraphs
(a) through (f) above) that is referred to in or incorporated by reference into
the documents reviewed by us. We have assumed that there exists no provision in
any document that we have not reviewed that is inconsistent with the opinions
stated herein. We have conducted no independent factual investigation of our own
but rather have relied solely upon the foregoing documents, the statements and
information set forth therein and the additional matters recited or assumed
herein, all of which we have assumed to be true, complete and accurate in all
material respects.
With respect to all documents examined by us, we have assumed (i) the
authenticity of all documents submitted to us as authentic originals, (ii) the
conformity with the originals of all documents submitted to us as copies or
forms, and (iii) the genuineness of all signatures.
For purposes of this opinion, we have assumed (i) that the Trust
Agreement and the Certificate are in full force and effect and have not been
amended, (ii) that there are no proceedings pending or contemplated for the
merger, consolidation, conversion, dissolution or termination of the Trust,
(iii) except to the extent provided in paragraph 1 below, that each party to
documents examined by us has been duly created, organized or formed, as the case
may be, and is validly existing in good standing under the laws of the
jurisdiction governing its creation, organization or formation, (iv) the legal
capacity of natural persons who are parties to the documents examined by us,
(v) except to the extent provided in paragraph 2 below, that each of the parties
to the documents examined by us has the power and authority to execute and
deliver, and to perform its obligations under, such documents, and (vi) except
to the extent provided in paragraph 3 below, that each of the documents examined
by us has been duly authorized,
<PAGE>
PECO Energy Transition Trust
September 18, 1998
Page 3
executed and delivered by all parties thereto. We have not participated in the
preparation of the Registration Statement and assume no responsibility for its
contents.
This opinion is limited to the laws of the State of Delaware (excluding
the securities laws of the State of Delaware), and we have not considered and
express no opinion on the laws of any other jurisdiction, including federal laws
and rules and regulations relating thereto. Our opinions are rendered only with
respect to Delaware laws and rules, regulations and orders thereunder that are
currently in effect.
Based upon the foregoing, and upon our examination of such questions of
law and statutes of the State of Delaware as we have considered necessary or
appropriate, and subject to the assumptions, qualifications, limitations and
exceptions set forth herein, we are of the opinion that:
1. The Trust has been duly created and is validly existing in good
standing as a business trust under the Business Trust Act.
2. Under the Business Trust Act and the Trust Agreement, the Trust has
all necessary trust power and authority to execute and deliver the Indenture and
to issue the Transition Bonds, and to perform its obligations under the
Indenture and the Transition Bonds.
3. Under the Business Trust Act and the Trust Agreement, the execution
and delivery by the Trust of the Indenture and the Transition Bonds, and the
performance by the Trust of its obligations under the Indenture and the
Transition Bonds, have been duly authorized by all necessary trust action on the
part of the Trust.
We consent to the filing of this opinion with the Securities and
Exchange Commission as an exhibit to the Registration Statement. In addition, we
hereby consent to the use of our name under the heading "Legal Matters" in the
Prospectus. We also consent to Ballard Spahr Andrews & Ingersoll's relying as to
matters of Delaware law upon this opinion in connection with its rendering of an
opinion to be attached as an exhibit to the Registration Statement. In giving
the foregoing consents, we do not thereby admit that we come within the category
of Persons whose consent is required under Section 7 of the Securities Act of
1933, as amended, or the rules and regulations of the Securities and Exchange
Commission thereunder. Except as stated above, without our prior written
consent, this opinion may not be furnished or quoted to, or relied upon by, any
other Person for any purpose.
Very truly yours,
/s/ Richards, Layton & Finger, P.A.
-----------------------------------
Exhibit 5.2
[Letterhead of Ballard Spahr Andrews & Ingersoll, LLP]
September 18, 1998
PECO Energy Transition Trust
c/o First Union Trust Company, National Association
One Rodney Square
920 King Street
Wilmington, Delaware 19801
Re: PECO Energy Transition Trust
Ladies and Gentlemen:
We have acted as special counsel to PECO Energy Transition Trust, a
Delaware statutory business trust (the "Trust"), in connection with the
preparation of the Registration Statement, as amended to the date hereof, filed
on Form S-3 (the "Registration Statement") with the Securities and Exchange
Commission (the "Commission") in connection with the registration under the
Securities Act of 1933, as amended, of Transition Bonds (the "Transition Bonds")
of the Trust to be offered from time to time as described in the form of the
prospectus (the "Prospectus") included as part of the Registration Statement.
Each capitalized term used in this letter and not defined has the meaning given
to such term in the Prospectus.
We are familiar with the proceedings taken and proposed to be taken by
the Trust in connection with the proposed authorization, issuance and sale of
the Transition Bonds. In this connection, we have examined and relied upon such
trust records and other documents, instruments and certificates and have made
such other investigation as we deemed appropriate as the basis for the opinion
set forth below. In our examination, we have assumed legal capacity of all
natural persons, the genuineness of all signatures, the authenticity of all
documents submitted to us as originals, the conformity to original documents of
documents submitted to us as certified, conformed or photostatic copies and the
authenticity of such original documents.
We have relied on the opinion of Richards, Layton & Finger filed
contemporaneously herewith for all matters of Delaware law.
<PAGE>
PECO Energy Transition Trust
September 18, 1998
Page 2
The opinions expressed below are based on the following assumptions:
(a) The Registration Statement on Form S-3 filed by the Trust as
registrant with the Securities and Exchange Commission with respect to the
Transition Bonds (the "Registration Statement") will become effective;
(b) The proposed transactions are carried out on the basis set forth in
the Registration Statement and in conformity with the authorizations, approvals,
consents or exemptions under the securities laws of various states and other
jurisdictions of the United States;
(c) Prior to the issuance of any Series or Class of Transition Bonds:
(i) all necessary orders, approvals and authorizations for the
Trust's purchase from time to time of Intangible Transition
Property from PECO Energy Company, a Pennsylvania
corporation, in exchange for the proceeds from the issuance
of Transition Bonds will have been obtained by the Trust;
(ii) the Indenture will have been executed and delivered by the
Trust's authorized representative and The Bank of New York,
as trustee;
(iii) the Amended and Restated Trust Agreement will have been
executed and delivered by George Shicora and Diana Moy Kelly,
as Beneficiary Trustees, and The Bank of New York, as Issuer
Trustee, Delaware Trustee and Independent Trustee;
(iv) the maturity dates, the bond rates, the redemption provisions
and the other terms of the Transition Bonds being offered
will be fixed in accordance with the terms of the Indenture;
(v) the Sale Agreement between the Trust and PECO Energy Company,
as Seller, will have been executed and delivered; and
(vi) the Master Servicing Agreement between the Trust and PECO
Energy Company, as Servicer, will have been executed and
delivered.
(d) The Indenture will be qualified in accordance with the provisions
of the Trust Indenture Act of 1939, as amended.
Based on the foregoing, we are of the opinion that, when properly
executed, authenticated, delivered and paid for as provided in the Indenture and
upon satisfaction of all
<PAGE>
PECO Energy Transition Trust
September 18, 1998
Page 3
conditions contained on the Indenture and the Underwriting Agreement (a form of
which is filed as Exhibit 1.1 to the Registration Statement), the Transition
Bonds will be legally issued, valid and binding obligations of the Trust.
We consent to the filing of this opinion as an Exhibit to the
Registration Statement and to the references to this firm under the headings
"Legal Matters" and "Litigation" in the Prospectus included in the Registration
Statement.
Very truly yours,
/s/ Ballard Spahr Andrews & Ingersoll, LLP
-----------------------------------------------
Exhibit 8.1
-----------
[Letterhead of Ballard Spahr Andrews & Ingersoll, LLP]
September 18, 1998
PECO Energy Transition Trust
c/o First Union Trust Company, National Association
One Rodney Square
920 King Street
Wilmington, Delaware 19801
Re: PECO Energy Transition Trust
----------------------------
Ladies and Gentlemen:
We have acted as special counsel to PECO Energy Transition Trust, a
Delaware statutory business trust (the "Trust"), in connection with the
preparation of the Registration Statement, as amended to the date hereof, filed
on Form S-3 (the "Registration Statement") with the Securities and Exchange
Commission in connection with the registration under the Securities Act of 1933,
as amended, of Transition Bonds of the Trust to be offered from time to time as
described in the form of the prospectus (the "Prospectus") included as part of
the Registration Statement.
We hereby confirm to you our opinion as set forth under the headings
"Summary--Tax Status" and "Material Tax Matters" in Prospectus, and hereby
consent to the filing of this opinion as an exhibit to the Registration
Statement and the references to this firm under the headings "Summary--Tax
Status" and "Material Tax Matters" in the Prospectus.
Very truly yours,
/s/ Ballard Spahr Andrews & Ingersoll, LLP
------------------------------------------
PHL_A 1141763 v 1
- -------------------------------------------------------------------------------
INTANGIBLE TRANSITION PROPERTY
SALE AGREEMENT
between
PECO ENERGY TRANSITION TRUST
Issuer
and
PECO ENERGY COMPANY
Seller
Dated as of [_________], 1998
- -------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
Page
----
ARTICLE I
Definitions
SECTION 1.01. Definitions..................................................2
SECTION 1.02. Other Definitional Provisions................................8
ARTICLE II
Conveyance of Intangible Transition Property
SECTION 2.01. Conveyance of Initial Intangible
Transition Property.................................9
SECTION 2.02. Conveyance of Subsequent Intangible
Transition Property................................11
SECTION 2.03. Conditions to Conveyance of Intangible
Transition Property................................11
ARTICLE III
Representations and Warranties of Seller
SECTION 3.01. Organization and Good Standing..............................14
SECTION 3.02. Due Qualification...........................................14
SECTION 3.03. Power and Authority.........................................14
SECTION 3.04. Binding Obligation..........................................15
SECTION 3.05. No Violation................................................15
SECTION 3.06. No Proceedings..............................................16
SECTION 3.07. Approvals...................................................16
SECTION 3.08. The Intangible Transition Property..........................17
ARTICLE IV
Covenants of the Seller
SECTION 4.01. Corporate Existence.........................................22
SECTION 4.02. No Liens or Conveyances.....................................23
SECTION 4.03. Delivery of Collections.....................................23
SECTION 4.04. Notice of Liens.............................................24
SECTION 4.05. Compliance with Law.........................................24
SECTION 4.06. Covenants Related to Intangible Transition
Property...........................................24
SECTION 4.07. Notice of Indemnification Events............................26
SECTION 4.08. Protection of Title.........................................26
<PAGE>
Contents, p. ii
Page
----
SECTION 4.09. Taxes ...................................................27
ARTICLE V
The Seller
SECTION 5.01. Liability of Seller; Indemnities and
Liquidated Damages.................................28
SECTION 5.02. Merger or Consolidation of, or Assumption
of the Obligations of, Seller......................35
SECTION 5.03. Limitation on Liability of Seller
and Others.........................................37
SECTION 5.04. Opinions of Counsel.........................................37
ARTICLE VI
Miscellaneous Provisions
SECTION 6.01. Amendment...................................................38
SECTION 6.02. Notices ...................................................39
SECTION 6.03. Assignment..................................................40
SECTION 6.04. Limitations on Rights of Others.............................40
SECTION 6.05. Severability................................................40
SECTION 6.06. Separate Counterparts.......................................41
SECTION 6.07. Headings ...................................................41
SECTION 6.08. Governing Law...............................................41
SECTION 6.09. Assignment to Bond Trustee..................................41
SECTION 6.10. Nonpetition Covenant........................................42
SECTION 6.11. Limitation of Liability of Issuer Trustee...................43
SECTION 6.12. Perfection..................................................43
<PAGE>
INTANGIBLE TRANSITION PROPERTY SALE AGREEMENT dated as
of [______], 1998, between PECO ENERGY TRANSITION TRUST, a
Delaware business trust (the "Issuer"), and PECO ENERGY
COMPANY, a Pennsylvania corporation, and its successors in
interest to the extent permitted hereunder, as Seller (the
"Seller").
WHEREAS the Issuer desires to purchase from time to time Intangible
Transition Property created pursuant to the Statute and the Qualified Rate
Order;
WHEREAS the Seller is willing to sell Intangible Transition Property to the
Issuer;
WHEREAS the Issuer, in order to finance the purchase of the Transferred
Intangible Transition Property, will from time to time issue Transition Bonds
under the Indenture;
WHEREAS the Issuer, to secure its obligations under all Transition Bonds
and the Indenture, will pledge its right, title and interest in the Transferred
Intangible Transition Property to the Bond Trustee for the benefit of the
Transition Bondholders; and
WHEREAS the Issuer has determined that the transactions contemplated by the
Basic Documents are in the
<PAGE>
2
best interest of the Issuer and its creditors and represent a prudent and
advisable course of action that does not impair the rights and interests of the
Issuer's creditors.
NOW, THEREFORE, in consideration of the premises and the mutual covenants
herein contained and intending to be legally bound hereby, the parties hereto
agree as follows:
ARTICLE I
Definitions
SECTION 1.01. Definitions. (a) Whenever used in this Agreement, each of the
following words and phrases shall have the following meaning:
"Addition Notice" means, with respect to the transfer of Subsequent
Intangible Transition Property to the Issuer pursuant to Section 2.02, notice,
which shall be given by the Seller to the Issuer and the Rating Agencies not
later than 10 days prior to the related Subsequent Transfer Date, specifying the
Subsequent Transfer Date for such Subsequent Intangible Transition Property.
"Agreement" means this Intangible Transition Property Sale Agreement, as
the same may be amended and supplemented from time to time.
"Bill of Sale" means a bill of sale substantially in the form of Exhibit A
hereto.
<PAGE>
3
"Business Day" has the meaning specified in the Master Servicing Agreement.
"Competitive Transition Charges" has the meaning specified in the Master
Servicing Agreement.
"Corporate Trust Office" means,(i) with respect to the Bond Trustee, 101
Barclay Street, Floor 12 East, New York, New York 10286, Attention: Asset Backed
Finance Unit, or the principal corporate trust office of any successor Bond
Trustee (the address of which the successor Bond Trustee will notify the
Transition Bondholders and the Issuer), and (ii) with respect to the Issuer
Trustee, c/o First Union Trust Company, National Association, One Rodney Square,
920 King Street, Wilmington, Delaware 19801, Attention: [ ].
"Customers" has the meaning specified in the Master Servicing Agreement.
"De Minimis Loss Amount" has the meaning specified in Section 5.01(c)(iii).
"Duff" has the meaning specified in the Master Servicing Agreement.
"Fitch" has the meaning specified in the Master Servicing Agreement.
"Indemnification Event" has the meaning specified in Section 5.01(c)(i).
<PAGE>
4
"Indenture" means the Indenture dated as of [________], 1998, between the
Issuer and the Bond Trustee, as the same may be amended and supplemented from
time to time.
"Initial Intangible Transition Property" means the Intangible Transition
Property, as identified in the related Bill of Sale, sold to the Issuer on the
Initial Transfer Date pursuant to this Agreement in connection with the issuance
of the Series [__________] Transition Bonds.
"Initial Loss Calculation Date" has the meaning specified in Section
5.01(c)(ii).
"Initial Transfer Date" means [_____________], 1998.
"Intangible Transition Charges" has the meaning specified in the Master
Servicing Agreement.
"Intangible Transition Property" has the meaning specified in the Master
Servicing Agreement.
"ITC Collections" has the meaning specified in the Master Servicing
Agreement.
"Lien" has the meaning specified in the Master Servicing Agreement.
"Liquidated Damages Amount" means an amount equal to the sum of (i) all
amounts due to the Bond Trustee or the Issuer Trustee in respect of expenses or
indemnity payments, (ii) the then outstanding principal amount of the Transition
Bonds as of the Liquidated Damages Redemption Date and unpaid interest accrued
thereon to such date and (iii)
<PAGE>
5
amounts due to the Issuer in respect of any other fees or Operating Expenses of
the Issuer or indemnity payments.
"Liquidated Damages Payment Date" means the date that is (i) 90 days after
the date of a breach of a representation or warranty specified in Section
3.08(b),(c),(d)(i), (d)(ii), (d)(iv) or (f) if the Seller (A) has the long term
debt ratings specified by, and enters into the binding agreement described in,
Section 5.01(d)(i)(B)(i) or (B) does not have such long term debt ratings but
makes the deposit required by Section 5.01(d)(i)(B)(ii) or (ii) in all other
cases, two Business Days after the date of such breach.
"Losses" has the meaning specified in the Master Servicing Agreement.
"Master Servicing Agreement" means the Master Servicing Agreement dated as
of [ ], 1998, among the Issuer, the Servicer and any Other Issuers, as the same
may be amended and supplemented from time to time.
"Monthly Allocation Date" has the meaning specified in the Master Servicing
Agreement.
"Moody's" has the meaning specified in the Master Servicing Agreement.
"Mortgage" has the meaning specified in the Master Servicing Agreement.
<PAGE>
6
"Officers' Certificate" means a certificate signed by (a) the chairman of
the board, the president, the vice chairman of the board, the executive vice
president or any vice president and (b) a treasurer, assistant treasurer,
secretary or assistant secretary of the Seller or the Servicer, as appropriate.
"Opinion of Counsel" means one or more written opinions of counsel who may
be an employee of or counsel to the Seller or the Servicer, which counsel shall
be reasonably acceptable to the Bond Trustee, the Issuer or the Rating Agencies,
as applicable, and which shall be in form reasonably satisfactory to the Bond
Trustee, if applicable.
"Other Issuer" means any Person other than the Issuer that issues Other
Transition Bonds secured by Intangible Transition Property sold by the Seller to
such Person in accordance with Section 4.02 of this Agreement.
"Other Transition Bonds" means "transition bonds" (as defined in the
Statute) issued by any Other Issuer.
"PECO Energy" has the meaning specified in the Master Servicing Agreement.
"PUC" has the meaning specified in the Master Servicing Agreement.
"PUC Regulations" has the meaning specified in the Master Servicing
Agreement.
<PAGE>
7
"Qualified Rate Order" has the meaning specified in the Master Servicing
Agreement.
"Qualified Transition Expenses" has the meaning specified in the Master
Servicing Agreement.
"Rate Class" has the meaning specified in the Master Servicing Agreement.
"Retained Intangible Transition Property" means Intangible Transition
Property other than (i) the Transferred Intangible Transition Property and (ii)
any Intangible Transition Property sold to Other Issuers.
"Serviced Intangible Transition Property" has the meaning specified in the
Master Servicing Agreement.
"Servicer" means PECO Energy, as the servicer of the Intangible Transition
Property, and each successor to PECO Energy (in the same capacity) pursuant to
Section 5.03 or 6.04 of the Master Servicing Agreement.
"Servicer Default" means an event specified in Section 6.01 of the Master
Servicing Agreement.
"Standard & Poor's" has the meaning specified in the Master Servicing
Agreement.
"Statute" has the meaning specified in the Master Servicing Agreement.
"Subsequent Intangible Transition Property" means Intangible Transition
Property, as identified in the related Bill of Sale, sold to the Issuer on any
Subsequent Transfer
<PAGE>
8
Date in connection with the issuance of a Series of Transition Bonds.
"Subsequent Transfer Date" means any date on which Subsequent Intangible
Transition Property is to be transferred to the Issuer pursuant to Section 2.02.
"Third Party" has the meaning specified in the Master Servicing Agreement.
"Transferred Intangible Transition Property" means, collectively, the
Initial Intangible Transition Property and any Subsequent Intangible Transition
Property.
"Trust Agreement" means the Amended and Restated Trust Agreement dated as
of July [ ], 1998, among the Seller, the Issuer Trustee and the other trustees
named therein, as the same may be amended and supplemented from time to time.
"UCC" has the meaning specified in the Master Servicing Agreement.
(b) Except as otherwise specified herein or as the context may otherwise
require, each of the following terms has the meaning set forth in the Indenture
for all purposes of this Agreement, and the definitions of such terms are
equally applicable both to the singular and plural forms of such terms:
Term Section of the Indenture
- ---- ------------------------
Adjustment Date ............................................ 1.01(a)
Affiliate .................................................. 1.01(a)
- ------------------------------------------
<PAGE>
9
Basic Documents............................................. 1.01(a)
Bond Trustee................................................ 1.01(a)
Capital Subaccount.......................................... 1.01(a)
Collateral.................................................. 1.01(a)
Collection Account.......................................... 1.01(a)
General Subaccount.......................................... 1.01(a)
Holders or Transition
Bondholders .............................................. 1.01(a)
Issuer Trustee.............................................. 1.01(a)
Liquidated Damages.......................................... 1.01(a)
Liquidated Damages Redemption
Date...................................................... 1.01(a)
Loss Subaccount............................................. 1.01(a)
Operating Expenses.......................................... 1.01(a)
Overcollateralization Amount................................ 1.01(a)
Person...................................................... 1.01(a)
Rating Agency............................................... 1.01(a)
Rating Agency Condition..................................... 1.01(a)
Reserve Subaccount.......................................... 1.01(a)
Series...................................................... 1.01(a)
Transition Bonds............................................ 1.01(a)
SECTION 1.02. Other Definitional Provisions. (a) The words "hereof",
"herein", "hereunder" and words of similar import when used in this Agreement
shall refer to this Agreement as a whole and not to any particular provision of
this Agreement; Section, Schedule and Exhibit references contained in this
Agreement are references to Sections, Schedules and Exhibits in or to this
Agreement unless otherwise specified; and the term "including" shall mean
"including without limitation".
(b) The definitions contained in this Agreement are applicable to the
singular as well as the plural forms of such terms and to the masculine as well
as to the feminine and neuter genders of such terms.
<PAGE>
10
ARTICLE II
Conveyance of Intangible Transition Property
SECTION 2.01. Conveyance of Initial Intangible Transition Property. (a) In
consideration of the Issuer's delivery to or upon the order of the Seller of
$[______________], subject to the conditions specified in Section 2.03, the
Seller does hereby irrevocably sell, transfer, assign, set over and otherwise
convey to the Issuer, without recourse (subject to the obligations herein), all
right, title and interest of the Seller in and to the Initial Intangible
Transition Property (such sale, transfer, assignment, set over and conveyance of
the Initial Intangible Transition Property includes, to the fullest extent
permitted by the Statute, the assignment of all revenues, collections, claims,
rights, payments, money or proceeds of or arising from the Intangible Transition
Charges related to the Initial Intangible Transition Property, as the same may
be adjusted from time to time). Such sale, transfer, assignment, set over and
conveyance is hereby expressly stated to be a sale and, pursuant to Section
2812(e) of the Statute, shall be treated as an absolute transfer of all of the
Seller's right, title and interest (as in a true sale), and not as a pledge or
other financing, of the Initial Intangible Transition Property. The preceding
sentence is the statement referred to in
<PAGE>
11
Section 2812(e) of the Statute. The Seller agrees and confirms that after giving
effect to the sale contemplated hereby it has no rights in the Initial
Intangible Transition Property to which a security interest of creditors of the
Seller could attach because it has sold all rights in the Initial Intangible
Transition Property to the Issuer pursuant to Section 2812(e) of the Statute.
(b) Subject to the conditions specified in Section 2.03, the Issuer does
hereby purchase the Initial Intangible Transition Property from the Seller for
the consideration set forth in paragraph (a) above.
(c) The Seller and the Issuer each acknowledge and agree that the purchase
price for the Initial Intangible Transition Property sold pursuant to this
Agreement is equal to its fair market value at the time of sale.
SECTION 2.02. Conveyance of Subsequent Intangible Transition Property. The
Seller may from time to time offer to sell additional Intangible Transition
Property to the Issuer, subject to the conditions specified in Section 2.03. If
any such offer is accepted by the Issuer, such Subsequent Intangible Transition
Property shall be sold to the Issuer effective on the Subsequent Transfer Date
specified in the related Addition Notice, subject to the satisfaction or waiver
of the conditions specified in Section 2.03.
<PAGE>
12
SECTION 2.03. Conditions to Conveyance of Intangible Transition Property.
The Seller shall be permitted to sell Intangible Transition Property to the
Issuer only upon the satisfaction or waiver of each of the following conditions:
(i) on or prior to the Initial Transfer Date or Subsequent
Transfer Date, as applicable, 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;
(ii) as of the Initial Transfer Date or the Subsequent Transfer
Date, as applicable, the Seller was not insolvent and will not have
been made insolvent by such sale and the Seller is not aware of any
pending insolvency with respect to itself;
(iii) as of the Initial Transfer Date or the Subsequent Transfer
Date, as applicable, no breach by the Seller of its representations,
warranties or covenants in this Agreement shall exist; and no Servicer
Default shall have occurred and be continuing;
(iv) as of the Initial Transfer Date or the Subsequent Transfer
Date, as applicable, (A) the Issuer shall have sufficient funds
available to pay the purchase price for the Transferred Intangible
Transition Property to be conveyed on such date and
<PAGE>
13
(B) all conditions to the issuance of one or more Series of Transition
Bonds intended to provide such funds set forth in the Indenture shall
have been satisfied or waived;
(v) on or prior to the Initial Transfer Date or Subsequent
Transfer Date, as applicable, the Seller shall have taken all action
required to transfer to the Issuer ownership of the Transferred
Intangible Transition Property to be conveyed on such date, free and
clear of all Liens other than Liens created by the Issuer pursuant to
the Indenture; and the Issuer or the Servicer, on behalf of the
Issuer, shall have taken any action required for the Issuer to grant
the Bond Trustee a first priority perfected security interest in the
Collateral and maintain such security interest as of such date;
(vi) in the case of a sale of Subsequent Intangible Transition
Property only, on or prior to such Subsequent Transfer Date, the
Seller shall have provided the Issuer and the Rating Agencies with a
timely Addition Notice;
(vii) the Seller shall have delivered to the Rating Agencies and
the Issuer (A) an Opinion of Counsel with respect to the transfer of
the Transferred Intangible Transition Property then being conveyed to
the Issuer
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14
substantially in the form of Exhibit B hereto and (B) the Opinion of
Counsel required by Section 5.04(a); and
(viii) the Seller shall have delivered to the Bond Trustee and
the Issuer an Officers' Certificate confirming the satisfaction of
each condition precedent specified in this Section 2.03.
ARTICLE III
Representations and Warranties of Seller
As of the Initial Transfer Date and as of any Subsequent Transfer Date, as
applicable, the Seller makes the following representations and warranties on
which the Issuer has relied and will rely in acquiring Transferred Intangible
Transition Property. The representations and warranties shall survive the sale
of Transferred Intangible Transition Property to the Issuer and the pledge
thereof to the Bond Trustee pursuant to the Indenture.
SECTION 3.01. Organization and Good Standing. 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.
SECTION 3.02. Due Qualification. 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
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15
lease of property or the conduct of its business shall require such
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).
SECTION 3.03. Power and Authority. The Seller has the corporate power and
authority to execute and deliver this Agreement and to carry out its terms; the
Seller has full corporate power and authority to own the Intangible Transition
Property and sell and assign the Initial Intangible Transition Property, in the
case of the Initial Transfer Date, and the Subsequent Intangible Transition
Property, in the case of each Subsequent Transfer Date, as applicable, and the
Seller has duly authorized such sale and assignment to the Issuer by all
necessary corporate action; and the execution, delivery and performance of this
Agreement has been duly authorized by the Seller by all necessary corporate
action.
SECTION 3.04. Binding Obligation. This Agreement constitutes a legal, valid
and binding obligation of the Seller enforceable against the Seller in
accordance with its terms subject to bankruptcy, receivership, insolvency,
fraudulent transfer, reorganization, moratorium or other laws affecting
creditors' rights generally from time to time
<PAGE>
16
in effect and to general principles of equity (regardless of whether considered
in a proceeding in equity or at law).
SECTION 3.05. No Violation. The consummation of the transactions
contemplated by this Agreement and the fulfillment of the terms hereof 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 the Mortgage on the Seller's interest in this
Agreement) pursuant to the terms of any such indenture, agreement or other
instrument; 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.
SECTION 3.06. No Proceedings. 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 (i)
asserting the invalidity of the
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17
Basic Documents or the Transition Bonds, (ii) seeking to prevent the issuance of
the Transition Bonds or the consummation of any of the transactions contemplated
by the Basic Documents or the Transition Bonds or (iii) except as disclosed by
the Seller to the Issuer, seeking any determination or ruling that could
reasonably be 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.
SECTION 3.07. Approvals. Except for UCC continuation filings, 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 this Agreement, the performance by the Seller of the transactions
contemplated hereby or the fulfillment by the Seller of the terms hereof, except
those that have been obtained or made.
SECTION 3.08. The Intangible Transition Property. (a) Information. All
information provided by the Seller to the Issuer with respect to the Transferred
Intangible Transition Property is correct in all material respects.
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18
(b) Effect of Transfer. The transfers and assignments herein contemplated
constitute sales of the Initial Intangible Transition Property or the Subsequent
Intangible Transition Property, as the case may be, 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.
(c) Transfer Filings. The Seller is the sole owner of the Intangible
Transition Property being sold to the Issuer on the Initial Transfer Date or
Subsequent Transfer Date, as applicable; the Transferred Intangible Transition
Property has been validly transferred and sold to the Issuer free and clear of
all Liens other than Liens created by the Issuer pursuant to the Indenture. All
filings, including filings with the PUC under the Statute, necessary in any
jurisdiction to give the Issuer a valid ownership interest in the Transferred
Intangible Transition Property, free and clear of all Liens of the Seller or
anyone claiming through the Seller and to give the Bond Trustee a first priority
perfected security interest in the Transferred Intangible Transition Property
have been made, other than any such filings (except for filings with the PUC
under the Statute and UCC filings with the Secretary of
<PAGE>
19
State of the State of Delaware) the absence of which would not have an adverse
impact on (i) the ability of the Servicer to collect Intangible Transition
Charges with respect to the Serviced Intangible Transition Property or (ii) the
rights of the Issuer or the Bond Trustee with respect to the Transferred
Intangible Transition Property.
(d) Irrevocable; Process Valid; No Litigation; Etc. (i) The Qualified Rate
Order has been issued by the PUC in accordance with the Statute, such order and
the process by which it was issued comply with all applicable laws, rules and
regulations, and such order is in full force and effect. (ii) As of the date of
issuance of any Series of Transition Bonds, such Transition Bonds are entitled
to the protections provided by the Statute and, accordingly, the provisions of
the Qualified Rate Order relating to Intangible Transition Property and
Intangible Transition Charges are not revocable by the PUC. (iii) (a) Under the
Statute, neither the Commonwealth of Pennsylvania nor the PUC 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 Order or any rights
thereunder, except such a limitation or alteration may be made by the
Commonwealth of Pennsylvania or the PUC if adequate compensation is made by law
for the full protection of the Intangible Transition Charges and of
<PAGE>
20
Transition Bondholders; and (b) under the Contract Clauses of the Constitutions
of the Commonwealth of Pennsylvania and the United States, the Commonwealth of
Pennsylvania and the PUC cannot take any action that substantially impairs the
rights of the Transition Bondholders unless such action is a reasonable exercise
of the Commonwealth of Pennsylvania's sovereign powers and appropriate to
further a legitimate public purpose, and, under the Takings Clauses of the
Pennsylvania and United States Constitutions, in the event such 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, unless just compensation, as determined by a court of
competent jurisdiction, is provided to Transition Bondholders. (iv) There is no
order by any court providing for the revocation, alteration, limitation or other
impairment of the Statute, Qualified Rate Order, 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 Qualified
Rate Order. (v) No other approval, authorization, consent, order or other action
of, or filing with, any court, Federal or state regulatory body, administrative
agency or other
<PAGE>
21
governmental instrumentality is required in connection with the creation of the
Intangible Transition Property, except those that have been obtained or made.
(vi) Except as disclosed by the Seller to the Issuer 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 challenging the Qualified Rate Order or the Statute. (vii) No failure
on the Initial Transfer Date or any Subsequent Transfer Date or any time
thereafter to satisfy any condition imposed by the Statute with respect to the
recovery of stranded costs will adversely affect the creation or sale hereunder
of Intangible Transition Property or the right to collect Intangible Transition
Charges.
(e) Assumptions. The assumptions used in calculating Intangible Transition
Charges are reasonable and made in good faith.
(f) Creation of Intangible Transition Property. (i) The Intangible
Transition Property other than the Retained Intangible Transition Property
constitutes a current property right, (ii) the Intangible Transition Property
includes, without limitation, (A) the irrevocable right of the Issuer and any
Other Issuers to receive through
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22
Intangible Transition Charges an amount sufficient to recover all of the
Seller's Qualified Transition Expenses described in the Qualified Rate Order in
an amount equal to the aggregate principal amount of Transition Bonds and Other
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 Other
Transition Bonds, and (B) all right, title and interest of the Seller or its
assignee applicable to the Transition Bonds and Other Transition Bonds in the
Qualified Rate Order and in all revenues, collections, claims, payments, money
or proceeds of or arising from the Intangible Transition Charges applicable to
the Transition Bonds and Other Transition Bonds set forth in the Qualified Rate
Order to the extent that in accordance with the Statute, the Qualified Rate
Order and the rates and charges authorized under the Qualified Rate Order are
declared to be irrevocable and (iii) paragraphs four through nineteen of the
Qualified Rate Order, including the right to collect Intangible Transition
Charges, have been declared to be irrevocable by the PUC.
(g) Solvency. After giving effect to the sale of any Transferred Intangible
Transition Property hereunder,
<PAGE>
23
the Seller (i) is solvent and expects to remain solvent, (ii) is adequately
capitalized to conduct its business and affairs considering its size and the
nature of its business and intended purposes, (iii) is not engaged in nor does
it expect to engage in a business for which its remaining property represents an
unreasonably small capital, (iv) believes that it will be able to pay its debts
as they come due and that such belief is reasonable and (v) 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.
ARTICLE IV
Covenants of the Seller
SECTION 4.01. Corporate Existence. Subject to Section 5.02, so long as any
of the Transition Bonds are outstanding, the Seller will keep in full force and
effect its corporate existence and remain in good standing, in each case under
the laws of the jurisdiction of its incorporation, and will obtain and preserve
its qualification to do business in each jurisdiction in which such
qualification is or shall be necessary to protect the validity and
enforceability of this Agreement and the Trust Agreement and each other
instrument or agreement to which the Seller is a party necessary to the proper
administration of this Agreement and the transactions contemplated hereby.
<PAGE>
24
SECTION 4.02. No Liens or Conveyances. Except for the
conveyances hereunder, the Seller will not sell, pledge, assign or transfer to
any other Person, or grant, create, incur, assume or suffer to exist any Lien
on, any of the Intangible Transition Property, whether now existing or hereafter
created, or any interest therein, other than, with respect to Retained
Intangible Transition Property, the Lien of the Mortgage; provided, that the
Seller may sell Retained Intangible Transition Property to Other Issuers if (i)
the Rating Agency Condition is satisfied with respect to all outstanding
Transition Bonds and (ii) each such Other Issuer is, or prior to such sale
becomes, a party to the Master Servicing Agreement as an "Issuer" (as defined in
the Master Servicing Agreement). The Seller shall not at any time assert any
Lien against or with respect to any Serviced Intangible Transition Property, and
shall defend the right, title and interest of the Issuer, the Bond Trustee, as
assignee of the Issuer, and any Other Issuers in, to and under the Intangible
Transition Property, whether now existing or hereafter created, against all
claims of third parties claiming through or under the Seller.
SECTION 4.03. Delivery of Collections. If the Seller receives collections
in respect of the Intangible Transition Charges or the proceeds thereof, the
Seller agrees to pay the Servicer all payments received by the
<PAGE>
25
Seller in respect thereof as soon as practicable after receipt thereof by the
Seller, but in no event later than two Business Days after such receipt.
SECTION 4.04. Notice of Liens. The Seller shall notify the Issuer Trustee
and the Bond Trustee promptly after becoming aware of any Lien on any Intangible
Transition Property other than the conveyances hereunder or under the Indenture,
conveyances to Other Issuers (and related pledges) or, in the case of Retained
Intangible Transition Property, the Lien of the Mortgage.
SECTION 4.05. Compliance with Law. The Seller hereby agrees to comply with
its organizational or governing documents and all laws, treaties, rules,
regulations and determinations of any governmental instrumentality applicable to
the Seller, except to the extent that failure to so comply would not adversely
affect the Issuer's, the Bond Trustee's or any Other Issuer's interests in the
Intangible Transition Property or under any of the Basic Documents or the
Seller's performance of its obligations hereunder or under any of the other
Basic Documents to which it is a party.
SECTION 4.06. Covenants Related to Intangible Transition Property. (a) So
long as any of the Transition Bonds are outstanding, the Seller shall treat the
Transition Bonds as debt of the Seller for Federal income tax purposes.
<PAGE>
26
(b) So long as any of the Transition Bonds are outstanding, the Seller
shall (i) clearly disclose in its financial statements that it is not the owner
of the Serviced Intangible Transition Property and that the assets of the Issuer
are not available to pay creditors of the Seller or any of its Affiliates and
(ii) clearly disclose the effects of all transactions between the Seller and the
Issuer in accordance with generally accepted accounting principles.
(c) The Seller agrees that upon the sale by the Seller of the Transferred
Intangible Transition Property to the Issuer pursuant to this Agreement, (i) to
the fullest extent permitted by law, including applicable PUC Regulations, the
Issuer shall have all of the rights originally held by the Seller with respect
to the Transferred Intangible Transition Property (other than the rights of an
electric distribution company set forth in Section 2807 of the Statute),
including the right to collect any amounts payable by any Customer or Third
Party in respect of such Transferred Intangible Transition Property,
notwithstanding any objection or direction to the contrary by the Seller and
(ii) any payment by any Customer or Third Party to the Issuer shall discharge
such Customer's or such Third Party's obligations in respect of such Transferred
Intangible Transition Property to the extent of such
<PAGE>
27
payment, notwithstanding any objection or direction to the contrary by the
Seller.
(d) So long as any of the Transition Bonds are outstanding, (i) the Seller
shall not make any statement or reference in respect of the Transferred
Intangible Transition Property that is inconsistent with the ownership thereof
by the Issuer and (ii) the Seller shall not take any action in respect of the
Serviced Intangible Transition Property except solely in its capacity as the
Servicer thereof pursuant to the Master Servicing Agreement or as otherwise
contemplated by the Basic Documents.
SECTION 4.07. Notice of Indemnification Events. The Seller shall deliver to
the Issuer and the Bond Trustee promptly after having obtained knowledge
thereof, written notice in an Officer's Certificate of any Indemnification Event
or any event which, with the giving of notice or the passage of time, would
become an Indemnification Event.
SECTION 4.08. Protection of Title. The Seller shall execute and file such
filings, including filings with the PUC pursuant to the Statute, and cause to be
executed and filed such filings, all in such manner and in such places as may be
required by law fully to preserve, maintain, and protect the interests of the
Issuer in the Transferred Intangible Transition Property, including all
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28
filings required under the Statute relating to the transfer of the ownership or
security interest in the Transferred Intangible Transition Property by the
Seller to the Issuer. The Seller shall deliver (or cause to be delivered) to the
Issuer file-stamped copies of, or filing receipts for, any document filed as
provided above, as soon as available following such filing. The Seller agrees to
take such 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 (i) 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 representation or warranty set forth in Article III or (ii) to
block or overturn any attempts to cause a repeal of, modification of or
supplement to the Statute or the Qualified Rate Order 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.
SECTION 4.09. Taxes. So long as any of the Transition Bonds are
outstanding, the Seller shall, and shall cause each of its subsidiaries (other
than the Issuer) to, pay all material taxes, including gross receipts taxes,
<PAGE>
29
assessments and governmental charges imposed upon it or any of its properties or
assets or with respect to any of its franchises, business, income or property
before any penalty accrues thereon if the failure to pay any such taxes,
assessments and governmental charges would, after any applicable grace periods,
notices or other similar requirements, result in a lien on the Intangible
Transition Property; provided that no such tax need be paid if the Seller or one
of its subsidiaries is contesting the same in good faith by appropriate
proceedings promptly instituted and diligently conducted and if the Seller or
such subsidiary has established appropriate reserves as shall be required in
conformity with generally accepted accounting principles.
ARTICLE V
The Seller
SECTION 5.01. Liability of Seller; Indemnities and Liquidated Damages. (a)
The Seller shall be liable in accordance herewith only to the extent of the
obligations specifically undertaken by the Seller under the Agreement.
(b) The Seller shall indemnify the Issuer and the Bond Trustee, for itself
and on behalf of the Transition Bondholders, and each of their respective
trustees, officers, directors and agents for, and defend and hold
<PAGE>
30
harmless each such Person from and against, any and all taxes (other than any
taxes imposed on Transition Bondholders solely as a result of their ownership of
Transition Bonds) that may at any time be imposed on or asserted against any
such Person as a result of the acquisition or holding of the Transferred
Intangible Transition Property by the Issuer or the issuance and sale by the
Issuer of the Transition Bonds, including any sales, gross receipts, general
corporation, tangible personal property, privilege or license taxes.
(c)(i) The Seller shall indemnify the Issuer and the Bond Trustee, on
behalf of the Transition Bondholders, and each of their respective trustees,
officers, directors, and agents for, and defend and hold harmless each such
Person from and against, any and all Losses that may be imposed on, incurred by
or asserted against any such Person as a result of (x) the Seller's wilful
misconduct, bad faith or gross negligence in the performance of its duties or
observance of its covenants under this Agreement, (y) the Seller's reckless
disregard of its obligations and duties under this Agreement or (z) the Seller's
breach of any of its representations or warranties contained in this Agreement
other than those contained in Sections 3.08(b), 3.08(c), 3.08(d)(i), (ii) and
(iv) and 3.08(f) (any event described in any of the foregoing clauses
<PAGE>
31
(x), (y) or (z), an "Indemnification Event"); provided, however, that the amount
of such Losses (other than those payable pursuant to Section 5.01(e)) for which
the Seller shall be obligated to provide indemnification shall not exceed the
Liquidated Damages Amount. Amounts on deposit in the Reserve Subaccount and the
Capital Subaccount shall not be available to satisfy any Losses for which
indemnification is provided in this Agreement.
(ii) If an Indemnification Event shall occur, upon receipt of written
notice thereof by the Seller from the Issuer or the Bond Trustee, the Seller
shall notify the Servicer of the occurrence of such event so that the Servicer
may, pursuant to Section 8 of Annex 1 to the Master Servicing Agreement,
calculate (x) on the day which is 90 days after receipt of such notice by the
Seller (the "Initial Loss Calculation Date") the amount of Losses expected to be
incurred as a result of such Indemnification Event from and including the time
of its occurrence through and including the next Monthly Allocation Date after
the Initial Loss Calculation Date and (y) to the extent that Losses may be
incurred as a result of such Indemnification Event in an amount exceeding the
amount of Losses calculated pursuant to clause (x) above and unless the Seller
has paid Liquidated Damages with respect to such Indemnification Event pursuant
to the penultimate sentence of this
<PAGE>
32
Section 5.01(c)(ii), not later than each Monthly Allocation Date succeeding the
Initial Loss Calculation Date, the amount of Losses expected to be incurred as a
result of such Indemnification Event from but excluding such Monthly Allocation
Date through and including the next Monthly Allocation Date. All such
calculations shall be subject to the approval of the Bond Trustee. If such
Indemnification Event shall continue unremedied beyond the Initial Loss
Calculation Date, the Seller shall pay to the Bond Trustee, as assignee of the
Issuer, for deposit into the General Subaccount of the Collection Account, (x)
on the Monthly Allocation Date immediately following the Initial Loss
Calculation Date, the amount of Losses calculated pursuant to clause (x) and
clause (y) of the preceding sentence with respect to such Monthly Allocation
Date and (y) on each subsequent Monthly Allocation Date, the amount of Losses
calculated as of such date pursuant to clause (y) of the preceding sentence.
With respect to Indemnification Events occurring as a result of the breach of
the Seller's representations or warranties contained in Sections 3.01, 3.03,
3.04, 3.05 and 3.08(d)(iii), (v) and (vi) of this Agreement for which the full
amount of Losses attributable thereto are reasonably expected to be incurred
beyond a twelve-month period immediately succeeding the occurrence of such
Indemnification Event, the Seller shall, except as
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33
otherwise provided in clause (iii) below, pay to the Bond Trustee, as assignee
of the Issuer, for deposit into the General Subaccount of the Collection
Account, the Liquidated Damages Amount on the first Monthly Allocation Date
following the expiration of such twelve-month period. Upon payment pursuant to
this Section 5.01(c)(ii), the Seller shall have no further obligations with
respect to such Losses to the extent of such payments.
(iii) With respect to any Losses described in Section 5.01(c)(ii) above,
the full amount of which is reasonably expected not to exceed 1/12th of 1% of
the annual outstanding balance of Transition Bonds per Monthly Allocation Date
(the "De Minimis Loss Amount"), the Seller, on the Monthly Allocation Date
immediately following the Initial Loss Calculation Date, shall pay to the Bond
Trustee, as assignee of the Issuer, for deposit in the Loss Subaccount of the
Collection Account, the aggregate expected amount of such Losses for all Monthly
Allocation Dates on which such Losses are expected to be incurred, following
which the Seller's obligation to pay indemnification or Liquidated Damages, as
applicable, as a result of such Losses shall be waived so long as the actual
Losses incurred on any Monthly Allocation Date do not exceed the De Minimis Loss
Amount. If the aggregate amount of such Losses incurred as of any Monthly
Allocation Date exceeds the
<PAGE>
34
amounts paid by the Seller to the Bond Trustee, as assignee of the Issuer, with
respect thereto, the Seller shall pay to the Bond Trustee, as assignee of the
Issuer, on the next Monthly Allocation Date, the amount of such excess for such
Monthly Allocation Date and the expected amount of excess for all subsequent
Monthly Allocation Dates.
(d)(i) In the event of a breach by the Seller of any representation and
warranty specified in Section 3.08(b), 3.08(c), 3.08(d)(i), (ii) or (iv) or
3.08(f) that has a material adverse effect on the Transition Bondholders, the
Seller shall pay to the Bond Trustee, as assignee of the Issuer, for deposit
into the General Subaccount of the Collection Account the Liquidated Damages
Amount on the Liquidated Damages Payment Date; provided, however, that the
Seller shall not be obligated to pay the Liquidated Damages Amount pursuant to
this Section 5.01(d)(i) if (A) within 90 days after the date of the occurrence
thereof such 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 such breach and (B) either (i) 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, the Seller enters into a binding agreement with the Issuer to pay any
amounts
<PAGE>
35
necessary so that all interest payments due on the Transition Bonds during such
90-day period will be paid in full, or (ii) if the Seller does not have such
long term debt ratings, the Seller deposits, within two Business Days after such
breach, an amount in escrow with the Bond Trustee sufficient, taking into
account amounts on deposit in the Collection Account which will be available for
such purpose, to pay all interest payments which will become due on the
Transition Bonds during such 90-day period. In the event that within such 90-day
period (i) such breach is cured or (ii) the Seller takes the remedial action
specified by Section 5.01(d)(i)(A), any amounts paid by the Seller to the Bond
Trustee, as assignee of the Issuer pursuant to Section 5.01(d)(i)(B), which have
not been distributed pursuant to the Indenture shall be returned to the Seller
at the end of such 90-day period.
(ii) Upon the payment by the Seller of the Liquidated Damages Amount
pursuant to this Section 5.01(d), neither the Issuer nor any other Person shall
have any other claims, rights or remedies against the Seller for a breach of the
representations and warranties specified in Section 3.08(b), (c), (d)(i),
(d)(ii), (d)(iv) or (f).
(e) The Seller shall indemnify the Bond Trustee and the Issuer Trustee and
their respective officers, directors and agents for, and defend and hold
harmless each
<PAGE>
36
such Person from and against, any and all Losses that may be imposed upon,
incurred by or asserted against any such Person as a result of the acceptance or
performance of the trusts and duties contained herein and in the Indenture,
except to the extent that any such Loss shall be due to the wilful misfeasance,
bad faith or gross negligence of the Bond Trustee or the Issuer Trustee, as
applicable. Such amounts shall be deposited into the Collection Account and
distributed in accordance with the Indenture.
(f) The Seller's indemnification obligations under Section 5.01(b),(c), (d)
and (e) for events occurring prior to the removal or resignation of the Bond
Trustee or the termination of this Agreement shall survive the resignation or
removal of the Bond Trustee or the termination of this Agreement and shall
include reasonable fees and expenses of investigation and litigation (including
the Bond Trustee's reasonable attorney's fees and expenses).
SECTION 5.02. Merger or Consolidation of, or Assumption of the Obligations
of, Seller. Any Person (a) into which the Seller may be merged or consolidated
and which succeeds to the major part of the electric distribution business of
the Seller, (b) which results from the division of the Seller into two or more
Persons and which succeeds to the major part of the electric distribution
business of the Seller, (c) which may result
<PAGE>
37
from any merger or consolidation to which the Seller shall be a party and which
succeeds to the major part of the electric distribution business of the Seller,
(d) which may succeed to the properties and assets of the Seller substantially
as a whole and which succeeds to the major part of the electric distribution
business of the Seller or (e) which may otherwise succeed to the major part of
the electric distribution business of the Seller, which Person in any of the
foregoing cases executes an agreement of assumption to perform every obligation
of the Seller under this Agreement, shall be the successor to the Seller
hereunder without the execution or filing of any document or any further act by
any of the parties to this Agreement; provided, however, that (i) immediately
after giving effect to such transaction, no representation or warranty made
pursuant to Article III 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, (ii) the Seller shall have
delivered to the Issuer and the Bond Trustee an Officers' Certificate and an
Opinion of Counsel each stating that such consolidation, merger or succession
and such agreement of assumption comply with this Section and that all
conditions precedent, if any, provided for in this Agreement relating to such
transaction have been complied with, (iii) the
<PAGE>
38
Rating Agencies shall have received prior written notice of such transaction and
(iv) the Seller shall have delivered to the Issuer and the Bond Trustee an
Opinion of Counsel either (A) stating that, in the opinion of such counsel, all
filings, including filings with the PUC pursuant to the Statute, have been
executed and filed that are necessary fully to preserve and protect the interest
of the Issuer in the Transferred Intangible Transition Property and reciting the
details of such filings or (B) stating that, in the opinion of such counsel, no
such action shall be necessary to preserve and protect such interests.
Notwithstanding anything herein to the contrary, the execution of the above
described agreement of assumption and compliance with clauses (i), (ii), (iii)
and (iv) above shall be conditions precedent to the consummation of any
transaction referred to in clauses (a), (b), (c), (d) or (e) above.
SECTION 5.03. Limitation on Liability of Seller and Others. The Seller and
any director or officer or employee or agent of the Seller may rely in good
faith on the advice of counsel or on any document of any kind, prima facie
properly executed and submitted by any Person, respecting any matters arising
hereunder. Subject to Section 5.04, the Seller shall not be under any obligation
to appear in, prosecute or defend any legal action that is not incidental to its
obligations under this Agreement, and
<PAGE>
39
that in its opinion may involve it in any expense or liability.
SECTION 5.04. Opinions of Counsel. The Seller shall deliver to the Issuer
and the Bond Trustee: (a) promptly after the execution and delivery of this
Agreement and of each amendment hereto or to the Master Servicing Agreement and
on each Subsequent Transfer Date, an Opinion of Counsel either (i) to the effect
that, in the opinion of such counsel, all filings, including filings with the
PUC pursuant to the Statute, that are necessary to fully preserve and protect
the interests of the Issuer in the Intangible Transition Property have been
executed and filed, and reciting the details of such filings or referring to
prior Opinions of Counsel in which such details are given, or (ii) to the effect
that, in the opinion of such counsel, no such action shall be necessary to
preserve and protect such interest; and (b) within 90 days after the beginning
of each calendar year beginning with the first calendar year beginning more than
three months after the Initial Transfer Date, an Opinion of Counsel, dated as of
a date during such 90-day period, either (ii) to the effect that, in the opinion
of such counsel, all filings with the PUC pursuant to the Statue, have been
executed and filed that are necessary to preserve fully and protect fully the
interest of the Issuer in the Intangible Transition Property, and
<PAGE>
40
reciting the details of such filings or referring to prior Opinions of Counsel
in which such details are given, or (ii) to the effect that, in the opinion of
such counsel, no such action shall be necessary to preserve and protect such
interest. Each Opinion of Counsel referred to in clause (a) or (b) above shall
specify any action necessary (as of the date of such opinion) to be taken in the
following year to preserve and protect such interest.
ARTICLE VI
Miscellaneous Provisions
SECTION 6.01. Amendment. This Agreement may be amended by the Seller and
the Issuer, with the consent of the Bond Trustee. Promptly after the execution
of any such amendment or consent, the Issuer shall furnish written notification
of the substance of such amendment or consent to each of the Rating Agencies.
Prior to the execution of any amendment to this Agreement, the Issuer and
the Bond Trustee shall be entitled to receive and rely upon an Opinion of
Counsel stating that the execution of such amendment is authorized or permitted
by this Agreement and the Opinion of Counsel referred to in Section 5.04(a). The
Issuer and the Bond Trustee may, but shall not be obligated to, enter into any
such amendment
<PAGE>
41
which affects their own rights, duties or immunities under this Agreement or
otherwise.
SECTION 6.02. Notices. All demands, notices and communications upon or to
the Seller, the Issuer or the Issuer Trustee, the Bond Trustee or the Rating
Agencies under this Agreement shall be in writing, delivered personally, via
facsimile, reputable overnight courier or by certified mail, return-receipt
requested, and shall be deemed to have been duly given upon receipt (a) in the
case of the Seller, to PECO Energy Company, 2301 Market Street, Philadelphia, PA
19101, Attention of Vice President, Finance and Treasurer, (b) in the case of
the Issuer, the Issuer Trustee or any other trustee of the Issuer, at the
Corporate Trust Office, (c) in the case of the Bond Trustee, at the Corporate
Trust Office, (d) in the case of Moody's, to Moody's Investors Service, Inc.,
ABS Monitoring Department, 99 Church Street, New York, New York 10007, (e) in
the case of Standard & Poor's, to Standard & Poor's Corporation, 26 Broadway
(15th Floor), New York, New York 10004, Attention of Asset Backed Surveillance
Department, (f) in the case of Fitch, to Fitch IBCA, Inc., One State Street
Plaza, New York, New York 10004, and (h) in the case of Duff, to Duff & Phelps
Credit Rating Company, 55 E. Monroe Street (35th Floor), Chicago, Illinois
60603; or, as to each of the
<PAGE>
42
foregoing, at such other address as shall be designated by written notice to the
other parties.
SECTION 6.03. Assignment. Notwithstanding anything to the contrary
contained herein, except as provided in Section 5.02, this Agreement may not be
assigned by the Seller.
SECTION 6.04. Limitations on Rights of Others. The provisions of this
Agreement are solely for the benefit of the Seller, the Issuer, the Issuer
Trustee and the Bond Trustee, on behalf of itself and the Transition
Bondholders, and nothing in this Agreement, whether express or implied, shall be
construed to give to any other Person any legal or equitable right, remedy or
claim in the Collateral or under or in respect of this Agreement or any
covenants, conditions or provisions contained herein.
SECTION 6.05. Severability. Any provision of this Agreement that is
prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction,
be ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof, and any such prohibition or
unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction.
SECTION 6.06. Separate Counterparts. This Agreement may be executed by the
parties hereto in separate
<PAGE>
43
counterparts, each of which when so executed and delivered shall be an original,
but all such counterparts shall together constitute but one and the same
instrument.
SECTION 6.07. Headings. The headings of the various Articles and Sections
herein are for convenience of reference only and shall not define or limit any
of the terms or provisions hereof.
SECTION 6.08. Governing Law. This Agreement shall be construed in
accordance with the laws of the Commonwealth of Pennsylvania, without reference
to its conflict of law provisions, and the obligations, rights and remedies of
the parties hereunder shall be determined in accordance with such laws.
SECTION 6.09. Assignment to Bond Trustee. The Seller hereby acknowledges
and consents to any mortgage, pledge, assignment and grant of a security
interest by the Issuer to the Bond Trustee pursuant to the Indenture for the
benefit of the Transition Bondholders of all right, title and interest of the
Issuer in, to and under the Transferred Intangible Transition Property and the
proceeds thereof and the assignment of any or all of the Issuer's rights
hereunder to the Bond Trustee. In no event shall The Bank of New York have any
liability for the representations, warranties, covenants, agreements or other
obligations of the Issuer, hereunder or in any of the certificates, notices
<PAGE>
44
or agreements delivered pursuant hereto, as to all of which recourse shall be
had solely to the assets of the Issuer.
SECTION 6.10. Nonpetition Covenant. Notwithstanding any prior termination
of this Agreement or the Indenture, but subject to the PUC's rights to order the
sequestration and payment of revenues arising with respect to the Intangible
Transition Property notwithstanding any bankruptcy, reorganization or other
insolvency proceedings with respect to the debtor, pledgor or transferor of the
Intangible Transition Property pursuant to Section 2812(d)(3)(v) of the Statute,
the Seller shall not, prior to the date which is one year and one day after the
termination of the Indenture, petition or otherwise invoke or cause the Issuer
to invoke the process of any court or government authority for the purpose of
commencing or sustaining a case against the Issuer under any Federal or state
bankruptcy, insolvency or similar law or appointing a receiver, liquidator,
assignee, trustee, custodian, sequestrator or other similar official of the
Issuer or any substantial part of the property of the Issuer, or ordering the
winding up or liquidation of the affairs of the Issuer.
SECTION 6.11. Limitation of Liability of Issuer Trustee. Notwithstanding
anything contained herein to the contrary, this Agreement has been countersigned
by First Union Trust Company, National Association not in its
<PAGE>
45
individual capacity but solely in its capacity as Issuer Trustee of the Issuer
and in no event shall First Union Trust Company, National Association in its
individual capacity have any liability for warranties, covenants, agreements or
other obligations of the Issuer hereunder or in any of the certificates, notices
or agreements delivered pursuant hereto, as to all of which recourse shall be
had solely to the assets of the Issuer. For all purposes of this Agreement, in
the performance of its duties or obligations hereunder or in the performance of
any duties or obligations of the Issuer hereunder, the Issuer Trustee shall be
subject to, and entitled to the benefits of, the terms and provisions of
Articles VI, VII, VIII and IX of the Trust Agreement.
SECTION 6.12. Perfection. In accordance with Section 2812(e) of the
Statute, upon the execution and delivery of this Agreement and the related Bill
of Sale, the transfer of the Initial Intangible Transition Property will be
perfected as against all third persons, including any judicial lien creditors,
and upon the execution and delivery of a Bill of Sale and, if applicable, a
supplement to this Agreement, a transfer of Subsequent Intangible Transition
<PAGE>
46
Property will be perfected against all third persons, including any judicial
lien creditors.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed by their respective officers as of the day and year first above
written.
PECO ENERGY TRANSITION TRUST,
by First Union Trust
Company, National
Association, not in its
individual capacity but
solely as Issuer Trustee
on behalf of the Trust,
by
______________________________
Title:
PECO ENERGY COMPANY, Seller,
by
______________________________
Title:
Acknowledged and Accepted:
THE BANK OF NEW YORK, not in its
individual capacity but
solely as Bond Trustee
on behalf of the Transition
Bondholders,
by
______________________________
Title:
[Draft--9/16/98]
================================================================================
MASTER SERVICING
AGREEMENT
between
PECO ENERGY TRANSITION TRUST,
the other Issuers from
time to time party hereto
and
PECO ENERGY COMPANY
Servicer
Dated as of [ ], 1998
================================================================================
<PAGE>
TABLE OF CONTENTS
Page
ARTICLE I
Definitions
SECTION 1.01. Definitions.....................................................2
SECTION 1.02. Other Definitional Provisions..................................12
ARTICLE II
Appointment and Authorization of Servicer
SECTION 2.01. Appointment of Servicer; Acceptance of
Appointment..................................................13
SECTION 2.02. Authorization..................................................13
SECTION 2.03. Dominion and Control over Serviced
Intangible Transition Property...............................14
ARTICLE III
Billing Services
SECTION 3.01. Duties of Servicer.............................................15
SECTION 3.02. Collection and Allocation of Intangible
Transition Charges...........................................17
SECTION 3.03. Servicing and Maintenance Standards............................19
SECTION 3.04. Servicer's Certificates........................................20
SECTION 3.05. Annual Statement as to Compliance;
Notice of Default............................................20
SECTION 3.06. Annual Independent Certified Public
Accountants' Report..........................................21
SECTION 3.07. Intangible Transition Property Documentation..................22
SECTION 3.08. Computer Records; Audits of Documentation......................23
SECTION 3.09. Defending Intangible Transition
Property Against Claims......................................25
SECTION 3.10. Opinions of Counsel............................................25
ARTICLE IV
Services Related to Intangible
Transition Charges Adjustments
SECTION 4.01. Intangible Transition Charges Adjustments......................27
<PAGE>
ARTICLE V
The Servicer
SECTION 5.01. Representations and Warranties of Servicer.....................27
SECTION 5.02. Indemnities of Servicer; Release
of Claims....................................................31
SECTION 5.03. Merger or Consolidation of, or Assumption
of the Obligations of, Servicer..............................34
SECTION 5.04. Assignment of Servicer's Obligations...........................36
SECTION 5.05. Limitation on Liability of Servicer
and Others........................................36
SECTION 5.06. PECO Energy Not To Resign as Servicer..........................37
SECTION 5.07. Monthly Servicing Fee..........................................38
SECTION 5.08. Servicer Expenses..............................................39
SECTION 5.09. Appointments...................................................39
SECTION 5.10. Remittances....................................................40
SECTION 5.11. Servicer Advances..............................................41
SECTION 5.12. Protection of Title............................................41
ARTICLE VI
Servicer Default
SECTION 6.01. Servicer Default...............................................42
SECTION 6.02. Notice of Servicer Default.....................................45
SECTION 6.03. Waiver of Past Defaults........................................46
SECTION 6.04. Appointment of Successor.......................................46
SECTION 6.05. Cooperation with Successor.....................................48
ARTICLE VII
Miscellaneous Provisions
SECTION 7.01. Amendment......................................................48
SECTION 7.02. Notices........................................................49
SECTION 7.03. Assignment.....................................................50
SECTION 7.04. Limitations on Rights of Others................................50
SECTION 7.05. Severability...................................................50
SECTION 7.06. Separate Counterparts..........................................51
SECTION 7.07. Headings.......................................................51
SECTION 7.08. Governing Law..................................................51
SECTION 7.09. Assignment to Bond Trustee.....................................51
SECTION 7.10. Nonpetition Covenants..........................................52
SECTION 7.11. Addition of Issuers............................................53
SECTION 7.12. Termination by Issuers.........................................53
SECTION 7.13. Limitation of Liability of Trustee.............................53
<PAGE>
Page
----
EXHIBIT A Servicing Procedures
EXHIBIT B Supplement for Addition of Issuer
ANNEX 1 ITC Adjustment Process and Reports
- PECO Energy Transition Trust
<PAGE>
MASTER SERVICING AGREEMENT dated as of [ ], 1998, between PECO
ENERGY TRANSITION TRUST, a Delaware business trust (the "First Issuer"),
the other Issuers from time to time party hereto (together with the First
Issuer, the "Issuers"), and PECO ENERGY COMPANY, a Pennsylvania
corporation, as the servicer of the Intangible Transition Property
(together with each successor to PECO ENERGY COMPANY (in the same capacity)
pursuant to Section 5.03 or 6.02, the "Servicer").
WHEREAS the Servicer is willing to service the Intangible Transition
Property purchased from the Seller by each Issuer; and
WHEREAS each Issuer, in connection with ownership of Serviced Intangible
Transition Property, desires to engage the Servicer to carry out the functions
described herein.
NOW, THEREFORE, in consideration of the premises and the mutual covenants
herein contained and intending to be legally bound hereby, the parties hereto
agree as follows:
<PAGE>
2
ARTICLE I
Definitions
SECTION 1.01. Definitions. Whenever used in this Agreement, each of the
following words and phrases shall have the following meaning:
"Agreement" means this Master Servicing Agreement, as the same may be
amended and supplemented from time to time.
"Annual Accountant's Report" has the meaning specified in Section 3.06(a).
"Bond Trustees" means, collectively, The Bank of New York, a New York
banking corporation, as bond trustee under the Indenture to which the First
Issuer is a party, and each other Person serving as a bond trustee or in a
similar capacity under any of the other Indentures, or any successors to any of
the foregoing.
"Business Day" means any day other than a Saturday, Sunday or a day on
which banking institutions in the City of New York, the City of Philadelphia or
the State of Delaware are required by law or executive order to remain closed.
"Class" means, with respect to any Series, any one of the classes of
Transition Bonds of that Series.
"Collateral" means, with respect to an Issuer, all property of such Issuer
pledged by it to secure Transition
<PAGE>
3
Bonds issued by such Issuer as provided in the Indenture to which it is a
party.
"Collection Period" means the period from and including the 18th day of a
calendar month to but excluding the 18th day of the next calendar month.
"Competitive Transition Charges" means the competitive transition charges
that PECO Energy may impose on Customers as set forth in a schedule thereof in
the Final Order issued on May 14, 1998 by the PUC with respect to PECO Energy's
restructuring plan.
"Customers" means each person that (i) was a customer of PECO Energy
located within PECO Energy's retail electric service territory on January 1,
1997 or that became a customer of electric services within such territory after
January 1, 1997, (ii) is still located within such territory, and (iii) is in a
Rate Class that has been assigned stranded cost responsibility.
"Duff" means Duff & Phelps Credit Rating Company or its successor.
"Fitch" means Fitch IBCA, Inc. or its successor.
"Formation Documents" means, collectively, the Amended and Restated Trust
Agreement of the First Issuer dated as of [ ], 1998, among the
Seller and the trustees named therein, and any other trust agreement,
certificate of incorporation, limited liability company
<PAGE>
4
agreement, partnership agreement, or other document pursuant to which any
other Issuer is formed or governed, in each case, as the same may be amended and
supplemented from time to time.
"Holder" or "Transition Bondholder" means the Person in whose name a
Transition Bond of any Series or Class is registered as provided in the
Indenture therefor.
"Indentures" means, collectively, the indenture dated as of
[ ], 1998, between the First Issuer and The Bank of New York, and
each indenture entered into by any other Issuer in connection with the
issuance of Transition Bonds, in each case as the same may be amended and
supplemented from time to time, including by any Series Supplement.
"Insolvency Event" means, with respect to a specified Person,
(a) the filing of a decree or order for relief by a court having jurisdiction in
the premises in respect of such Person or any substantial part of its property
in an involuntary case under any applicable Federal or state bankruptcy,
insolvency or other similar law now or hereafter in effect, or appointing a
receiver, liquidator, assignee, custodian, trustee, sequestrator or similar
official for such Person or for any substantial part of its property, or
ordering the winding-up or liquidation of such Person's affairs, and such decree
or order shall remain
<PAGE>
5
unstayed and in effect for a period of 90 consecutive days or (b) the
commencement by such Person of a voluntary case under any applicable Federal or
state bankruptcy, insolvency or other similar law now or hereafter in effect, or
the consent by such Person to the entry of an order for relief in an involuntary
case under any such law, or the consent by such Person to the appointment of or
taking possession by a receiver, liquidator, assignee, custodian, trustee,
sequestrator or similar official for such Person or for any substantial part of
its property, or the making by such Person of any general assignment for the
benefit of creditors, or the failure by such Person generally to pay its debts
as such debts become due, or the taking of action by such Person in furtherance
of any of the foregoing.
"Intangible Transition Charges" means the amounts authorized by the PUC to
be imposed on all Customer bills with respect to the Intangible Transition
Property and collected, through a non-bypassable mechanism, by the Seller or its
successor or by any other entity which provides electric service to Customers,
to recover Qualified Transition Expenses pursuant to the Qualified Rate Order.
"Intangible Transition Charges Adjustment" means each adjustment to
Intangible Transition Charges related to the Serviced Intangible Transition
Property made in accordance with Section 4.01 and the Issuer Annexes or in
<PAGE>
6
connection with the conveyance to any Issuer of Intangible Transition Property
or the redemption or refunding by any Issuer of Transition Bonds.
"Intangible Transition Property" means the irrevocable right of the Seller
or its successor or assignee to collect Intangible Transition Charges from
Customers to recover through the issuance of Transition Bonds the Qualified
Transition Expenses described in the Qualified Rate Order, including all right,
title and interest of the Seller or its successor or assignee in such order and
in all revenues, collections, claims, payments, money or proceeds of or arising
from Intangible Transition Charges pursuant to such order, and all proceeds of
any of the foregoing.
"Intangible Transition Property Documentation" has the meaning assigned to
that term in Section 3.07.
"Issuer Annex" means, with respect to the First Issuer, Annex 1 hereto, and
with respect to any other Issuer, an Annex hereto describing the statements and
certificates to be provided by the Servicer and the procedures regarding
Intangible Transition Charges Adjustments to be followed by the Servicer with
respect to such Issuer.
"Issuers" means, collectively, the First Issuer and each other Person from
time to time named as an Issuer
<PAGE>
7
in this Agreement, in each case each until a successor replaces it and,
thereafter, such successor.
"ITC Collections" means amounts collected in respect of Intangible
Transition Charges or the Intangible Transition Property.
"Lien" means a security interest, lien, charge, pledge, equity or
encumbrance of any kind.
"Losses" means collectively, any and all liabilities, obligations, losses,
damages, payments, costs or expenses of any kind whatsoever.
"Monthly Allocation Date" means the 20th day of each calendar month or, if
any such day is not a Business Day, the immediately succeeding Business Day.
"Monthly Servicing Fee" means, with respect to any Series of Transition
Bonds, the fee payable to the Servicer on each Monthly Allocation Date for
services rendered, determined pursuant to Section 5.07.
"Moody's" means Moody's Investors Service Inc., or its successor.
"Mortgage" means the First and Refunding Mortgage, dated May 1, 1923
between the Counties Gas and Electric Company (to which PECO Energy is
successor) and Fidelity Trust Company (to which First Union National Bank is
successor), as trustee, as supplemented and amended by 96 supplemental
indentures.
<PAGE>
8
"Officers' Certificate" means a certificate signed by (a) the chairman of
the board, the president, the vice chairman of the board, the executive vice
president or any vice president and (b) a treasurer, assistant treasurer,
secretary or assistant secretary of the Servicer.
"Operating Expenses" means, with respect to any Issuer, all fees, costs,
expenses and indemnity payments owed by such Issuer, including all amounts owed
by such Issuer to a Bond Trustee or any other trustee of such Issuer, the
Monthly Servicing Fee payable in respect of Transition Bonds issued by such
Issuer, legal fees and expenses of the Servicer allocated to such Issuer
pursuant to Section 3.09 and legal and accounting fees, costs and expenses of
such Issuer and any trustee of such Issuer.
"Opinion of Counsel" means one or more written opinions of counsel who may
be an employee of or counsel to the Seller or the Servicer, which counsel shall
be reasonably acceptable to the Bond Trustees, the Issuers or the Rating
Agencies, as applicable, and shall be in form reasonably satisfactory to the
Bond Trustee, if applicable.
"PECO Energy" means PECO Energy Company, a Pennsylvania corporation.
"Percentage" means, with respect to any Issuer, the percentage equivalent
of a fraction, the numerator of which is the aggregate Intangible Transition
Charges (as
<PAGE>
9
adjusted from time to time) applicable to all Series of Transition Bonds
issued by such Issuer and 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 all the Issuers.
"Person" means any individual, corporation, estate, partnership, joint
venture, association, joint stock company, trust (including any beneficiary
thereof), business trust, unincorporated organization or government or any
agency or political subdivision thereof.
"PUC" means the Pennsylvania Public Utility Commission or any successor.
"PUC Regulations" means any regulations promulgated or adopted by the PUC.
"Qualified Rate Order" means the order of the PUC issued on May 14, 1998,
adopted in accordance with the Statute, which, among other things, creates the
Intangible Transition Property and authorizes the imposition and collection of
the Intangible Transition Charges by PECO Energy or its assignee.
"Qualified Transition Expenses" has the meaning assigned to that term in
the Qualified Rate Order.
"Rate Class" means each of the rate classes into which Customers are
divided as of the date hereof, as such rate classes may be reconfigured from
time to time.
<PAGE>
10
"Rating Agency" means any rating agency rating the Transition Bonds of any
Class or Series at the time of issuance thereof at the request of the Issuer of
such Class or Series. If no such organization or successor is any longer in
existence, "Rating Agency" shall be a nationally recognized statistical rating
organization or other comparable Person designated by an Issuer, notice of which
designation shall be given to the Bond Trustee under the Indenture to which such
Issuer is a party, any trustee of such Issuer and the Servicer.
"Rating Agency Condition" means, with respect to any action, the
notification in writing by each Rating Agency to the Seller, the Servicer, the
Bond Trustees and the applicable Issuer that such action will not result in a
reduction or withdrawal of the then current rating by such Rating Agency of any
outstanding Series or Class of Transition Bonds issued by such Issuer.
"Released Parties" has the meaning specified in Section 5.02(e).
"Remittance Date" means each date on which ITC Collections allocated to any
Issuer are to be remitted by the Servicer to the Bond Trustee for such Issuer
pursuant to Section 5.10.
"Sale Agreements" means, collectively, the Intangible Transition Property
Sale Agreement dated
<PAGE>
11
[ ], 1998, between the Seller and the First Issuer, and any other
agreements between the Seller and any other Issuer relating to the sale of
Intangible Transition Property to such Issuer.
"Sale Date" means each date on which the Seller sells, conveys, or
otherwise transfers any Intangible Transition Property to any Issuer.
"Seller" means PECO Energy and its successors in interest to the extent
permitted hereunder.
"Series" means any series of Transition Bonds issued by any of the Issuers.
"Series Supplement" means an indenture supplemental to the Indenture that
authorizes a particular Series of Transition Bonds.
"Serviced Intangible Transition Property" means, collectively, all
Intangible Transition Property sold, conveyed, assigned or otherwise transferred
to any Issuer by the Seller or, with respect to an Issuer, all Intangible
Transition Property sold, conveyed, assigned or otherwise transferred to such
Issuer by the Seller.
"Servicer Default" means an event specified in Section 6.01.
"Servicing Fee Rate" means, with respect to any Series of Transition Bonds,
the per annum rate specified in
<PAGE>
12
the Indenture pursuant to which such Transition Bonds are issued.
"Standard & Poor's means Standard & Poor's Rating Group, or its successor.
"Statute" means the Pennsylvania Electricity Generation Customer Choice and
Competition Act, Chapter 28 of Title 66 of the Pennsylvania Consolidated
Statutes, 66 Pa. C.S., ss.2801, et seq.
"Termination Notice" has the meaning specified in Section 6.01(d).
"Third Party" means any third party, including any electric generation
supplier, providing billing or metering services, licensed by the PUC pursuant
to relevant provisions of the Statute and any PUC order.
"Transition Bonds" means "transition bonds" (as defined in the Statute)
issued by any Issuer.
"UCC" means, unless the context otherwise requires, the Uniform Commercial
Code, as in effect in the relevant jurisdiction, as amended from time to time.
SECTION 1.02. Other Definitional Provisions. (a) The words "hereof",
"herein", "hereunder" and words of similar import when used in this Agreement
shall refer to this Agreement as a whole and not to any particular provision of
this Agreement; Section, Annex, Schedule and Exhibit references contained in
this Agreement are
<PAGE>
13
references to Sections, Annexes, Schedules and Exhibits in or to this
Agreement unless otherwise specified; and the term "including" shall mean
"including without limitation".
(b) The definitions contained in this Agreement are applicable to the
singular as well as the plural forms of such terms and to the masculine as well
as to the feminine and neuter genders of such terms.
ARTICLE II
Appointment and Authorization of Servicer
SECTION 2.01. Appointment of Servicer; Acceptance of Appointment. Subject
to Section 5.04 and Article VI, each Issuer hereby appoints the Servicer, and
the Servicer hereby accepts such appointment, to perform the Servicer's
obligations pursuant to this Agreement on behalf of and for the benefit of each
Issuer in accordance with the terms of this Agreement. This appointment and the
Servicer's acceptance thereof may not be revoked except in accordance with the
express terms of this Agreement.
SECTION 2.02. Authorization. With respect to all or any portion of the
Serviced Intangible Transition Property, the Servicer shall be, and hereby is,
authorized and empowered by each Issuer to (a) execute and deliver, on behalf of
itself or such Issuer, as the case may be, any and all instruments, documents or
notices, and (b) on behalf of itself or such Issuer, as the case may be, make
any filing
<PAGE>
14
and participate in proceedings of any kind with any governmental
authorities, including with the PUC. Each Issuer shall furnish the Servicer with
such documents as have been prepared by the Servicer for execution by such
Issuer, and with such other documents as may be in such Issuer's possession, as
necessary or appropriate to enable the Servicer to carry out its servicing and
administrative duties hereunder. Upon the written request of the Servicer, each
Issuer shall furnish the Servicer with any powers of attorney or other documents
necessary or appropriate to enable the Servicer to carry out its duties
hereunder.
SECTION 2.03. Dominion and Control over Serviced Intangible Transition
Property. Notwithstanding any other provision herein, the Servicer and each
Issuer agree that such Issuer shall have dominion and control over its
respective Serviced Intangible Transition Property, and the Servicer, in
accordance with the terms hereof, is acting solely as the servicing agent of
such Issuer with respect to the Serviced Intangible Transition Property owned by
such Issuer. The Servicer hereby agrees that it shall not take any action that
is not authorized by this Agreement, that is not consistent with its customary
procedures and practices, or that shall impair the rights of any Issuer in its
respective Serviced Intangible Transition Property, in each
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15
case unless such action is required by law or court or regulatory order.
ARTICLE III
Billing Services
SECTION 3.01. Duties of Servicer. The Servicer, as agent for each Issuer
(to the extent provided herein), shall have the following duties:
(a) Duties of Servicer Generally. The Servicer will manage, service,
administer and make collections in respect of the Serviced Intangible
Transition Property. The Servicer's duties will include (i) calculating and
billing the Intangible Transition Charges and collecting (from Customers
and Third Parties, as applicable) and posting all ITC Collections; (ii)
responding to inquiries by Customers, Third Parties, the PUC, or any
Federal, local or other state governmental authorities with respect to the
Serviced Intangible Transition Property and Intangible Transition Charges;
(iii) accounting for ITC Collections, investigating delinquencies,
processing and depositing collections and making periodic remittances,
furnishing periodic reports to the Issuers, the Bond Trustees and the
Rating Agencies; (iv) selling, as the agent for each Issuer, as its
interest may appear, defaulted or written off accounts
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16
in accordance with the Servicer's usual and customary practices; and (v)
taking action in connection with Intangible Transition Charge Adjustments
as set forth herein. Anything to the contrary notwithstanding, the duties
of the Servicer set forth in this Agreement shall be qualified in their
entirety by any PUC Regulations as in effect at the time such duties are to
be performed. Without limiting the generality of this Section 3.01(a), in
furtherance of the foregoing, the Servicer hereby agrees that it shall also
have, and shall comply with, the duties and responsibilities relating to
data acquisition, usage and bill calculation, billing, customer service
functions, collections, payment processing and remittance set forth in
Exhibit A hereto.
(b) Notification of Laws and Regulations. The Servicer shall
immediately notify the Issuers, the Bond Trustees and the Rating Agencies
in writing of any laws or PUC Regulations hereafter promulgated that have a
material adverse effect on the Servicer's ability to perform its duties
under this Agreement.
(c) Other Information. Upon the reasonable request of any Issuer, any Bond
Trustee or any Rating Agency, the Servicer shall provide to such Issuer,
such Bond Trustee or such Rating Agency, as the case may be,
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17
any public financial information in respect of the Servicer, or any
material information regarding the Intangible Transition Property to the
extent it is reasonably available to the Servicer, as may be reasonably
necessary and permitted by law for such Issuer, such Bond Trustee or such
Rating Agency to monitor the performance by the Servicer hereunder. In
addition, so long as any of the Transition Bonds of any Series are
outstanding, the Servicer shall provide each Issuer and each Bond Trustee,
within a reasonable time after written request therefor, any information
available to the Servicer or reasonably obtainable by it that is necessary
to calculate the Intangible Transition Charges applicable to each Rate
Class.
SECTION 3.02. Collection and Allocation of Intangible Transition Charges.
(a) The Servicer shall use all reasonable efforts consistent with its customary
servicing procedures to collect all amounts owed in respect of Intangible
Transition Charges as and when the same shall become due and shall follow such
collection procedures as it follows with respect to collection activities that
the Servicer conducts for itself or others. The Servicer shall not change the
amount of or reschedule the due date of any scheduled payment of Intangible
Transition Charges, except as contemplated in this Agreement or as required by
law or
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18
court or PUC order; provided, however, that the Servicer may take any of
the foregoing actions to the extent that such action would be in accordance with
customary billing and collection practices of the Servicer with respect to
billing and collection activities that it conducts for itself.
(b) Any amounts received by the Servicer from a Customer that
represent a partial payment toward an outstanding balance will be applied first
to state tax charges, then Intangible Transition Charges, then to Competitive
Transition Charges, then to transmission and distribution charges and finally to
electric generation charges. Notwithstanding the foregoing, when PECO Energy is
providing billing for its transmission and distribution charges which is
separate from billing for generation, any amounts received from Customers
remitting partial payments will be applied in the following priority: (i) to the
outstanding balance before direct access to electric generation from electric
generation suppliers or the installment amount for a payment agreement on such
balance; (ii) to the balance due for state tax charges; (iii) to the balance due
[or the installment amount for a payment agreement]/1 for Intangible Transition
Charges; (iv) to the balance due or the installment amount for a payment
agreement for Competitive Transition Charges; (v) to the
- -----------------
/1 Verify whether or nor this applies to ITC.
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19
balance due or the installment amount for a payment agreement for fixed and
variable utility distribution service charges; (vi) to the current state tax
charges; (vii) to the current Intangible Transition Charges; and (viii) to other
charges.
(c) Any ITC Collections received by the Servicer shall be allocated between
the Issuers based on their respective Percentages at the time such Intangible
Transition Charges were billed.
SECTION 3.03. Servicing and Maintenance Standards. The Servicer shall, on
behalf of each Issuer, (a) 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 PUC
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; (b) follow standards, policies and
procedures in performing its duties as Servicer that are customary in the
Servicer's industry; (c) use all reasonable efforts, consistent with its
customary servicing procedures, to enforce and maintain rights in respect of the
Intangible Transition Property; and (d) calculate Intangible Transition Charges
<PAGE>
20
in compliance with the Statute, the Qualified RateOrder and any applicable
tariffs, except where the failure to comply with any of the foregoing would not
adversely affect any Issuer's or any Bond Trustee's interest in the Serviced
Intangible Transition Property. The Servicer shall follow such customary and
usual practices and procedures as it shall deem necessary or advisable in its
servicing of all or any portion of the Serviced Intangible Transition Property,
which, in the Servicer's judgment, may include the taking of legal action
pursuant to Section 3.09 hereof or otherwise.
SECTION 3.04. Servicer's Certificates. (a) The Servicer will provide to
each Issuer and the Bond Trustee under the Indenture to which such Issuer is a
party, the statements and certificates specified in the Issuer Annex for such
Issuer.
SECTION 3.05. Annual Statement as to Compliance; Notice of Default. (a) The
Servicer shall deliver to each Issuer, each Bond Trustee and each Rating Agency,
on or before March 31 of each year beginning March 31, 1999, an Officers'
Certificate, stating that (i) a review of the activities of the Servicer during
the preceding calendar year (or relevant portion thereof) and of its performance
under this Agreement has been made under such officers' supervision and (ii) to
the best of such officers' knowledge, based on such review, the Servicer has
fulfilled
<PAGE>
21
all its obligations under this Agreement throughout such period or, if
there has been a default in the fulfillment of any such obligation, describing
each such default.
(b) The Servicer shall deliver to each Issuer, each Bond Trustee and each
Rating Agency, promptly after having obtained knowledge thereof, but in no event
later than five Business Days thereafter, written notice in an Officers'
Certificate of any event which with the giving of notice or lapse of time, or
both, would become a Servicer Default under Section 6.01.
SECTION 3.06. Annual Independent Certified Public Accountants' Report. (a)
The Servicer shall cause a firm of independent certified public accountants
(which may also provide other services to the Servicer or the Seller) to
prepare, and the Servicer shall deliver to each Issuer, each Bond Trustee and
each Rating Agency, on or before March 31 of each year, beginning March 31, 1999
to and including the March 31 succeeding the retirement of all Transition Bonds,
a report addressed to the Servicer (the "Annual Accountant's Report"), which may
be included as part of the Servicer's customary auditing activities, to the
effect that such firm has performed certain procedures in connection with the
Servicer's compliance with its obligations under this Agreement during the
preceding calendar year ended December 31 (or, in the case of the first Annual
<PAGE>
22
Accountant's Report, the period of time from the first Sale Date until December
31, 1998), identifying the results of such procedures and including any
exceptions noted. In the event such accounting firm requires any Bond Trustee or
any Issuer to agree or consent to the procedures performed by such firm, such
Issuer shall direct the applicable Bond Trustee in writing to so agree; it being
understood and agreed that such Bond Trustee will deliver such letter of
agreement or consent in conclusive reliance upon the direction of such Issuer,
and neither such Bond Trustee nor such Issuer will make any independent inquiry
or investigation as to, and shall have no obligation or liability in respect of,
the sufficiency, validity or correctness of such procedures.
(b) The Annual Accountant's Report shall also indicate that the accounting
firm providing such report is independent of the Servicer within the meaning of
the Code of Professional Ethics of the American Institute of Certified Public
Accountants.
SECTION 3.07. Intangible Transition Property Documentation. To assure
uniform quality in servicing the Serviced Intangible Transition Property and to
reduce administrative costs, the Servicer shall keep on file, in accordance with
its customary procedures, all documents relating to the Intangible Transition
Property, including
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23
copies of the Qualified Rate Order and all documents filed
with the PUC in connection with any Intangible Transition Charges Adjustment
(collectively, the "Intangible Transition Property Documentation").
SECTION 3.08. Computer Records; Audits of Documentation. (a) Safekeeping.
The Servicer shall maintain accurate and complete accounts, records and computer
systems pertaining to the Intangible Transition Property and the Intangible
Transition Property Documentation in accordance with its standard accounting
procedures and in sufficient detail to permit reconciliation between payments or
recoveries on (or with respect to) Intangible Transition Charges and the ITC
Collections from time to time remitted to each Bond Trustee pursuant to Section
5.10 and to enable each Issuer to comply with this Agreement and the Indenture
to which it is a party. The Servicer shall conduct, or cause to be conducted,
periodic audits of the Intangible Transition Property Documentation held by it
under this Agreement and of the related accounts, records and computer systems,
in such a manner as shall enable each Issuer and each Bond Trustee, as pledgee
of the applicable Issuer, to verify the accuracy of the Servicer's record
keeping. The Servicer shall promptly report to each Issuer and each Bond Trustee
any failure on the Servicer's part to hold the Intangible Transition Property
<PAGE>
24
Documentation and maintain its accounts, records and computer systems as herein
provided and promptly take appropriate action to remedy any such failure.
Nothing herein shall be deemed to require an initial review or any periodic
review by any Issuer or any Bond Trustee of the Intangible Transition Property
Documentation.
(b) Maintenance of and Access to Records. The Servicer shall maintain the
Intangible Transition Property Documentation at 2301 Market Street,
Philadelphia, Pennsylvania or at such other office as shall be specified to each
Issuer and each Bond Trustee by written notice not later than 30 days prior to
any change in location. The Servicer shall permit each Issuer and each Bond
Trustee or their respective duly authorized representatives, attorneys, agents
or auditors at any time during normal business hours to inspect, audit and make
copies of and abstracts from the Servicer's records regarding the Intangible
Transition Property and Intangible Transition Charges and the Intangible
Transition Property Documentation. The failure of the Servicer to provide access
to such information as a result of an obligation or applicable law (including
PUC Regulations) prohibiting disclosure of information regarding customers shall
not constitute a breach of this Section 3.08(b).
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25
SECTION 3.09. Defending Intangible Transition Property Against Claims. The
Servicer shall institute any action or proceeding necessary to compel
performance by the PUC or the Commonwealth of Pennsylvania of any of their
obligations or duties under the Statute or the Qualified Rate Order with respect
to the Intangible Transition Property. The costs of any such action reasonably
allocated by the Servicer to the Serviced Intangible Transition Property shall
be payable from ITC Collections as an Operating Expense in accordance with the
Indentures and shall be allocated among the Issuers based on their respective
Percentages at the time such costs are incurred. The Servicer's obligations
pursuant to this Section 3.09 shall survive and continue notwithstanding the
fact that the payment of Operating Expenses pursuant to the Indentures may be
delayed (it being understood that the Servicer may be required to advance its
own funds to satisfy its obligations hereunder).
SECTION 3.10. Opinions of Counsel. The Servicer shall deliver to each
Issuer and each Bond Trustee:
(a) promptly after the execution and delivery of this Agreement and of
each amendment hereto, promptly after the execution of each Sale Agreement
and of each amendment thereto and on each Sale Date, an Opinion of Counsel
either (i) to the effect that, in the opinion of
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26
such counsel, all filings, including filings with the PUC pursuant to the
Statute, that are necessary to fully preserve and protect the interests of
each Bond Trustee in the Serviced Intangible Transition Property have been
executed and filed, and reciting the details of such filings or referring
to prior Opinions of Counsel in which such details are given, or (ii) to
the effect that, in the opinion of such counsel, no such action shall be
necessary to preserve and protect such interest; and
(b) within 90 days after the beginning of each calendar year beginning
with the first calendar year beginning more than three months after the
first Sale Date, an Opinion of Counsel, dated as of a date during such
90-day period, either (i) to the effect that, in the opinion of such
counsel, all filings with the PUC pursuant to the Statute, have been
executed and filed that are necessary to preserve fully and protect fully
the interest of each Bond Trustee in the Serviced Intangible Transition
Property, and reciting the details of such filings or referring to prior
Opinions of Counsel in which such details are given, or (ii) to the effect
that, in the opinion of such counsel, no such action shall be necessary to
preserve and protect such interest.
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27
Each Opinion of Counsel referred to in clause (a) or (b) above shall
specify any action necessary (as of the date of such opinion) to be taken in the
following year to preserve and protect such interest.
ARTICLE IV
Services Related to Intangible
Transition Charges Adjustments
SECTION 4.01. Intangible Transition Charges Adjustments. The Servicer shall
perform the calculations and take the actions relating to revising the
Intangible Transition Charges, in each case set forth in each Issuer Annex to
this Agreement.
ARTICLE V
The Servicer
SECTION 5.01. Representations and Warranties of Servicer. The Servicer
makes the following representations and warranties as of each Sale Date, on
which the Issuers have relied and will rely in acquiring Serviced Intangible
Transition Property. The representations and warranties shall survive the sale
of any of the Serviced Intangible Transition Property to any Issuer and the
pledge thereof to any Bond Trustee pursuant to any Indenture.
(a) Organization and Good Standing. The Servicer is a corporation duly
organized and in good standing under the laws of the state of its
incorporation, with
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28
the corporate power and authority to own its properties and to conduct its
business as such properties are currently owned and such business is
presently conducted, and has the power, authority and legal right to
service the Serviced Intangible Transition Property.
(b) Due Qualification. The Servicer 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 (including the servicing
of the Serviced Intangible Transition Property as required by this
Agreement) requires such qualifications, licenses or approvals (except
where the failure to so qualify would not be reasonably likely to have a
material adverse effect on the Servicer's business, operations, assets,
revenues, properties or prospects or adversely affect the servicing of the
Serviced Intangible Transition Property).
(c) Power and Authority. The Servicer has the corporate power and
authority to execute and deliver this Agreement and to carry out its terms;
and the execution, delivery and performance of this Agreement have been
duly authorized by the Servicer by all necessary corporate action.
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29
(d) Binding Obligation. This Agreement constitutes a legal, valid and
binding obligation of the Servicer enforceable against the Servicer in
accordance with its terms subject to bankruptcy, receivership, insolvency,
fraudulent transfer, reorganization, moratorium or other laws affecting
creditors' rights generally from time to time in effect and to general
principles of equity (regardless of whether considered in a proceeding in
equity or at law).
(e) No Violation. The consummation of the transactions contemplated by
this Agreement and the fulfillment of the terms hereof shall 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 Servicer, or any indenture,
agreement or other instrument to which the Servicer is a party or by which
it shall be bound; nor result in the creation or imposition of any Lien
(other than the lien of the Mortgage on the Servicer's interest in this
Agreement) upon any of its properties pursuant to the terms of any such
indenture, agreement or other instrument; nor violate any law or any order,
rule or regulation applicable to the Servicer of any court or of any
Federal or state regulatory body,
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30
administrative agency or other governmental instrumentality having
jurisdiction over the Servicer or its properties.
(f) Approvals. Except for filings with the PUC for revised Intangible
Transition Charges pursuant to Section 4.01 and the Issuer Annexes and UCC
continuation filings, 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 Servicer of this
Agreement, the performance by the Servicer of the transactions contemplated
hereby or the fulfillment by the Servicer of the terms hereof, except those
that have been obtained or made.
(g) No Proceedings. There are no proceedings or investigations 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:
(i) except as disclosed by the Servicer to the 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
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31
the Servicer of this Agreement or (ii) relating to the Servicer and which
might adversely affect the Federal or state income tax attributes of the
Transition Bonds.
(h) Reports and Certificates. Each report and certificate delivered in
connection with any filing made to the PUC by the Servicer on behalf of any
Issuer with respect to Intangible Transition Charges or Intangible
Transition Charges Adjustments will constitute a representation and
warranty by the Servicer that each such report or certificate, as the case
may be, is true and correct in all material respects; provided, however,
that to the extent any such report or certificate is based in part upon or
contains assumptions, forecasts or other predictions of future events, the
representation and warranty of the Servicer with respect thereto will be
limited to the representation and warranty that such assumptions, forecasts
or other predictions of future events are reasonable based upon historical
performance.
SECTION 5.02. Indemnities of Servicer; Release of Claims. (a) The Servicer
shall be liable in accordance herewith only to the extent of the obligations
specifically undertaken by the Servicer under this Agreement.
(b) The Servicer shall indemnify each Issuer and each Bond Trustee, for
itself and on behalf of the
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32
Transition Bondholders for which it acts as Bond Trustee, and each of
their respective trustees, officers, directors and agents for, and defend and
hold harmless each such Person from and against, any and all Losses that may be
imposed upon, incurred by or asserted against any such Person as a result of (i)
the Servicer's wilful misfeasance, bad faith or gross negligence in the
performance of its duties or observance of its covenants under this Agreement or
the Servicer's reckless disregard of its obligations and duties under this
Agreement or (ii) the Servicer's breach of any of its representations or
warranties in this Agreement.
(c) If any action, claim, demand or proceeding (including any
governmental investigation) shall be brought or asserted against a party (the
"indemnified party") entitled to any indemnification provided for under this
Section 5.02, such indemnified party shall promptly notify the Servicer in
writing; provided, however, that failure to give such notification shall not
affect the indemnification provided hereunder except to the extent the Servicer
shall have been actually prejudiced as a result of such failure.
(d) The Servicer shall indemnify the Bond Trustees and their respective
officers, directors and agents for, and defend and hold harmless each such
Person from and against, any and all Losses that may be imposed upon, incurred
by or asserted against any such Person as a result
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33
of the acceptance or performance of the trusts and duties contained
herein and in the Indenture, except to the extent that any such Loss shall be
due to the wilful misfeasance, bad faith or gross negligence of the applicable
Bond Trustee. Such amounts with respect to the Bond Trustee of the First Issuer
shall be deposited and distributed in accordance with the Indenture to which
such Bond Trustee is a party.
(e) The Servicer's indemnification obligations under Section 5.02(b) and
(d) for events occurring prior to the removal or resignation of any Bond Trustee
or the termination of this Agreement with respect to any Issuer shall survive
the resignation or removal of such Bond Trustee or the termination of this
Agreement with respect to such Issuer and shall include reasonable costs, fees
and expenses of investigation and litigation (including any Issuer's and any
Bond Trustee's reasonable attorneys' fees and expenses).
(f) Except to the extent expressly provided for in this Agreement, the
Sale Agreements or the Formation Documents (including the Servicer's claims with
respect to the Monthly Servicing Fees and the Seller's claim for payment of the
purchase price of Intangible Transition Property), the Servicer hereby releases
and discharges each Issuer (including its respective trustees, officers,
directors and agents, if any), and each Bond Trustee (including its respective
officers,
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34
directors and agents) (collectively, the "Released Parties") from any
and all actions, claims and demands whatsoever, which the Servicer, in its
capacity as Servicer or Seller, shall or may have against any such Person
relating to the Serviced Intangible Transition Property or the Servicer's
activities with respect thereto other than any actions, claims and demands
arising out of the wilful misconduct, bad faith or gross negligence of the
Released Parties.
SECTION 5.03. Merger or Consolidation of, or Assumption of the
Obligations of, Servicer. Any Person (a) into which the Servicer may be merged
or consolidated and which succeeds to the major part of the electric
distribution business of the Servicer, (b) which results from the division of
the Servicer into two or more Persons and which succeeds to the major part of
the electric distribution business of the Servicer, (c) which may result from
any merger or consolidation to which the Servicer shall be a party and which
succeeds to the major part of the electric distribution business of the
Servicer, (d) which may succeed to the properties and assets of the Servicer
substantially as a whole and which succeeds to the major part of the electric
distribution business of the Servicer or (e) which may otherwise succeed to the
major part of the
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35
electric distribution business of the Servicer, which Person in any of
the foregoing cases executes an agreement of assumption to perform every
obligation of the Servicer hereunder, shall be the successor to the Servicer
under this Agreement without further act on the part of any of the parties to
this Agreement; provided, however, that (i) immediately after giving effect to
such transaction, no representation and warranty made pursuant to Section 5.01
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, (ii) the Servicer shall have delivered to each
Issuer and each Bond Trustee an Officers' Certificate and an Opinion of Counsel
each stating that such consolidation, merger or succession and such agreement of
assumption comply with this Section 5.03 and that all conditions precedent
provided for in this Agreement relating to such transaction have been complied
with, (iii) the Rating Agencies shall have received prior written notice of such
transaction, (iv) the Servicer shall have delivered to each Issuer, each Bond
Trustee and each Rating Agency an Opinion of Counsel either (A) stating that, in
the opinion of such counsel, all filings, including filings with the PUC
pursuant to the Statute, have been executed and filed that are necessary to
preserve fully and protect fully the interests of each
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36
Issuer in the Serviced Intangible Transition Property and reciting the
details of such filings or (B) stating that, in the opinion of such counsel, no
such action shall be necessary to preserve and protect such interests.
Notwithstanding anything herein to the contrary, the execution of the above
referenced agreement of assumption and compliance with clauses (i), (ii), (iii)
and (iv) above shall be conditions precedent to the consummation of the
transactions referred to in clause (a), (b), (c), (d) or (e) above.
SECTION 5.04. Assignment of Servicer's Obligations. Pursuant to
paragraph 13 of the Qualified Rate Order in which the PUC authorizes PECO Energy
to contract with an alternative party to perform PECO Energy's obligations
contemplated in the Qualified Rate Order, the Servicer may assign its
obligations hereunder to any electric distribution company (as such term is
defined in the Statute) which succeeds to the major part of PECO Energy's
electric distribution business.
SECTION 5.05. Limitation on Liability of Servicer and Others. The
Servicer shall not be liable to any Issuer, except as provided under this
Agreement, for any action taken or for refraining from the taking of any action
pursuant to this Agreement or for errors in judgment; provided, however, that
this provision shall not protect the
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37
Servicer against any liability that would otherwise be imposed by reason
of wilful misfeasance, bad faith or gross negligence in the performance of its
duties or by reason of reckless disregard of obligations and duties under this
Agreement. The Servicer and any director or officer or employee or agent of the
Servicer may rely in good faith on the advice of counsel reasonably acceptable
to the Bond Trustees or on any document of any kind, prima facie properly
executed and submitted by any Person, respecting any matters arising under this
Agreement.
Except as provided in this Agreement, the Servicer shall not be under
any obligation to appear in, prosecute or defend any legal action that is not
incidental to its duties to service the Serviced Intangible Transition Property
in accordance with this Agreement or related to its obligation to pay
indemnification, and that in its reasonable opinion may cause it to incur any
expense or liability.
SECTION 5.06. PECO Energy Not To Resign as Servicer. Subject to the
provisions of Sections 5.03 and 5.04, PECO Energy shall not resign from the
obligations and duties hereby imposed on it as Servicer under this Agreement
except upon a determination that the performance of its duties under this
Agreement shall no longer be permissible under applicable law. Notice of any
such determination permitting the resignation of PECO Energy shall be
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38
communicated to each Issuer, each Bond Trustee and each Rating Agency at the
earliest practicable time (and, if such communication is not in writing, shall
be confirmed in writing at the earliest practicable time), and any such
determination shall be evidenced by an Opinion of Counsel to such effect
delivered to each Issuer and each Bond Trustee concurrently with or promptly
after such notice. No such resignation shall become effective until a successor
Servicer shall have assumed the servicing obligations and duties hereunder of
PECO Energy in accordance with Section 6.02.
SECTION 5.07. Monthly Servicing Fee. Each Issuer, severally
and not jointly, agrees to pay the Servicer, solely to the extent amounts are
available therefor in accordance with the Indenture to which such Issuer is a
party, the Monthly Servicing Fees with respect to all Series of Transition Bonds
issued by such Issuer. The Monthly Servicing Fee with respect to a Series for a
Monthly Allocation Date shall equal the product of (a) 1/12, (b) the Servicing
Fee Rate for such Series and (c) the outstanding principal amount of the
Transition Bonds of such Series as of such Monthly Allocation Date. The Servicer
will be entitled to retain as additional compensation net investment income on
ITC Collections related to Serviced Intangible Transition Property received by
the Servicer
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39
during any Collection Period and the late fees, if any, paid by
Customers to the Servicer. The foregoing fees constitute a fair and reasonable
price for the obligations to be performed by the Servicer.
SECTION 5.08. Servicer Expenses. Except as otherwise expressly provided
herein, the Servicer shall be required to pay all expenses incurred by it in
connection with its activities hereunder, including fees and disbursements of
independent accountants and counsel, taxes imposed on the Servicer and expenses
incurred in connection with reports to Transition Bondholders.
SECTION 5.09. Appointments. The Servicer may at any time appoint a
subservicer to perform all or any portion of its obligations as Servicer
hereunder; provided, however, that the Rating Agency Condition shall have been
satisfied in connection therewith; provided further that the Servicer shall
remain obligated and be liable to each Issuer for the servicing and
administering of the Serviced Intangible Transition Property in accordance with
the provisions hereof without diminution of such obligation and liability by
virtue of the appointment of such subservicer and to the same extent and under
the same terms and conditions as if the Servicer alone were servicing and
administering the Serviced Intangible Transition Property. The fees and expenses
of the subservicer shall be as agreed between the
<PAGE>
40
Servicer and its subservicer from time to time, and no Issuer (or
trustee thereof, if any), Bond Trustee or Transition Bondholder shall have any
responsibility therefor.
SECTION 5.10. Remittances. (a) Subject to Section 5.07, the Servicer
shall remit all ITC Collections (from whatever source) allocated to each Issuer
pursuant to Section 3.02 and all proceeds of other Collateral of such Issuer, if
any, received by the Servicer to the Bond Trustee under the Indenture to which
such Issuer is a party, for deposit pursuant to such Indenture, not later than
the second Business Day after receipt thereof.
(b) Notwithstanding the foregoing clause (a), (i) as long as PECO Energy
or any successor to PECO Energy's electric distribution business remains the
Servicer, (ii) no Servicer Default has occurred and is continuing and (iii) (A)
PECO Energy or such successor maintains a short-term rating of "A-2" or better
by Standard & Poor's and "P-2" or better by Moody's (and for five Business Days
following a reduction in either such rating) or (B) the Rating Agency Condition
shall have been satisfied (and any conditions or limitations imposed by the
Rating Agencies in connection therewith are complied with), the Servicer need
not make the daily remittances required by such clause (a), but in lieu thereof,
shall remit all ITC Collections (from
<PAGE>
41
whatever source) allocated to each Issuer pursuant to Section 3.02 and all
proceeds of other Collateral of such Issuer, if any, received by the Servicer
during any Collection Period to the Bond Trustee under the Indenture to which
such Issuer is a party, for deposit pursuant to such Indenture, not later than
the final day of any Collection Period or, if any such day is not a Business
Day, the next succeeding Business Day.
SECTION 5.11. Servicer Advances. The Servicer shall make advances of
interest or principal on the Transition Bonds of any Series in the manner and to
the extent, if any, specified in any Annex to this Agreement entered into in
connection with the issuance of such Transition Bonds.
SECTION 5.12. Protection of Title. The Servicer shall execute and file
such filings, including filings with the PUC pursuant to the Statute, and cause
to be executed and filed such filings, all in such manner and in such places as
may be required by law fully to preserve, maintain, and protect the interests of
each Issuer in its respective Serviced Intangible Transition Property, including
all filings required under the Statute relating to the transfer of the ownership
or security interest in the Serviced Intangible Transition Property by the
Seller to such Issuer or any security interest granted by such Issuer
<PAGE>
42
in its Serviced Intangible Transition Property. The Servicer shall
deliver (or cause to be delivered) to the applicable Issuers file-stamped copies
of, or filing receipts for, any document filed as provided above, as soon as
available following such filing.
ARTICLE VI
Servicer Default
SECTION 6.01. Servicer Default. If any one of the following events (a
"Servicer Default") shall occur and be continuing:
(a) any failure by the Servicer to remit to any Bond Trustee on behalf
of an Issuer any required remittance that shall continue unremedied for a
period of three Business Days after written notice of such failure is
received by the Servicer from such Issuer or Bond Trustee; or
(b) any failure by the Servicer or, so long as the Seller and the
Servicer are the same Person, the Seller, as applicable, duly to observe or
perform in any material respect any other covenant or agreement of the
Servicer or the Seller, as the case may be, set forth in this Agreement or
any other Basic Document to which it is a party, which failure shall (i)
materially and adversely affect the Intangible Transition Property and (ii)
continue unremedied for a period of 30 days
<PAGE>
43
after written notice of such failure shall have been given to the Servicer
or the Seller, as the case may be, by any Issuer or any Bond Trustee or
after discovery of such failure by an officer of the Servicer or the
Seller, as the case may be; or
(c) any representation or warranty made by the Servicer in this
Agreement shall prove to have been incorrect when made, which has a
material adverse effect on any of the Issuers or the Transition Bondholders
and which material adverse effect continues unremedied for a period of 60
days after the date on which written notice thereof shall have been given
to the Servicer by any Issuer or any Bond Trustee; or
(d) an Insolvency Event occurs with respect to the Servicer;
then, and in each and every case, so long as the Servicer Default shall not have
been remedied, Bond Trustees, as assignees of the applicable Issuers, with
respect to Holders of a majority of the outstanding principal amount of the
Transition Bonds, by notice then given in writing to the Servicer (a
"Termination Notice") may terminate all the rights and obligations (other than
the indemnification obligations set forth in Section 5.02 hereof and the
obligation under Section 6.02 to continue performing its functions as Servicer
until a successor Servicer is
<PAGE>
44
appointed) of the Servicer under this Agreement with respect to all the
Issuers. In addition, upon a Servicer Default described in Section 6.01(a), each
of the following shall be entitled to apply to the PUC for sequestration and
payment of revenues arising with respect to the Serviced Intangible Transition
Property: (i) each Issuer or its assignees or (ii) pledgees or transferees,
including transferees under the Statute, of the Serviced Intangible Transition
Property. On or after the receipt by the Servicer of a Termination Notice, all
authority and power of the Servicer under this Agreement with respect to the
Issuers, whether with respect to the Serviced Intangible Transition Property,
the related Intangible Transition Charges or otherwise, shall, upon appointment
of a successor Servicer pursuant to Section 6.02, without further action, pass
to and be vested in such successor Servicer and, without limitation, each Bond
Trustee is hereby authorized and empowered to execute and deliver, on behalf of
the predecessor Servicer, as attorney-in-fact or otherwise, any and all
documents and other instruments, and to do or accomplish all other acts or
things necessary or appropriate to effect the purposes of such Termination
Notice, whether to complete the transfer of the Intangible Transition Property
Documentation and related documents, or otherwise. The predecessor Servicer
shall cooperate with the successor Servicer, the Bond Trustees and
<PAGE>
45
the Issuers in effecting the termination of the responsibilities and rights
of the predecessor Servicer under this Agreement, including the transfer
to the successor Servicer for administration by it of all cash amounts that
shall at the time be held by the predecessor Servicer for remittance, or shall
thereafter be received by it with respect to the Serviced Intangible Transition
Property or the related Intangible Transition Charges. As soon as practicable
after receipt by the Servicer of such Termination Notice, the Servicer shall
deliver the Intangible Transition Property Documentation to the successor
Servicer. All reasonable costs and expenses (including attorneys fees and
expenses) incurred in connection with transferring the Intangible Transition
Property Documentation to the successor Servicer and amending this Agreement to
reflect such succession as Servicer pursuant to this Section shall be paid by
the predecessor Servicer upon presentation of reasonable documentation of such
costs and expenses. Termination of PECO Energy as Servicer shall not terminate
PECO Energy's rights or obligations as Seller under any of the Sale Agreements.
SECTION 6.02. Notice of Servicer Default. The Servicer shall deliver to
each Issuer, each Bond Trustee and each Rating Agency promptly after having
obtained knowledge
<PAGE>
46
thereof, but in no event later than five Business Days thereafter,
written notice in an Officer's Certificate of any event or circumstance (such as
a breach of any representation or warranty made by the Servicer in this
Agreement) which, with the giving of notice or the passage of time, would become
a Servicer Default under Section 6.01.
SECTION 6.03. Waiver of Past Defaults. All the Bond Trustees acting
together may waive in writing any default by the Servicer in the performance of
its obligations hereunder and its consequences, except a default in making any
required remittances to any Bond Trustee of ITC Collections from Serviced
Intangible Transition Property in accordance with Section 5.10 of this
Agreement. Upon any such waiver of a past default, such default shall cease to
exist, and any Servicer Default arising therefrom shall be deemed to have been
remedied for every purpose of this Agreement. No such waiver shall extend to any
subsequent or other default or impair any right consequent thereto.
SECTION 6.04. Appointment of Successor. (a) Upon the Servicer's receipt
of a Termination Notice, pursuant to Section 6.01 or the Servicer's resignation
in accordance with the terms of this Agreement, the predecessor Servicer shall
continue to perform its functions as Servicer under this Agreement and shall be
entitled to receive the requisite portion of the Monthly Servicing Fees, until a
<PAGE>
47
successor Servicer shall have assumed in writing the obligations of the Servicer
hereunder as described below. In the event of the Servicer's termination
hereunder, Bond Trustees, as assignees of the applicable Issuers, with respect
to Holders of a majority of the outstanding principal amount of the Transition
Bonds, shall appoint a successor Servicer, and the successor Servicer shall
accept its appointment by a written assumption in form acceptable to the Issuers
and the Bond Trustees. If, within 30 days after the delivery of the Termination
Notice, a new Servicer shall not have been appointed and accepted such
appointment, any Bond Trustee may petition the PUC or a court of competent
jurisdiction to appoint a successor Servicer under this Agreement. A Person
shall qualify as a successor Servicer only if (i) such Person is permitted under
PUC Regulations to perform the duties of the Servicer pursuant to the Statute,
the Qualified Rate Order and this Agreement, (ii) the Rating Agency Condition
shall have been satisfied and (iii) such Person enters into a servicing
agreement with the Issuers having substantially the same provisions as this
Agreement.
(b) Upon appointment, the successor Servicer shall be the successor in
all respects to the predecessor Servicer and shall be subject to all the
responsibilities, duties and liabilities arising thereafter relating thereto
<PAGE>
48
placed on the predecessor Servicer and shall be entitled to the Monthly
Servicing Fees and all the rights granted to the predecessor Servicer by the
terms and provisions of this Agreement.
(c) The successor Servicer may not resign unless it is prohibited from
serving as such by law.
SECTION 6.05. Cooperation with Successor. The Servicer covenants and
agrees with each Issuer that it will, on an ongoing basis, 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 hereunder.
ARTICLE VII
Miscellaneous Provisions
SECTION 7.01. Amendment. This Agreement may be amended by the Seller,
the Servicer and the Issuers, with the consent of all the Bond Trustees.
Promptly after the execution of any such amendment or consent, the Issuers shall
furnish written notification of the substance of such amendment or consent to
each of the Rating Agencies.
Prior to the execution of any amendment to this Agreement, the Issuers
and the Bond Trustees shall be entitled to receive and rely upon an Opinion of
Counsel stating that the execution of such amendment is authorized or permitted
by this Agreement and the Opinion of Counsel
<PAGE>
49
referred to in Section 3.10. The Issuers and the Bond Trustees may, but
shall not be obligated to, enter into any such amendment which affects their own
rights, duties or immunities under this Agreement or otherwise.
SECTION 7.02. Notices. All demands, notices and communications upon or
to the the Servicer, the Issuers, the Bond Trustees or the Rating Agencies under
this Agreement shall be in writing, delivered personally, via facsimile,
reputable overnight courier or by first class mail, postage prepaid, and shall
be deemed to have been duly given upon receipt (a) in the case of the Servicer,
to PECO Energy Company, 2301 Market Street, Philadelphia, PA 19101, Attention of
Vice President, Finance and Treasurer, (b) in the case of any Issuer or any Bond
Trustee, at the address provided for notices or communications to such Person in
the Indenture to which such Person is a party, (c) in the case of Moody's, to
Moody's Investors Service, Inc., ABS Monitoring Department, 99 Church Street,
New York, New York 10007, (d) in the case of Standard & Poor's, to Standard &
Poor's Corporation, 26 Broadway (15th Floor), New York, New York 10004,
Attention of Asset Backed Surveillance Department, (e) in the case of Fitch, to
Fitch IBCA, Inc., One State Street Plaza, New York, New York 10004, and (f) in
the case of Duff, to Duff & Phelps Credit Rating Company, 55 E. Monroe Street
(35th Floor), Chicago, Illinois 60603;
<PAGE>
50
or, as to each of the foregoing, at such other address as shall be
designated by written notice to the other parties.
SECTION 7.03. Assignment. Notwithstanding anything to the contrary
contained herein, except as provided in Sections 5.03 and 5.04 and as provided
in the provisions of this Agreement concerning the resignation of the Servicer,
this Agreement may not be assigned by the Servicer.
SECTION 7.04. Limitations on Rights of Others. The provisions of this
Agreement are solely for the benefit of the Servicer, the Issuers (including
their respective trustees, if any) and the Bond Trustees, on behalf of
themselves and the Transition Bondholders, and nothing in this Agreement,
whether express or implied, shall be construed to give to any other Person any
legal or equitable right, remedy or claim in any Collateral or under or in
respect of this Agreement or any covenants, conditions or provisions contained
herein.
SECTION 7.05. Severability. Any provision of this Agreement that is
prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction,
be ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof, and any such prohibition or
unenforceability in any jurisdiction
<PAGE>
51
shall not invalidate or render unenforceable such provision in any other
jurisdiction.
SECTION 7.06. Separate Counterparts. This Agreement may be executed by
the parties hereto in separate counterparts, each of which when so executed and
delivered shall be an original, but all such counterparts shall together
constitute but one and the same instrument.
SECTION 7.07. Headings. The headings of the various Articles and
Sections herein are for convenience of reference only and shall not define or
limit any of the terms or provisions hereof.
SECTION 7.08. Governing Law. This Agreement shall be construed in
accordance with the laws of the Commonwealth of Pennsylvania, without reference
to its conflict of law provisions, and the obligations, rights and remedies of
the parties hereunder shall be determined in accordance with such laws.
SECTION 7.09. Assignment to Bond Trustee. The Servicer hereby
acknowledges and consents to any mortgage, pledge, assignment and grant of a
security interest by any Issuer to any Bond Trustee pursuant to any Indenture
for the benefit of any Transition Bondholders of all right, title and interest
of such Issuer in, to and under the Serviced Intangible Transition Property
owned by such Issuer and the proceeds thereof and the assignment of any or all
of such
<PAGE>
52
Issuer's rights hereunder to such Bond Trustee. In no event shall any
Bond Trustee have any liability for the representations, warranties, covenants,
agreements or other obligations of any Issuer, hereunder or in any of the
certificates, notices or agreements delivered pursuant hereto, as to all of
which recourse shall be had solely to the assets of the applicable Issuer.
SECTION 7.10. Nonpetition Covenants. Notwithstanding any prior
termination of this Agreement or the Indenture, but subject to the PUC's rights
to order the sequestration and payment of revenues arising with respect to the
Serviced Intangible Transition Property notwithstanding any bankruptcy,
reorganization or other insolvency proceedings with respect to the debtor,
pledgor or transferor of the Serviced Intangible Transition Property pursuant to
Section 2812(d)(3)(v) of the Statute, the Servicer shall not, prior to the date
which is one year and one day after the termination of the applicable Indenture,
petition or otherwise invoke or cause any Issuer to invoke the process of any
court or government authority for the purpose of commencing or sustaining a case
against any Issuer under any Federal or state bankruptcy, insolvency or similar
law or appointing a receiver, liquidator, assignee, trustee, custodian,
sequestrator or other similar official of any Issuer or any substantial part of
the property of any
<PAGE>
53
Issuer, or ordering the winding up or liquidation of the affairs of any
Issuer.
SECTION 7.11. Addition of Issuers. Upon execution and delivery by the
Servicer and a Person which owns Intangible Transition Property sold to such
Person by the Seller of an instrument in the form of Exhibit B hereto, such
Person shall become an Issuer hereunder with the same force and effect as if
originally named as an Issuer herein. The execution and delivery of any such
instrument shall not require the consent of any Issuer hereunder. The rights and
obligations of each Issuer hereunder shall remain in full force and effect
notwithstanding the addition of any new Issuer as a party to this Agreement.
SECTION 7.12. Termination by Issuers. This Agreement shall terminate
with respect to any Issuer when all Transition Bonds issued by such Issuer have
been retired, redeemed or defeased in full.
SECTION 7.13. Limitation of Liability of Trustee. Notwithstanding
anything contained herein to the contrary, this Agreement has been countersigned
by First Union Trust Company, National Association, not in its individual
capacity but solely in its capacity as trustee of the First Issuer and in no
event shall First Union Trust Company, National Association, in its individual
capacity have any liability for warranties, covenants, agreements or other
<PAGE>
54
obligations of the First Issuer hereunder or in any of the certificates,
notices or agreements delivered pursuant hereto, as to all of which recourse
shall be had solely to the assets of the First Issuer. For all purposes of this
Agreement, in the performance of its duties or obligations hereunder or in the
performance of any duties or obligations of the First Issuer hereunder, First
Union Trust Company, National Association, shall be subject to, and entitled to
the benefits of, the applicable terms and provisions of the Formation Documents
relating to the First Issuer.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed by their respective officers as of the day and year first above
written.
PECO ENERGY TRANSITION TRUST,
by First Union Trust Company,
National Association, not in
its individual capacity but
solely as Issuer Trustee on
behalf of PECO Energy
Transition Trust,
by
------------------------------------
Title:
<PAGE>
55
PECO ENERGY COMPANY, Servicer,
by
------------------------------------
Title:
Acknowledged and Accepted:
THE BANK OF NEW YORK, not
in its individual capacity
but solely as Bond Trustee
on behalf of the Holders of
Transition Bonds issued by
the First Issuer,
by
------------------------------------
Title:
<PAGE>
EXHIBIT B
Supplement for Addition of Issuer
SUPPLEMENT NO. __ dated as of [ ], to the Master Servicing
Agreement dated as of [ ], 1998, between [ ], a [state of
formation] [type of entity] (the "New Issuer") and PECO ENERGY COMPANY,
a Pennsylvania corporation as Servicer (the "Servicer").
A. Reference is made to the Master Servicing Agreement dated as of [ ],
1998 (as amended, supplemented or otherwise modified from time to time, the
"Servicing Agreement"), between PECO ENERGY TRANSITION TRUST, a Delaware
business trust (the "First Issuer"), the other Issuers from time to time party
thereto (together with the First Issuer, the "Issuers") and the Servicer.
B. Capitalized terms used herein and not otherwise defined herein shall
have the meanings assigned to such terms in the Servicing Agreement.
C. The Issuers have entered into the Servicing Agreement in order to
provide for servicing of the Serviced Intangible Transition Property. Section
7.11 of Servicing Agreement provides that additional Persons may become Issuers
under the Servicing Agreement by execution and delivery of an instrument in the
form of this Supplement. The New Issuer is executing this Supplement in
accordance with the requirements of the Servicing Agreement to become
<PAGE>
2
an Issuer under the Servicing Agreement in order to provide for the
servicing of the Serviced Intangible Transition Property owned by the New
Issuer.
Accordingly, the Servicer and the New Issuer agree as follows:
SECTION 1. In accordance with Section 7.11 of the Servicing Agreement, the
New Issuer by its signature below becomes an Issuer under the Servicing
Agreement with the same force and effect as if originally named therein as an
Issuer and the New Issuer hereby agrees to all the terms and provisions of the
Servicing Agreement applicable to it as an Issuer thereunder. Each reference to
an "Issuer" in the Servicing Agreement shall be deemed to include the New
Issuer. The Servicing Agreement is hereby incorporated herein by reference.
SECTION 2. The New Issuer represents and warrants to the Servicer that this
Supplement has been duly authorized, executed and delivered by it and
constitutes its legal, valid and binding obligation, enforceable against it in
accordance with its terms.
SECTION 3. This Supplement may be executed by the parties hereto in
separate counterparts, each of which when so executed and delivered shall be an
original, but all such counterparts shall together constitute but one and the
same agreement. This Supplement shall become effective when the
<PAGE>
3
Servicer shall have received counterparts of this Supplement that, when
taken together, bear the signatures of the New Issuer and the Servicer.
SECTION 4. Except as expressly supplemented hereby, the Servicing Agreement
shall remain in full force and effect.
SECTION 5. THIS SUPPLEMENT SHALL BE CONSTRUED IN ACCORDANCE WITH THE LAWS
OF THE COMMONWEALTH OF PENNSYLVANIA WITHOUT REFERENCE TO ITS CONFLICT OF LAW
PROVISIONS, AND THE OBLIGATIONS, RIGHTS AND REMEDIES OF THE PARTIES HEREUNDER
SHALL BE DETERMINED IN ACCORDANCE WITH SUCH LAWS.
SECTION 6. Any provision of this Supplement that is prohibited or
unenforceable in any jurisdiction shall be ineffective to the extent of such
prohibition or unenforceability without invalidating the remaining provisions
hereof, and any such prohibition or unenforceability in any jurisdiction shall
not invalidate or render unenforceable such provision in any other jurisdiction.
<PAGE>
4
SECTION 7. All communications and notices hereunder shall be in writing and
given as provided in Section 7.02 of the Servicing Agreement.
IN WITNESS WHEREOF, the New Issuer and the Servicer have duly executed this
Supplement to the Servicing Agreement as of the day and year first above
written.
[Name Of New Issuer],
by
--------------------------------
Title:
PECO ENERGY COMPANY, Servicer,
by
--------------------------------
Title:
<PAGE>
ANNEX 1
to
MASTER SERVICING AGREEMENT
The Servicer agrees to comply with the following with respect to PECO Energy
Transition Trust (the "First Issuer"):
SECTION 1. Definitions. (a) Capitalized terms used herein and not otherwise
defined shall have the meanings set forth in the Master Servicing Agreement
dated as of [ ], 1998, between the First Issuer, the other Issuers from time to
time party thereto and PECO ENERGY COMPANY, as Servicer.
(b) Whenever used in this Annex 1, the following words and phrases shall
have the following meanings:
"Adjustment Date" has the meaning specified in the Indenture.
"Adjustment Request" means an application filed by the Servicer with the
PUC for revised Intangible Transition Charges pursuant to Section 4(b) of this
Annex.
"Bond Trustee" has the meaning specified in the Indenture.
"Calculation Date" means, with respect to any Series of Transition Bonds,
such date or dates specified as such in the Series Supplement therefor.
"Calculated Overcollateralization Level" has the meaning set forth in the
Indenture.
<PAGE>
"Class" has the meaning specified in the Indenture.
"Expected Amortization Schedule" has the meaning set forth in the
Indenture.
"Expected Final Payment Date" has the meaning set forth in the Indenture.
"Holder" or "Transition Bondholder" has the meaning set forth in the
Indenture.
"Indenture" means the Indenture dated as of [ ], 1998, between the First
Issuer and the Bond Trustee, as amended and supplemented from time to time,
including any Series Supplement.
"Overcollateralization Subaccount" has the meaning set forth in the
Indenture.
"Payment Date" has the meaning specified in the Indenture.
"Projected Transition Bond Balance" has the meaning specified in the
Indenture.
"Regulatory Year" means (i) the period from [ ], 1998 through
and including the first Adjustment Date (the "Initial Regulatory Year") and
(ii) following the Initial Regulatory Year until December 31, 2010, each period
from and including each Adjustment Date through but excluding the following
Adjustment Date.
<PAGE>
"Reserve Subaccount" has the meaning set forth in the Indenture.
"Sale Agreement" has the meaning set forth in the Indenture.
"Series" has the meaning specified in the Indenture.
"Series Supplement" has the meaning specified in the Indenture.
"Transferred ITP" has the meaning specified in the Sale Agreement.
"Transition Bonds" has the meaning specified in the Indenture.
"Transition Bond Balance" has the meaning specified in the Indenture.
SECTION 2. Calculation Date Statements. For each Calculation Date, the
Servicer will provide to the First Issuer and the Bond Trustee a statement
indicating (i) the Transition Bond Balance and the Projected Transition Bond
Balance for each Series as of the immediately preceding Payment Date, (ii) the
amount on deposit in the Overcollateralization Subaccount and the Calculated
Overcollateralization Level as of the immediately preceding Payment Date, (iii)
the Projected Transition Bond Balance for the next Payment Date and the
Servicer's projection of the Transition Bond Balance as of the next Payment Date
and,
<PAGE>
(iv) the Calculated Overcollateralization Level for the next Payment Date
and the Servicer's projection of the amount on deposit in the
Overcollateralization Subaccount as of the next Payment Date.
SECTION 3. Remittance Date Statements. On or before each Remittance Date,
the Servicer will prepare and furnish to the First 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 such Remittance Date pursuant to the
Indenture.
Section 4. Monthly Allocation Date Statements. On or before each Monthly
Allocation Date, the Servicer will prepare and furnish to the First Issuer and
the Bond Trustee a statement setting forth the transfers and payments to be made
on such Monthly Allocation Date pursuant to Section 8.02(d) of the Indenture and
the amounts thereof.
Section 5. Payment Date Statements. On or before each Payment Date for each
Series of Transition Bonds, the Servicer will prepare and furnish to the First
Issuer and the Bond Trustee a statement setting forth the amounts to be paid to
Holders of Transition Bonds of such Series pursuant to Section 8.02(e) of the
Indenture.
SECTION 6. Intangible Transition Charges Adjustments. (a) Prior to each
Calculation Date, the Servicer shall calculate (i) the Transition Bond Balance
as
<PAGE>
of each Calculation Date (a written copy of which shall be delivered by the
Servicer to the Bond Trustee within five days following such Calculation Date)
and (ii) the revised Intangible Transition Charges with respect to the
Transferred Intangible Transition Property for the then-current Regulatory Year
and each subsequent Regulatory Year, such that the Servicer projects that ITC
Collections therefrom allocable to the First Issuer will be sufficient so that
(x) the Transition Bond Balance on the Payment Date immediately [preceding] the
next Adjustment Date will equal the Projected Transition Bond Balance as of such
date or, if earlier with respect to any Series or Class of Transition Bonds, by
the Expected Final Payment Date therefor, (y) the amount on deposit in the
Overcollateralization Subaccount on the Payment Date immediately [preceding] the
next Adjustment Date, or if earlier with respect to any Series or Class of
Transition Bonds, by the Expected Final Payment Date therefor, will equal the
Calculated Overcollateralization Level for such date, taking into account
amounts on deposit in the Reserve Subaccount and (z) thereafter will provide for
amortization of the remaining outstanding principal amount of each Series in
accordance with the Expected Amortization Schedule therefor and deposits to the
Overcollateralization Subaccount such that the balance
<PAGE>
therein will equal the Calculated Overcollateralization Level on each
Payment Date.
(b) On each Calculation Date, the Servicer shall (i) file an Adjustment
Request with the PUC for such revised Intangible Transition Charges with respect
to the Transferred Intangible Transition Property to remain in effect until the
effective date of the next Intangible Transition Charges Adjustment with respect
to the Transition Bonds or, if earlier with respect to any Series or Class of
Transition Bonds, the Expected Final Payment Date therefor, (ii) take all
reasonable actions and make all reasonable efforts in order to effectuate such
revision to such Intangible Transition Charges and (iii) promptly send to the
Bond Trustee copies of all material notices and documents relating to such
revision.
SECTION 7. Servicer Advances. The Servicer shall not make any advances of
interest or principal on the Transition Bonds of any Series.
SECTION 8. Loss Calculations. Upon notice from the Seller, the Servicer
shall perform the calculations specified in Sections 5.01(c)(ii)(x) and
5.01(c)(ii)(y) of the Sale Agreement in the manner specified in such Sections
and notify the Issuer and the Bond Trustee thereof.
BEFORE THE
PENNSYLVANIA PUBLIC UTILITY COMMISSION
Application of PECO Energy Company for :
Approval of its Restructuring Plan Under : Docket Nos. R-00973953
Section 2806 of the Public Utility Code, et al. : and P-00971265
JOINT PETITION FOR FULL SETTLEMENT
OF PECO ENERGY COMPANY'S
RESTRUCTURING PLAN AND RELATED APPEALS
AND APPLICATION FOR A QUALIFIED RATE ORDER AND
APPLICATION FOR TRANSFER OF GENERATION ASSETS
April 29, 1998
<PAGE>
TABLE OF CONTENTS
I. SUMMARY OF SETTLEMENT.....................................................3
II. BACKGROUND...............................................................5
III. TERMS AND CONDITIONS...................................................10
A. Rate Reductions and Rate Unbundling..............................10
B. Rate Caps and Transmission and Distribution Charges..............13
C. Competitive Metering and Billing.................................15
D. Securitization...................................................17
E. Reconciliation and Projected Sales ..............................18
F. LILR and EER and Rule 4.6 Contracts..............................19
G. Phase-In.........................................................22
H. Transfer Of Generation Assets....................................23
I. Recovery Of Stranded ............................................25
J. Universal Service................................................26
K. Consumer Education and Information ..............................32
L. Provider of Last Resort and Generation Supply Obligations
And Opportunities.............................................32
M. Market Share Thresholds .........................................37
N. Code of Conduct..................................................39
O. Renewable Energy Development ....................................39
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P. Sustainable Development Fund.....................................40
Q. Resolution of Other Issues......................................41
R. Promotion of Settlement.........................................42
S. Withdrawal Of Pending State And Federal Court Cases.............42
T. Effectiveness, Duration And Enforcement Of Settlement...........44
U. Complete Agreement; No Alterations Or Modifications.............45
IV. PUBLIC INTEREST CONSIDERATIONS..........................................46
V. CONCLUSION...............................................................49
[APPENDICES NOT ATTACHED]
ii
<PAGE>
BEFORE THE
PENNSYLVANIA PUBLIC UTILITY COMMISSION
Application of PECO Energy Company for :
Approval of its Restructuring Plan Under : Docket Nos. R-00973953
Section 2806 of the Public Utility Code, et al. : and P-00971265
JOINT PETITION FOR FULL SETTLEMENT
OF PECO ENERGY COMPANY'S
RESTRUCTURING PLAN AND RELATED APPEALS
AND APPLICATION FOR A QUALIFIED RATE ORDER AND
APPLICATION FOR TRANSFER OF GENERATION ASSETS
PECO Energy Company ("PECO" or the "Company"); Senator Vincent J. Fumo;
the Office of Consumer Advocate ("OCA"); the Office of Small Business Advocate
("OSBA"); the Office of Trial Staff ("OTS"); the Philadelphia Area Industrial
Energy Users Group ("PAIEUG"); Lance S. Haver; the Consumers Education and
Protective Association, et al. ("CEPA");/1 the Environmentalists; the Delaware
Valley Energy Consortium; Pennsylvania Retailers' Association; U.S. Department
of the Navy; Action Alliance of Senior Citizens of Greater Philadelphia;
Pennsylvania Department of Aging; Southeastern Pennsylvania Transportation
Authority ("SEPTA"); Enron Power Marketing, Inc. ("Enron"); NEV East LLC
("NEV"); Conectiv Energy; Mid-Atlantic Power Supply Assoc. ("MAPSA"); Skipping
Stone; NorAm Energy Management, Inc. and Electric Clearinghouse, Inc.;
Pennsylvania Petroleum Association and Pennsylvania Association of Plumbing,
Heating, Cooling
- --------
1 As used herein, CEPA refers collectively to several intervenors represented
by common counsel, including the Consumers Education and Protective
Association, the Tenant Action Group, ACORN and John W. Long, Jr.
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Contractors, Inc.; Allegheny Power System, Inc. ("APS"); GPU Energy Inc.
("GPU"); PP&L, Inc. ("PP&L"); Pennsylvania Rural Electric Assoc. ("PREA") and
other parties as designated on the signature pages (all such parties
collectively referred to as the "Joint Petitioners"), by their counsel,
respectfully submit this Joint Petition for Full Settlement of PECO Energy
Company's Proposed Restructuring Plan and Related Appeals and Application for a
Qualified Rate Order and Application for Transfer of Generation Assets ("Joint
Petition").
The terms and conditions of the Joint Petition represent a comprehensive
settlement which resolves all issues on appeal before the Commonwealth Court and
all issues before the U.S. District Court arising from challenges by the Joint
Petitioners to the Commission's final order, reconsideration order and
compliance orders regarding PECO's Application for Approval of its Restructuring
Plan Under Section 2806 of the Public Utility Code. The Joint Petitioners aver
that this comprehensive settlement is in the public interest and, therefore,
request that the Commission: (1) approve without modification the proposed
settlement as set forth in the Joint Petition; (2) amend the Commission's final
order, reconsideration order and compliance filing orders as necessary to
implement the full settlement; (3) approve the tariff supplements necessary to
implement the proposed settlement as appended hereto; (4) issue a Qualified Rate
Order authorizing PECO to securitize up to $4.0 billion of stranded assets and
costs as agreed to herein; and (5) approve PECO's transfer of generation assets
as set forth herein./2
- --------
2 The Joint Petitioners recognize that pursuant to the Public Utility Code,
the Commission is obligated to provide notice and an opportunity to be
heard before it may amend a prior order or issue a Qualified Rate Order.
The Joint Petitioners
(continued...)
2
<PAGE>
In support of their request, the Joint Petitioners state as follows:
I. SUMMARY OF SETTLEMENT
The Joint Petitioners have agreed to the proposed settlement terms and
conditions set forth in this document as a means to resolve, finally and
equitably, all issues arising from PECO's proposed restructuring plan and
application for a qualified rate order, in lieu of further protracted and
expensive litigation in state and federal courts.
In particular, the Joint Petitioners have agreed to terms and conditions
that fairly balance the interests of all parties affected by PECO's
restructuring plan and that foster the creation of a vibrant competitive market.
All PECO customers will receive a guaranteed 8% rate reduction effective January
1, 1999, the start date for retail electric generation competition in PECO's
service territory, through December 31, 1999, and a 6% rate reduction from
January 1 to December 31, 2000. In addition to the guaranteed rate decreases of
8 and 6%, customers shall receive a system-average shopping credit of 4.46 cents
per KWH on January 1, 1999. Customers that elect to shop for generation shall
receive total rate reductions in 1999 equal to an 8% rate decrease and in 2000
equal to a 6% rate decrease, plus savings produced by the difference between
their generation purchase price and their shopping credit. Moreover, given the
system average shopping credit of 4.46 cents per KWH for the years 1999 and 2000
called for in the proposed settlement as well as
- --------
(continued)
agree: (1) that PECO will provide written notice by letter to its
customers; (2) that PECO will post notice in its office and on its Internet
web page; and (3) that PECO will provide notice by news release.
3
<PAGE>
other specific components agreed to herein, the Joint Petitioners expect
the development of a vibrant competitive market with many alternative electric
generation suppliers.
In addition, PECO shall (1) recover a substantially smaller amount of
stranded cost recovery than it claimed before the Commission; (2) transfer its
generation assets and liabilities and wholesale power contracts subject to
competitive safeguards to insure fair dealing; (3) expand its current universal
service programs; (4) accelerate the phase-in to customer choice for all
customer classes; (5) educate consumers about restructuring; (6) facilitate
funding of sustainable energy and economic development; (7) encourage small
renewable energy technologies; and (8) withdraw all of its appeals before
Commonwealth Court and its civil complaint before the U.S. District Court
challenging the Commission's restructuring orders at Docket Nos. R-00973953 and
P-00971265.
The other Joint Petitioners, in turn, agree to resolve all objections to
PECO's Restructuring Plan, as set forth herein, and to withdraw (1) all cases
pending before the Commonwealth Court which challenge the constitutionality of
the Electric Competition Act and the Commission's May 22, 1997 Order at Docket
No. R-00973877 in PECO's securitization proceeding and (2) all appeals pending
before Commonwealth Court which challenge the Commission's restructuring orders
at Docket Nos. R-00973953 and P-00971265, as set forth in Part S herein.
4
<PAGE>
II. BACKGROUND
1. On December 3, 1996, Governor Ridge signed into law the Electricity
Generation Customer Choice and Competition Act (66 Pa. C.S. ss.2801 et
seq.)(the "Electric Competition Act"). The Electric Competition Act
fundamentally restructures the provision of retail electric service in
Pennsylvania by mandating the introduction of customer choice of generation
supplier commencing January 1, 1999.
2. On April 1, 1997, PECO submitted a comprehensive Restructuring Plan in
which it requested the Commission to approve (1) the imposition of unbundled
rates, Competitive Transition Charges ("CTCs") and specific tariff provisions to
ensure customers direct access to all licensed electric generation suppliers;
(2) the recovery of $6.8 billion/3 of transition and stranded costs; (3) the
implementation of a plan to meet its universal service obligations, including a
mechanism to recover the costs of those obligations; and (4) the implementation
of a proposed Consumer Education Program.
3. PECO provided notice of its Restructuring Plan filing to all customers
by bill insert. In addition, notice of the filing was published in newspapers of
general circulation in PECO's service territory. Copies of the filing were
served on all parties to PECO's securitization proceeding at Docket No.
R-00973877 and on all active participants in PECO's last general base rate
investigation at Docket No. R-891364.
4. PECO's filing was assigned to Administrative Law Judges Marlane R.
Chestnut and Charles E. Rainey, Jr. (the "ALJs"). Thereafter, over thirty
parties intervened
- --------
3 In its April 1, 1997 Restructuring Filing, PECO claimed stranded assets and
costs totaling $6.8 billion. That figure increased to $7.5 billion in
PECO's rebuttal case submission on July 18, 1997.
5
<PAGE>
in the proceeding and, on June 20, 1997, thirteen parties filed extensive
testimony challenging various aspects of PECO's Restructuring Plan. In response,
PECO, on July 18, 1997, submitted the rebuttal testimony and supporting exhibits
of twenty-two witnesses.
5. On July 30, 1997, PECO and a number of other parties submitted a Motion
for Continuance of Hearings in which they advised the ALJs that settlement
negotiations were underway. As a consequence, by Orders issued July 31, 1997 and
August 14, 1997, the ALJs suspended the due date for the filing of surrebuttal
testimony and continued the hearing schedule to allow the settlement discussions
to proceed.
6. On August 27, 1997, PECO and other parties filed with the ALJs and the
Commission a Joint Petition for Partial Settlement of PECO Energy Company's
Proposed Restructuring Plan And Application For A Qualified Rate Order (the
"August Partial Settlement").
7. Several parties opposed the August Partial Settlement. As a result, the
ALJs established a schedule for the filing of direct and responsive testimony by
both those supporting the August Partial Settlement and those opposing it.
Public input hearings on the August Partial Settlement were convened on October
9 and 10, 1997 and technical, evidentiary hearings were held on October 14-16,
1997. In addition, by Order entered October 2, 1997, the Commission directed
that the evidentiary record be certified and the case briefed directly to the
Commission without issuance by the ALJs of a Recommended Decision.
6
<PAGE>
8. On October 7, 1997, Enron Energy Services Power, Inc. ("Enron") filed a
Petition with the Commission at P-00971265 requesting that it: (1) approve an
alternative restructuring proposal (the "Choice Plan") in lieu of the August
Partial Settlement; (2) designate Enron the provider of last resort in PECO's
service territory; and (3) direct PECO to issue to Enron transition bonds
totaling $5.461 billion (the "Enron Petition"). Enron also filed a Motion to
Consolidate its Petition and the August Partial Settlement.
9. At its public meeting two days later, on October 9, 1997, the Commission
set the Enron Petition for hearings and consolidated its consideration with the
ongoing proceedings involving the August Partial Settlement. Thereafter, in
accordance with a schedule established by the ALJs, extensive direct and
responsive testimony was submitted by both Enron and by those opposing the
Choice Plan. Technical evidentiary hearings on the Choice Plan were held on
November 17-19, 1997.
10. On November 6, 1997, the Commission issued an Order, clarifying and
reinforcing an earlier directive that the parties concurrently present for the
record and brief to the Commission their positions regarding (1) the August
Partial Settlement, (2) the Choice Plan and (3) PECO's original Restructuring
Plan. The Commission established December 2, 1997 as the due date for all
parties' Initial Briefs and directed that Reply Briefs would not be entertained.
11. On December 2, 1997, Initial Briefs (or letter comments in lieu of
briefs) and proposed Findings of Fact and Conclusions of Law were filed by 21
different parties. That same day, the ALJs issued an Order certifying the
evidentiary record to the Commission.
7
<PAGE>
12. At its public meeting on December 11, 1997, the Commission, by a vote
of 3-2, adopted an 88-page motion which rejected the August Partial Settlement
and the Choice Plan and substantially modified PECO's proposed Restructuring
Plan. Thereafter, the Commission, on December 23, 1997, issued a 164-page
Opinion and Order (the "Restructuring Order") which, among other things,
determined that PECO's proven net stranded costs were $5.024 billion and that
unbundling of PECO's rates resulted in a customer shopping credit of 4.46 cents
per KWH.
13. On January 7, 1998, PECO and five other parties filed petitions
requesting that the Commission rehear, reconsider, clarify and amend certain
aspects of its Restructuring Order. By Secretarial letter dated January 8, 1998,
the Commission directed that Answers to the foregoing Petitions, if any, be
submitted on or before January 13, 1998. Answers were filed by PECO and eight
other parties.
14. At its public meeting on January 15, 1998, the Commission, by a vote of
3-2, adopted a 14-page motion which denied many of the changes requested by the
parties but adjusted PECO's stranded cost allowance to $4.935 billion. The
following day, the Commission issued a 27-page Opinion and Order (the
"Reconsideration Order"). In its January 16, 1998 Reconsideration Order, the
Commission directed PECO to make a compliance filing on or before January 20,
1998 and indicated that interested parties could file comments to the compliance
filing on or before January 27, 1998.
15. PECO submitted its compliance filing on January 20, 1998. On January
27, 1998, nine parties submitted over 150 pages of comments to PECO's
8
<PAGE>
compliance tariff. Three days later, on January 30, 1998, PECO responded to
the opposing parties' comments.
16. Thereafter, the Commission issued two additional Orders, one on
February 5, 1998 in response to PECO's Proposed Compliance Filing (the
"Compliance Order"), and another on February 26, 1998, in response to PECO's
Revised Compliance Filing (the "Second Compliance Order"). PECO's Proposed
Compliance Filing was rejected, and its Revised Compliance Filing was modified
and/or accepted on all but one issue. Further, on February 26, 1998, the
Commission ordered that a new proceeding be initiated at Docket No. R-00984298
(the "Supplier Tariff" docket) to investigate and approve finally a tariff
setting forth all the terms and conditions associated with PECO/supplier
interactions.
17. In response to the Restructuring Order entered December 23, 1997, the
Reconsideration Order entered January 16, 1998, the Compliance Order entered
February 5, 1998 and the Second Compliance Order entered February 26, 1998
(hereinafter referred to collectively as the "PECO Restructuring Orders"), PECO
has filed appeals to Commonwealth Court, as well as a civil complaint action in
the U.S. District Court. In addition, appeals to Commonwealth Court challenging
various aspects of the Commission's orders have been filed by CEPA, Indianapolis
Power and Light Company, Conectiv Energy, OCA, Enron and NEV.
17a. On April 14, 1998, ALJ Chestnut issued a recommended decision
concerning the issues in the Supplier Tariff docket. On April 20, 1998, parties
filed exceptions to ALJ Chestnut's decision and the matter is presently pending
before the Commission for decision.
9
<PAGE>
18. On and after March 5, 1998, the Joint Petitioners signed a
"Pre-Settlement Agreement" designed to set forth the procedural ground rules for
participation in settlement negotiations aimed at resolving the matter in lieu
of further litigation in state and federal courts. This Joint Petition is the
product of these negotiations.
III. TERMS AND CONDITIONS
The Joint Petitioners, intending to be legally bound and for due
consideration given, agree as follows:
A. Rate Reductions and Rate Unbundling
19. On January 1, 1999, PECO will reduce its retail electric rates by 8%
from the levels that existed as of December 31, 1996. That 8% rate decrease will
continue in effect until January 1, 2000, when the rate reduction will become
6%. The 6% rate reduction will continue in effect until December 31, 2000. The
January 1, 1999, and January 1, 2000, rate decreases will apply to all retail
rate classifications and all customers within those rate classifications as set
forth on a system-average basis in Schedule 1 (excluding the components of LILR,
EER and Rule 4.6 contract charges that do not contain discounts off of Rate
Schedules HT, EP, GS, and PD tariffed component charges).
20. On January 1, 1999, PECO will unbundle its retail electric rates and
special contracts into the following components: (1) distribution charges, (2)
transmission charges, (3) a Competitive Transition Charge ("CTC") and, if
applicable, an Intangible Transition Charge ("ITC") and (4) a shopping credit.
The system-wide average values for these
10
<PAGE>
components for the years indicated are set forth in the following Schedule 1.
Attached as Appendix A and incorporated as part of this settlement are tariff
sheets setting forth for each rate class the rates, subject to reconciliation as
set forth in Part E, that will be effective from January 1, 1999 to December 31,
2010. The tariffs set forth in Appendix A are the tariffs that implement this
settlement except as specifically set forth herein.
11
<PAGE>
<TABLE>
<CAPTION>
Schedule 1
SCHEDULE OF SYSTEM-WIDE AVERAGE RATES (a)
Effective T&D Shopping Generation
Date Transmission Distribution Rate Cap CTC or ITC Credit Rate Cap
---- ------------ ------------ -------- ---------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
(b) (1) (2) (3) = (4) (5) (6)=
(1) + (2) (4) + (5)
(cent)/kWh (cent)/kWh (cent)/kWh (cent)/kWh (cent)/kWh (cent)/kWh
January 1, 0.45(cent) 2.53(cent) 2.98(cent) 1.72(cent) 4.46(cent) 6.18(cent)
1999
January 1, 0.45(cent) 2.53(cent) 2.98(cent) 1.92(cent) 4.46(cent) 6.38(cent)
2000
January 1, 0.45(cent) 2.53(cent) 2.98(cent) 2.51(cent) 4.47(cent) 6.98(cent)
2001
January 1, 0.45(cent) 2.53(cent) 2.98(cent) 2.51(cent) 4.47(cent) 6.98(cent)
2002
January 1, 0.45(cent) 2.53(cent) 2.98(cent) 2.47(cent) 4.51(cent) 6.98(cent)
2003
January 1, 0.45(cent) 2.53(cent) 2.98(cent) 2.43(cent) 4.55(cent) 6.98(cent)
2004
January 1, 0.45(cent)(d) 2.53(cent)(d) 2.98(cent)(d) 2.40(cent) 4.58(cent) 6.98(cent)
2005
January 1, (c) (c) N/A 2.66(cent) 4.85(cent) 7.51(cent)
2006
January 1, (c) (c) N/A 2.66(cent) 5.35(cent) 8.01(cent)
2007
January 1, (c) (c) N/A 2.66(cent) 5.35(cent) 8.01(cent)
2008
January 1, (c) (c) N/A 2.66(cent) 5.35(cent) 8.01(cent)
2009
January 1, (c) (c) N/A 2.66(cent) 5.35(cent) 8.01(cent)
2010
</TABLE>
(a) All prices reflect average retail billing for all classes of service
(including gross receipts tax). Detail of actual individual rates for each
class of service is provided in Appendix A. The average prices as presented
in this Schedule 1 reflect the profile of service contained in PECO's proof
of revenue set forth in Appendix A.
(b) The Transmission prices listed are for unbundling only. The Pennsylvania
Public Utility Commission does not regulate the rates for transmission
service.
(c) The cap on PECO's transmission and distribution rates under Section 2804(4)
of the Electric Competition Act will be extended until June 30, 2005.
(d) Effective until June 30, 2005.
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<PAGE>
Schedule 1, Column 3 sets forth the cap on system-wide average transmission and
distribution charges that will be in effect from January 1, 1999 through June
30, 2005, provided, however, PECO may if necessary request recovery of
additional nuclear decommissioning expense after January 1, 2004, and such
expense recovery will not be subject to any rate cap. The tariffed rates in
Appendix A underlying the system-wide average figures for CTC/ITC from 1999
through 2010 set forth in Schedule 1, Column 4, and the shopping credits set
forth in Schedule 1, Column 5 are fixed for each year, except as provided for in
paragraph 24 pertaining to periodic reconciliation of the CTC/ITC. The
generation rate caps shown on a system-wide average basis for each year are set
forth in Schedule 1, column 6 above from 1999 through 2010.
B. Rate Caps and Transmission and Distribution Charges
21. The Joint Petitioners agree that the rate cap exceptions set forth in
Section 2804(4) of the Electric Competition Act shall apply to the rates set
forth in this settlement, except as otherwise specifically set forth herein. If
at any time during the CTC Recovery Period, PECO requests and is granted a rate
increase pursuant to Section 2804(4) of the Act (Rate Cap Exceptions) such
increase shall not reduce the shopping credits listed in Schedule 1 and such
increases shall be allocated to the appropriate unbundled rate category in
accordance with determinations of the Commission. As set forth in Schedule 1,
the generation rate cap is extended from 2005 to 2010, five years beyond the
statutory rate cap period provided in the Electric Competition Act. Customer
savings may be greater if, for
13
<PAGE>
example, customers obtain lower prices from a competitive supplier or if
PECO's provider of last resort residential generation rates, as provided in Part
L, result in a lower rate.
The cap on PECO's transmission and distribution charges, which otherwise
would expire on June 30, 2001 under Section 2804(4) of the Electric Competition
Act (66 Pa. C.S. ss.2804(4)), will be extended until June 30, 2005, provided,
however, that PECO may, if necessary, request recovery of additional nuclear
decommissioning expense after January 1, 2004 and such expense recovery will not
be subject to any rate cap and will be treated as an exception to the rate cap
under Section 2804(4) and such increases shall not reduce the shopping credits
listed in Schedule 1 and such increases shall be allocated to the appropriate
unbundled rate category in accordance with determinations of the Commission. The
Joint Petitioners shall not file a complaint with the Commission or otherwise
challenge PECO's current transmission or distribution rate structure, or the
current level of PECO's transmission rates or the current level of PECO's
distribution rates as set forth in Appendix A hereto until the expiration of the
transmission and distribution cap on June 30, 2005, provided, however, that any
Joint Petitioner may participate as a complainant or otherwise in any future
transmission rate proceeding in which an increase in PECO's current transmission
rates or change in rate structure is proposed and, further, may file a complaint
or otherwise participate in any proceeding before the Commission to adjust
PECO's distribution rates as a result of any increase in PECO's transmission
rates or change in rate structure in effect as of April 29, 1998. The
transmission and distribution rate cap of 2.98 cents per KWH includes 2.97 cents
for all existing costs and services and .01 cents for the sustainable
development fund during the transmission and distribution rate cap period. No
14
<PAGE>
new fees shall be proposed or charged during the transmission and distribution
rate cap period for a cost or service that is included in the bundled
transmission and distribution rate.
Pursuant to this Settlement, PECO agrees to cap the sum of its transmission
and distribution charges, as described above. If, during the period that this
rate cap is in effect PECO's transmission charges or rates (including but not
limited to ancillary charges) are increased, then PECO's distribution rates will
be reduced in a non-discriminatory manner sufficiently to avoid exceeding the
transmission and distribution rate cap.
C. Competitive Metering and Billing
22. On January 1, 1999, PECO will unbundle its retail electric rates for
its metering, meter reading, and billing and collection services to provide
credits for those customers that elect to have their alternative suppliers
perform these services. The credits for metering, meter reading and billing for
each customer class are set forth in Appendix B.
Effective January 1, 1999, subject to the ability of an Electric Generation
Supplier ("EGS") to comply with the terms and conditions of "Competitive Billing
and Collection Service" as set forth in Appendix C to this Joint Petition, a
Commission-licensed EGS may (in addition to any other rights to act as agent for
the customer set forth in PECO's tariffs) act as agent to provide a single bill
and provide associated billing and collection services to its retail customers
located in PECO service territory. Effective January 1, 1999, subject to the
ability of an Electric Generation Supplier ("EGS") to comply with the terms and
conditions of "Competitive Metering Service" as set forth in Appendix C to this
Joint
15
<PAGE>
Petition, a Commission-licensed EGS may provide, finance, install, own,
maintain, calibrate and remotely read advanced meters for service to its retail
customers located in PECO service territory.
By June 1, 1998, the Joint Petitioners agree to develop standards related
to "Competitive Billing and Collection Service" and "Competitive Metering
Service" consistent with Appendix C.
By July 1, 1998, the Commission shall establish metering and billing
standards for the PECO service territory, including the specific applicability
of provisions contained within 52 Pa. Code Ch. 56 (relating to standards and
billing practices for residential services) to EGSs performing consolidated
billing. These Commission standards shall also include, at a minimum, data
exchange and billing format standards to facilitate the efficient, speedy and
non-discriminatory exchange of information between PECO and EGSs necessary to a
properly functioning competitive market for retail electric generation services.
An EGS that bills on behalf of an EDC must comply with all billing and
disclosure requirements applicable to an EDC, absent waiver by the Commission,
including the unbundling of transmission and distribution rates.
Only PECO EDC can physically disconnect or reconnect a customer's
distribution service. Physical termination of service may only be permitted for
failure to pay for EDC or PLR service.
16
<PAGE>
D. Securitization
23. The rates and rate reductions described in paragraphs 19 and 20 and
Schedule 1 above include, but are not contingent upon, the anticipated benefits
of securitization of $4.0 billion of stranded costs. The savings from
securitization are incorporated to fund the rates and rate reductions provided
for in paragraphs 19 and 20 Schedule 1, and no further rate adjustment upon sale
of transition bonds is required other than establishment of an ITC to replace an
equal amount of CTC. The effectiveness of this settlement is contingent upon the
issuance by the Commission simultaneous with approval of this settlement of an
irrevocable Qualified Rate Order as set forth in Appendix D under Section 2812
of the Electric Competition Act (66 Pa. C.S. ss.2812) authorizing the issuance
of up to $4.0 billion of Transition Bonds at any time after the issuance of such
Qualified Rate Order, provided that the ITC charges to customers terminate no
later than December 31, 2010. PECO hereby applies for the issuance of a
Qualified Rate Order as set forth in Appendix D which is incorporated as a part
of this settlement. The Joint Petitioners agree not to oppose PECO's application
for a Qualified Rate Order and PECO's securitization of its stranded assets and
costs in accordance with this agreement. The Joint Petitioners agree that, to
the extent necessary, the testimony, exhibits, applications and other documents
submitted by the parties and the record from the hearings in this proceeding and
in PECO Energy's securitization proceeding at Docket No. R-00973877 form the
basis for this settlement and PECO's Application for a Qualified Rate Order.
PECO assumes the risk
17
<PAGE>
that securitization may not be accomplished and such fact shall not be grounds
for adjustment of the rates or CTC set forth in Schedule 1.
E. Reconciliation and Projected Sales
24. The CTC/ITC rates set forth in Appendix A are designed to recover $5.26
billion of PECO's stranded assets and costs. The CTC recovery period begins on
January 1, 1999 and continues until December 31, 2010 at which point the CTC
will terminate. To insure recovery of no more or no less than $5.26 billion over
this 12 year recovery period, the CTC/ITC shall be subject to an annual
reconciliation within each customer class in accordance with the procedures
adopted in the PECO Restructuring Orders. The shopping credits shall be adjusted
to reflect the CTC/ITC reconciliation. The reconciliation during calendar year
2010 will be done quarterly or, if necessary, monthly in order to insure full
CTC/ITC recovery and termination by December 31, 2010. As required by the
Electric Competition Act, the ITC will be subject to periodic adjustment to
provide adequate debt service of the transition bonds. Any increase in the ITC
pursuant to such a periodic adjustment will result in a corresponding reduction
in the CTC set forth in Appendix A or the Company's other regulated revenues.
For purposes of determining the annual revenue that should be recovered
each year by the system-average CTCs contained in Schedule 1, a sales level of
33,569,358 Mwh will be used for the 12 months ending December 31, 1999, which
will be increased each year during the CTC recovery period after 1999 by 0.8%
over the projected sales level of the
18
<PAGE>
preceding year in accordance with the CTC reconciliation provisions in
Appendix A. The sales levels to be used for reconciliation of the annual
revenues for each major rate class (residential, commercial and large
industrial) are set forth on Appendix E attached. For calendar year 2000 only,
reconciliation will be as follows: If and to the extent sales growth exceeds
0.8% in 1999 (as set forth by class in Appendix E), the CTC/ITC figures for 2000
will be decreased accordingly, the generation rate caps for 2000 will be reduced
by a commensurate amount, and the shopping credits for 2000 will remain
unchanged. This will have the effect of increasing the guaranteed rate
reductions for customers in 2000 from 6% to a higher percentage, depending on
the level of sales growth and corresponding CTC/ITC overcollection in 1999.
Appendix E also sets forth the annual amortization of stranded costs and the
return allowed. Other than for reconciliation, the CTC/ITC and shopping credit
figures will not be changed.
F. LILR and EER and Rule 4.6 Contracts
25. The Joint Petitioners agree that the Large Interruptible Load Rider
("LILR") will continue to be available through at least December 31, 2010 to
current LILR customers. All LILR customers' unbundled charges will be: (i) for
on-peak usage, 0.5(cent)kWh for distribution plus Gross Receipts Tax ("GRT"),
and 0.5(cent)kWh for transmission plus GRT/4; and (ii) for off-peak usage, the
Rate HT CTC/ITC, transmission, and distribution charges calculated using the
customers' billing demand. PECO will assess no CTC/ITC charges
- --------
4 This transmission charge is not subject to the Commission's jurisdiction;
shall it increase or decrease, the distribution charge will be adjusted
accordingly.
19
<PAGE>
with respect to the on-peak portion of an LILR customer's interruptible
load. PECO will also not impose any additional CTC/ITC charge on an LILR
customer that obtains supply from a competitive supplier. For LILR customers
that after January 1, 1999 choose to remain with PECO in its role as PLR/default
supplier for their energy supply, the energy charges will be the individual
customer's Locational Marginal Price, as calculated by PJM, or its replacement,
for all on-peak energy associated with the customer's interruptible load, and
applicable unbundled Rate HT charges for all other energy usage.
The Joint Petitioners agree that the Economic Efficiency Rider ("EER") and
Rule 4.6 contracts will continue to be available to prospective and current EER
and Rule 4.6 customers in accordance with the terms and conditions of the EER,
Rule 4.6 and the customer's contract. If the customer's contract is silent with
respect to the customer's right to access competitive generation supply, then
the customer may obtain competitive supply. For those customers with EER or Rule
4.6 contracts that contain discounts to the Rate HT capacity charge and the
first two price blocks of Rate HT, the unbundled charges will be, starting
January 1, 1999: (i) the Rate HT unbundled distribution and transmission
charges, and (ii) the Rate HT CTC/ITC charges discounted by the negotiated
percentage discount presently reflected in the customer's contract.
With respect to those EER contracts and Rule 4.6 contracts that contain
language regarding access rights and unbundling, the customers' right to access
competitive generation supply and the unbundling of the customer's contract will
be governed by the terms and conditions of the customers' contracts.
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All Rate HT industrial customers, LILR customers, and Rule 4.6 and EER
customers shall have the right to pay all applicable CTC/ITC charges in one lump
sum. For customers exercising this option, PECO and the customers will negotiate
a mutually acceptable lump sum using the customer's most recent 12 months of
demand and energy usage as billing determinants, unless such demand and energy
usage will not be representative of the customer's likely demand and energy
consumption during the CTC/ITC recovery period (in which case representative
values will be used), applied to the CTC/ITC charges for the entire CTC/ITC
recovery period, discounted using PECO's after-tax cost of capital. Exercise of
the rights in this paragraph and paragraph 26 below shall impose no additional
burdens on any other customer classes. Prior to agreeing to such lump sum
payment, PECO shall submit for Commission approval a proposal for determining
how the lump sum payment of CTC/ITC will affect reconciliation.
26. Recovery of CTC/ITC from industrial and commercial customers that
significantly reduce their purchases through installation of on-site generation
will be as fully set forth in Appendix F hereto, which is incorporated as a part
of this settlement; provided, however, that existing industrial and commercial
customers whose peak load during 1996 was at least four (4) megawatts, and who
can document that they were actively self generating or considering
self-generation as of December 31, 1996 or earlier, will pay CTC/ITC charges
following full start-up of any self-generation facility they install before
December 31, 2010 as follows:
(a) PECO will calculate the customer's average billing demand and energy
usage for calendar year 1996;
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(b) Using those billing determinants PECO will determine the dollar amount
that would be charged were the customer billed for CTC/ITC using the
prevailing Rate HT CTC/ITC charges;
(c) PECO will bill the customer one-third of the dollar amount determined
in accordance with step b.
G. Phase-In
27. Direct access to electric generation suppliers will be phased in
for all customers located in PECO's service territory in accordance with the
PECO Restructuring Orders, in three steps -- one-third of the non-coincident
peak load of each customer class of service will have access on January 1, 1999,
two-thirds of the non-coincident peak load of each customer class on January 2,
1999, and the remainder on January 2, 2000. With respect to Rate HT, PD, and EP
customers and Rate GS customers above 40kW only, if the individual customer peak
load subscriptions exceed the class peak load limitation for one or more of
these first two steps, then each customer's subscription will be reduced pro
rata to meet the class peak load limitation, provided that customers with
multiple locations in the PECO service territory shall be permitted to allocate
their allotted share of their load to their multiple locations at their
discretion. For purposes of this section, a customer shall be defined to include
those customers which are affiliated with each other including, but not limited
to, divisions, separate business units, etc. The entity which nominates for
customers as defined herein with multiple locations shall designate the pro rata
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load for each multiple location. The Rate GS class will be divided into two
classes of service for phase-in purpose only - a large customer class and a
small customer class. All Rate GS customers with an average monthly demand for
1996 of 40kW or less will be in the small customer class, and all others will be
in the large customer class.
H. Transfer Of Generation Assets
28. PECO and its subsidiaries are permitted to transfer or assign all of
their generating assets and liabilities, as those assets and liabilities are
delineated in its Restructuring Plan filing and included at the date of transfer
in the accounts set for in Appendix I hereto, and any other assets necessary for
the operation of the generating plants, and their wholesale power contracts to a
separate corporate entity or entities. The entity or entities may, at PECO's
discretion, be an affiliate or subsidiary of PECO or a non-affiliate. The
wholesale power contracts transferred will exclude those wholesale power
contracts that PECO utilizes to satisfy its provider of last resort obligations
and those wholesale power contracts that PECO-affiliated or divisional EGSs
enter into; provided, however, that if the generation sold under such contracts
is provided by PECO's generating assets, then the sales obligations under those
contracts will be transferred or assigned and the purchase obligations will
remain with PECO or its affiliated or divisional EGSs. The generating assets and
liabilities shall be transferred at their net book value at the date of
transfer. Once the transfer is completed, the generation entity, if an affiliate
of PECO, will be regulated by the Commission only if it makes retail sales, and
then only as an EGS.
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PECO hereby requests, and the effectiveness of this Settlement is
conditioned upon, the Commission's approval, without addition, condition or
modification, of all aspects of PECO's transfer of its generation assets and
liabilities and wholesale power contracts under this settlement and the
Commission's issuance of such orders and certificates of public convenience as
are necessary to implement those transfers. The Commission approval includes,
but is not limited to, approval under Chapters 5, 11, 19, 21, and 28 of the
Public Utility Code (66 Pa.C.S.).
The Joint Petitioners expressly acknowledge that such transfers may require
various regulatory approvals or waivers, including, without limitation, the
FERC, the Nuclear Regulatory Commission ("NRC") and perhaps other agencies and
third parties not subject to PECO's control, and therefore the Joint Petitioners
will neither oppose, nor support any opposition to, PECO's requests to obtain
such approvals. If such authorizations or waivers (other than approval by this
Commission) are not obtained in a manner acceptable to PECO, then PECO will not
transfer the generation assets or liabilities or contracts affected, provided,
however that if a generating asset, liability or contract is not transferred,
PECO will separate that asset, liability or contract and its operation from its
regulated transmission and distribution functions by organizing generation
assets, liabilities or contracts into a functionally separate business unit or
units. Failure to obtain such authorization or waiver will not affect any other
aspects of this settlement.
PECO and its affiliates and subsidiaries agree to be bound by the
competitive safeguard provisions set forth in Appendix G. Upon request of a
Joint Petitioner the information referenced in paragraph 6 of Appendix G shall
be provided directly to the Joint
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Petitioner, who shall not disclose or use the information in a manner that
violates the Commission's standard rules governing proprietary information.
Complaints under these provisions shall be filed with the Commission and finally
adjudicated by the Commission within sixty days of filing.
I. Recovery Of Stranded
29. PECO shall be permitted to recover from its retail electric customers
$5.26 billion of stranded assets and costs through either a CTC (to remain in
effect from January 1, 1999 to December 31, 2010) and/or, at the Company's
discretion, an ITC (to be put in place any time after the effective date of this
settlement and the issuance of transition bonds and to remain in effect up to
December 31, 2010). PECO requests the Commission to declare that good cause has
been shown under Section 2808 of the Electric Competition Act to permit PECO to
recover the stranded assets and costs set forth below through a CTC or ITC
extending to December 31, 2010. PECO also requests that the Commission expressly
find that the transition and stranded cost recovery and level of CTC/ITC charges
provided herein is just and reasonable and that securitization of up to $4.0
billion of stranded costs is just and reasonable and in the public interest. The
other Joint Petitioners do not object to these findings. The total authorized
recovery of $5.26 billion includes all amounts previously approved for recovery
by the Commission in its May 22, 1997 Order at Docket No. R-00973877.
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Under the terms of this settlement, PECO shall be permitted to recover
$5.26 billion for transition and stranded costs through a CTC and/or, at PECO's
discretion, an ITC as set forth in Schedule 1, Appendix A and paragraphs 19, 20,
21, 23, 24, 25 and 26. This total authorized recovery of $5.26 billion
constitutes full and final satisfaction of all transition and stranded costs
that PECO has claimed or could have claimed before the Commission pursuant to
Section 2808 of the Electric Competition Act.
J. Universal Service
30. PECO will transfer all customers currently enrolled in its Customer
Assistance Program ("CAP") to its pilot CAP Rate by December 31, 1998. The
prepayment metering option provided to customers under the CAP Rate pilot will
not apply, unless regulatory or legislative provisions are adopted to provide a
prepayment metering option. When all such customers have been successfully
transferred, the CAP will be discontinued and the CAP Rate will become the
vehicle by which PECO ensures that its customers receive universal service. CAP
Rate will remain in effect through December 31, 2010. This settlement does not
address, and the Joint Petitioners make no commitment regarding, any other
issues regarding CAP Rate after December 31, 2010 including the existence or
closure of CAP Rate. The Joint Petitioners, in consultation with other
interested parties, agree to review and consider any recommendations for changes
in the CAP Rate program identified in the current evaluation of the CAP Rate
program being conducted for PECO. This settlement does not abrogate the joint
stipulation reached by the parties in PECO's current
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CAP Rate pilot proceeding. If that joint stipulation and this settlement
are inconsistent, this settlement shall control.
31. In order to be eligible for CAP Rate, customers must demonstrate that
their annual household gross incomes are at or below 150% of Federal poverty
income guidelines and that they have an inability to pay their electric bills,
as evidenced by failure to make at least two payments of their electric bill or
having met other criteria. These other criteria shall be determined by mutual
agreement of the Joint Petitioners in consultation with other interested parties
and shall become effective upon Commission approval. Within six months after
this settlement becomes effective, the Joint Petitioners will determine what
these criteria should be. For purposes of this settlement, failure to make a
payment shall include partial or late payment. Applicants whose income records
cannot be found in tax or public assistance databases will be provided a
personal interview to establish eligibility. Individual customer eligibility for
CAP Rate will be reviewed annually. The percentage rate discounts provided to
current CAP Rate customers, as set forth in PECO's existing tariff (i.e., either
nominal 25.0% or 50.0% depending on income status) will be deducted from the
residential rates then in effect and will remain in place, unless the Joint
Petitioners in consultation with other interested parties mutually agree to
modifications to the discounts, including additional discount tiers.
32. All CAP rate generation discounts shall be portable and customers'
access to the benefits of universal service programs shall not be affected by
whom the customer selects as its generation supplier or by whom the Commission
directs shall be the customers' provider of last resort-default supplier.
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33. The Joint Petitioners agree that the current annual level of universal
service costs reflected in residential distribution rates is $50.0 million. PECO
will recover its universal service costs in excess of $50.0 million, as set
forth below, through a separate Section 1307 mechanism established by the
Commission that will adjust distribution rates applicable to customers. Such
increases in PECO's universal service costs shall be deferred for recovery until
after January 1, 2002. On or after January 1, 2002, recovery of any increases
shall not be subject to the rate cap under this settlement or the Electric
Competition Act nor shall it impact the shopping credit. This settlement does
not address or resolve the manner in which universal service costs will be
allocated to customer classes if and when PECO incurs, and seeks recovery of,
universal service costs in excess of $50.0 million. PECO will recover from its
customers the universal service costs for those customers served by the CDS
supplier and credit the CDS supplier for its provision of customer care services
as set forth in Part L, paragraph 38c, and Appendix J.
34. Participation in the CAP Rate henceforth will be on an open
enrollment basis for all eligible customers, with an initial maximum
participation level of 100,000 customers subject to revision and adjustment as
set forth below. If and when CAP Rate enrollment reaches the 80,000 customer
mark, the Joint Petitioners agree to review and, as necessary, to propose
adjustments to program parameters with the dual intent of (1) maintaining total
CAP Rate program costs at or below the $50.0 million level and (2) ensuring that
all eligible customers are able to participate in the program. In the event that
such adjustments are not made to program parameters such that program costs are
maintained at or below the $50.0 million level and in the event that CAP rate
enrollment exceeds 90,000 customers, the costs
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recovered under the universal service mechanism will be increased to ensure
the recovery by PECO of total annual CAP Rate costs in excess of $50.0 million.
To determine the recoverable amount, prior to January 1, 2002, PECO will be
entitled to a $650 cost credit for each CAP Rate customer, with proportional
credit being given for a partial year's participation. The $650 cost credit
covers administration, credit and collection costs, CAP Rate revenue shortfalls
and LIURP costs. If the CAP Rate costs are reduced to $50.0 million or less, as
a result of program adjustments, the $650 annual cost credit will be adjusted to
reflect actual costs incurred. Absent earlier adjustment, on January 1, 2002,
the costs recovered under the universal service cost recovery mechanism will be
increased to ensure the recovery by PECO of total annual CAP Rate costs in
excess of $50.0 million, including administration, credit and collection costs,
CAP Rate revenue shortfalls and LIURP costs. PECO will direct $5.6 million of
the annual Universal Service budget of up to $50 million to LIURP funding, and
will make LIURP program changes consistent with the PECO Restructuring Orders.
35. The Joint Petitioners agree to establish a LIURP Advisory Committee
made up of representatives of Joint Petitioners and other interested consumer
and public representatives. The Committee will periodically review PECO's LIURP
program design and delivery, and PECO will consider all Committee
recommendations. The Committee shall meet as needed, but not less than twice a
year, and PECO will prepare written minutes of each meeting and shall distribute
those minutes to all Committee members within thirty days following each
meeting.
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PECO, with the help of the LIURP Advisory Committee, shall design and
implement the following LIURP program changes:
(a) Eligibility for LIURP services will be expanded to those customers
with usage over 110% of class average. PECO and the LIURP Advisor
Committee will determine what services and the priority of such
services to be delivered to customers with usage below 800kWh per
month.
(b) the program should audit for all electric energy usage in a dwelling
that could be reduced cost-effectively.
(c) the list of eligible measures will be expanded to include, when
cost-effective, refrigerator replacement and air conditioner
replacement, and to include energy education.
(d) a renewable energy pilot consisting of a solar hot water heater
program in 1999 and 2000, a photovoltaic program involving 50
installations in 1999 and 100 installations in 2000. The total 1999
budget would be $525,000 and the total 2000 budget would be $787,500.
(e) The cause of high customer non-participation levels in the "Could Not
Contact Customer" category should be determined and steps taken to
reduce this loss of participation.
PECO shall contract out the delivery of LIURP services to qualified
organizations including community based organizations experienced in low-income
energy conservation and other services. Such organizations will be selected by
means of an open, competitive process. Any Advisory Committee member whose
organization has a potential direct
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interest in providing any LIURP service must (1) disclose that interest at
the time the member joins the Committee, and at any time the Committee addresses
the LIURP service and (2) refrain from any Committee vote on such LIURP service.
PECO, its subsidiaries and/or its affiliates shall not be eligible to deliver
LIURP services.
36. The Joint Petitioners agree to review and, as appropriate, to recommend
changes to Commission regulations and procedures in order to facilitate the
efficient and full recovery of revenues from customers, while at the same time
protecting customers. Specific items that may be addressed include those
regarding the payments of outstanding balances, winter termination procedures,
medical certification, termination of service pending the resolution of a
dispute, and payment arrangements.
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K. Consumer Education and Information
37. In accordance with the PECO Restructuring Orders, the Joint Petitioners
will cooperate with one another and share control in developing and proposing,
for Commission approval, the local component of the Consumer Education Program
for PECO. Moreover, PECO specifically agrees, as part of the settlement, to
fully comply and cooperate with all Commission-directed Consumer Education
efforts and orders, including the PECO Restructuring Order and the Commission's
March 30, 1998 Secretarial Letter. The total costs of PECO's Consumer Education
Program, including its participation in the Statewide Program, shall not exceed
$24.0 million, which amount represents $4,183,365 as allowed expenses incurred
during 1997 and up to $19,816,635 in customer education expenses for 1998-2000.
L. Provider of Last Resort and Generation Supply Obligations And
Opportunities
38. PECO agrees that, for the duration of the CTC/ITC recovery period, it
will serve as the provider of last resort for all retail electric customers in
its service territory that do not choose or cannot choose to purchase power from
alternative suppliers, subject to the following terms, conditions and
qualifications:
a. On January 1, 2001, 20% of all of PECO's residential customers --
determined by random selection, including low-income and inability-to-pay
customers, and without regard to whether such customers are obtaining generation
service from an EGS --
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shall be assigned to a provider of last resort-default supplier other than PECO
that will be selected on the basis of a Commission-approved energy and capacity
market price bidding process. This service shall be referred to as Competitive
Default Service ("CDS").
b. For purposes of this bidding process, all of the customers selected
shall constitute a single bidding block. To qualify for the CDS bidding process
an EGS must, among other Commission-approved requirements, agree to provide in
2001 at least 2.0% of its offered energy supply for CDS service from renewable
resources of solar, wind, sustainable biomass (including landfill gas but
excluding incineration of Municipal Solid Waste), geothermal or ocean power. The
renewable energy increment shall increase by annual increments of 0.5%
thereafter. The requirement to include these levels of renewable energy in the
resource mix may be lowered by the Commission if the cost of the power from the
renewable energy sources increases the cost of the entire block by more than 2%
over what the cost would be without the renewable energy sources.
c. Terms and conditions of CDS shall be established, maintained, and
modified by the Commission. Competitive Default Service bids will require a term
that will be established by the Commission. Bids will provide a fixed rate for
the term, unless an alternative rate structure is approved by the Commission.
Any bid that exceeds the generation rate cap will be rejected. PECO EDC or
divisions or PECO divisional or affiliated EGSs may not bid (either directly or
as a partner or participant in any business combination with a bidder) on CDS
service. Any non-affiliated EGS or consortium of EGSs that are licensed by the
Commission and that meet applicable terms and conditions and standards for CDS
service could bid to provide CDS service. A customer assigned to CDS
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retains the right to elect a competitive EGS or return to PECO default
provider of last resort service at any time at no charge. If a consumer returns
to CDS for any reason, the consumer will receive service from its CDS on the
same terms and conditions and at the same rate available to other CDS customers.
The CDS provider will, at the customer's option, provide a single bill, subject
to the same standards for EGS consolidated billing as provided in Appendix C and
as established by the Commission. The CDS will include all customer care
functions, including processing customer accounts in accordance with all
applicable regulations (Chapter 56). Chapter 56 billing and collection costs,
uncollectible expense, and universal service costs shall be unbundled by PECO as
set forth in Appendix J. Revenues equal to the amount of these unbundled costs
shall be portable with customers randomly assigned to the CDS and shall be
provided to the CDS provider to the extent it is providing services funded by
these unbundled costs. The CDS will be rebid annually, unless an alternative
bidding term is approved by the Commission. If, 30 days prior to the annual bid
the number of residential customers served by the CDS has fallen below 17%, a
further random selection of customers shall be assigned to CDS service to
restore the number of customers for the 20% level. The further random selection
shall be chosen from the customers (not already assigned to CDS service) served
by EGSs other than PECO. The Commission will develop qualifications for an EGS
to bid on CDS, including credit worthiness and increased bond amount.
d. The EGS selected as the CDS provider will assume all responsibilities
and obligations associated with provider of last resort service that are
specified by the Commission. By January 1, 1999, the Commission will issue final
standards for PECO
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governing the responsibilities and obligations of the competitively determined
provider of last resort in PECO service territory.
e. PECO's distribution company shall satisfy its obligation as provider
of last resort by purchasing required amounts of energy and capacity at
wholesale from other generation suppliers including, in its sole discretion, its
affiliated generation entity, and reselling that energy and capacity. On and
after January 1, 2001 PECO as provider of last resort-default supplier will
price its service to residential customers at its sole discretion with the
following limitations. PECO will establish a single rate established for each
rate schedule. The rate will be:
(i) no less than (1) the price charged by the CDS selected to be the
alternative provider of last resort-default supplier in the 20% bid;
and
(ii) no higher than (2) 111% of the market price of energy and capacity
(determined by rate class) calculated as follows: energy will be at
the average PECO-PJM market clearing price as posted on the PJM
website for the prior 12 months (adjusted for line losses, on/off peak
usage and GRT); capacity shall be at the average PJM penalty price for
capacity for the prior 12 months (adjusted for line losses, reserve
margin, load factor and GRT). Such annualized rates will be computed
monthly.
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If (i) is higher than (ii) above, PECO will price its service at (i) above
(the competitive PLR winning bid). In no event will the price exceed the
shopping credit. Residential customers that remain with PECO provider of last
resort default service will pay the annualized rate as set by PECO during
January of each year. Residential customers returning to PECO provider of last
resort service who agree to take such service for a minimum of 12 months will
pay the annualized rate as set by PECO during the month they return. Returning
residential customers shall also have the option of receiving service on a
monthly published generation market rate basis without the benefit of the
generation rate cap, but such rate may not be less than the prices charged by
the CDS.
PECO as provider of last resort-default supplier will price its service to
industrial and commercial customers at tariffed rates or at special contract
rates as set forth in Appendix A.
f. The Joint Petitioners agree that through December 31, 2010, customers
may choose to purchase power from alternative suppliers and later return to take
generation service from PECO's EDC distribution company, or to their assigned
provider of last resort default supplier.
g. This Settlement does not address, and the Joint Petitioners make no
commitment regarding, PECO's obligation to serve after December 31, 2010, or the
continuance or discontinuance of the right to choose an alternative supplier and
later return after December 31, 2010.
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M. Market Share Thresholds
39. The following are the market share thresholds for random assignment of
non-shopping customers to alternative EGSs and PECO-affiliated or divisional
EGSs:
a. If, on January 1, 2001, less than 35% of all PECO's residential and
commercial customers by class are obtaining generation service from an alternate
EGS or PECO-Supplier affiliate or division (including those customers assigned
to the CDS pursuant to the competitive bid under Part L above), then the number
of remaining customers, necessary to reach the 35% target, determined by random
selection, by class, shall be assigned an EGS on the basis of a one-time,
Commission-approved process in which PECO-affiliated EGSs may participate. No
such assignment shall be made until after all customers have been notified in
advance of this process and have been given the option to remain with PECO
default service or select an EGS of their choice. The 35% will be determined for
residential and small commercial customers on the basis of the number of
customers and large commercial customer classes on the basis of peak load. For
purposes of applying this provision, the customers assigned to a provider of
last resort other than PECO pursuant to Part L above shall be counted as
customers receiving service from an EGS.
b. If, on January 1, 2003, less than 50% of all PECO's
residential and commercial customers are obtaining generation service from an
alternate EGS or PECO-supplier affiliate or division (including those customers
assigned to the CDS pursuant to the competitive bid under Part L above and those
customers assigned to an EGS under paragraph 39(a) above pertaining to market
share thresholds), then the number of remaining
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customers necessary to reach the 50% target, determined by random selection,
by class, shall be assigned to an EGS on the basis of a one-time,
Commission-approved process in which PECO-affiliated EGSs may participate. No
such assignment shall be made until after all customers have been notified in
advance of this process and have been given the option to remain with PECO
default service or select an EGS of their choice. The 50% will be determined for
residential and small commercial customers on the basis of the number of
customers and large commercial customer classes on the basis of peak load. For
purposes of applying this provision, the customers assigned to a provider of
last resort or EGS other than PECO pursuant to Part L above shall be counted as
customers receiving service from an EGS.
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N. Code of Conduct
39a. PECO further agrees that it will be subject to and governed by the
Code of Conduct set forth in Appendix H to this Joint Petition. The Code of
Conduct set forth in Appendix H shall remain applicable to PECO until the later
of January 1, 2001, or the date when the statewide generic code of conduct
established by the Commission in its rulemaking becomes effective.
O. Renewable Energy Development
40. PECO hereby files for Commission approval Rate RS Tariff sheet attached
in Appendix A to allow all customers to install and operate renewable energy
generation, including appropriate provisions for self-generation and net
metering. Renewable energy installations include solar, wind, biomass, and
methane field generation.
The interconnection requirements for the inverter portion of photovoltaic
systems, as presently set forth in the document entitled "Requirements for
Parallel Operation of Non-Utility Generation" (the "Grey Book"), shall be
expanded to incorporate, as appropriate, IEEE Standard 929-1988 and UL
Publication 1741 ("Power Conditioning Units for Use in Residential Photovoltaic
Power Systems"). PECO further agrees to continue good faith technical
discussions with the Environmentalists' members to determine what changes, if
any, should be made to the interconnection requirements and process under Rate
R-S and to promptly seek Commission approval to implement any changes mutually
agreed upon.
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The Joint Petitioners also agree that the current "engineering" review of
the inverters in new photovoltaic systems will be replaced with a simplified
inspection designed to confirm that the systems meet IEEE and UL standards. PECO
will continue to review the other auxiliary equipment associated with
photovoltaic installations to ensure compliance with the Grey Book requirements.
PECO will agree to reduce its processing fee for Rate R-S applications to
$300 for non-photovoltaic installations and to $100 for photovoltaic
installations. For multiple installations of the same photovoltaic equipment
covering contiguous properties, and inspected in the same time frame, the
application and processing fee will be reduced to $50 per installation for the
second and subsequent installations. PECO further agrees that it will not charge
for the additional distribution expenses incurred, up to a maximum of $1,000, to
accept a new Rate R-S installation. Customers will bear the responsibility of
any cost in excess of $1,000.
P. Sustainable Development Fund
40a. PECO will also establish a sustainable energy and economic
development fund which shall be funded from the 2.98 cents per kWh transmission
and distribution rate at .01 cents per kWh (less applicable gross receipts tax)
on all power sold for all customers beginning on January 1, 1999 ending on June
30, 2005 or until the Commission establishes new distribution rates, whichever
is later. The .01 cent per kWh shall not automatically be
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considered a cost of service element upon expiration of the transmission
and distribution rate cap on June 30, 2005.
50% of these funds shall be administered by the Delaware Valley Community
Reinvestment Fund overseen by a seven-member board of directors to be nominated
by the Joint Petitioners and approved by the Commission. This portion of the
funds shall be used to promote the development and use of renewable energy and
clean energy technologies, energy conservation and efficiency, and economic
developments projects which promote clean energy.
The remaining 50% of these funds shall be allocated to the Delaware Valley
Regional Economic Development Corporation. This portion of the funds shall be
used for economic development projects which have a job impact.
PECO agrees to include bill inserts twice a year describing the activities
of these funds. PECO will have final review and approval of the content of the
messages and will be reimbursed from the funds for its incremental costs related
to the bill inserts.
Q. Resolution of Other Issues
41. Any issue not specifically addressed in this settlement shall be
treated and resolved in accordance with the resolution of that issue adopted by
the Commission at this docket in the Restructuring Order entered December 23,
1997, the Reconsideration Order entered January 16, 1998, the Compliance Order
entered February 5, 1998 and the Second Compliance Order entered February 26,
1998.
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R. Promotion of Settlement
The Joint Petitioners agree that they shall make all reasonable and good
faith efforts necessary (a) to obtain final approval of this settlement by the
Commission and (b) to insure full implementation and enforcement of all of the
terms and conditions set forth in this settlement, including those providing for
an orderly transition from the current regulated structure to a structure under
which retail customers will have direct access to a competitive market for the
generation of electricity and a fair and reasonable recovery of PECO's
transition and stranded costs created by this transition to a competitive
market.
S. Withdrawal Of Pending State And Federal Court Cases
42. Within ten days of the execution of this Joint Petition by all of the
Joint Petitioners, the Petitioners in the following cases with the concurrence
and support of the Commission and other parties and intervenors that are Joint
Petitioners hereto, shall petition the Commonwealth Court to continue generally
further consideration of their respective appellate actions:
- -------------------------------------------------------------------------------
No. 269 M.D. 1997 CEPA Original Jurisdiction Action
- -------------------------------------------------------------------------------
No. 1600 C.D. 1997 CEPA Securitization Appeal
- -------------------------------------------------------------------------------
No. 1613 C.D. 1997 Sen Fumo Securitization Appeal
- -------------------------------------------------------------------------------
No. 1622 C.D. 1997 Environmentalists Securitization Appeal
- -------------------------------------------------------------------------------
No. 1633 C.D. 1997 OCA Securitization Appeal
- -------------------------------------------------------------------------------
No. 264 C.D. 1998 CEPA Restructuring Order and
Reconsideration Order Appeal
- -------------------------------------------------------------------------------
42
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- -------------------------------------------------------------------------------
No. 382 C.D. 1998 Conectiv Restructuring Order and
Reconsideration Order Appeal
- -------------------------------------------------------------------------------
No. 398 C.D. 1998 Enron Restructuring Order and
Reconsideration Order Appeal
- -------------------------------------------------------------------------------
No. 445 C.D. 1998 NEV Restructuring Order and
Reconsideration Order Appeal
- -------------------------------------------------------------------------------
No. 394 C.D. 1998 OCA Reconsideration Order Appeal
- -------------------------------------------------------------------------------
No. 395 C.D. 1998 OCA Restructuring Order Appeal
- -------------------------------------------------------------------------------
No. 245 C.D. 1998 PECO Restructuring Order Appeal
- -------------------------------------------------------------------------------
No. 246 C.D. 1998 PECO Reconsideration Order Appeal
- -------------------------------------------------------------------------------
No. 706 C.D. 1998 PECO Compliance Filing Order Appeal
- -------------------------------------------------------------------------------
No. 898 C.D. 1998 PECO Second Compliance Filing Order
Appeal
- -------------------------------------------------------------------------------
(The foregoing are hereafter referred to collectively as the "Commonwealth Court
Actions.")
Within ten days of the execution of this Joint Petition by all of the Joint
Petitioners, PECO shall petition the United States District Court to continue
generally its action filed at Civil Docket No. 98-CV-335.
In addition, within ten days after the Commission's approval of this
Joint Petition becomes final and no longer subject to administrative or judicial
challenge, PECO shall withdraw with prejudice (a) all of its pending appeals
before Commonwealth Court and (b) its pending civil action before the US.
District Court, and the other Joint Petitioners shall similarly withdraw with
prejudice all of their Commonwealth Court Actions. The Joint Petitioners agree
that they shall not initiate or join in any court challenge to the
constitutionality or legality of the Electric Competition Act such that would
prevent or preclude implementation of this settlement or any of its terms,
PECO's securitization of stranded costs, this Joint Petition for Settlement or
any order approving this Joint Petition, except as provided in paragraph 44
provided that nothing in this Joint Petition shall prevent
43
<PAGE>
any Joint Petitioner that is a party to the restructuring proceedings of
another utility from initiating any court challenge, including a challenge to
the constitutionality or legality of the Electric Competition Act, arising from
such proceedings.
T. Effectiveness, Duration And Enforcement Of Settlement
43. The settlement proposed herein will go into effect upon the
Commission's issuance of a final order approving this Joint Petition and all the
settlement terms and conditions without modification. The terms of this
settlement shall be implemented and enforceable notwithstanding the pendency of
a legal challenge to the Commission's approval of this Joint Petition or to
actions taken by another regulatory agency or Court, unless such implementation
and enforcement is stayed or enjoined by the Commission, another regulatory
agency, or a Court having jurisdiction over the matter.
The obligations under this settlement that apply for a specific term set
forth herein shall expire automatically in accordance with the term specified,
and shall require no further action for their expiration. This settlement,
including all of the terms and conditions set forth above, shall expire on
December 31, 2010.
The Joint Petitioners may enforce this Joint Petition through any
appropriate action before the Commission or through any other available remedy.
Joint Petitioners shall consider any final Commission order related to the
enforcement or interpretation of this Joint Petition as an appealable order to
Commonwealth Court. This shall be in addition to any other available remedy at
law and equity.
44
<PAGE>
If a court grants a legal challenge to the Commission's approval of this
Joint Petition and settlement and issues a final non-appealable order which
prevents or precludes implementation of any material term of the settlement, or
if some other legal bar has the same effect, then this settlement is voidable,
upon written notice by any Joint Petitioner.
U. Complete Agreement; No Alterations Or Modifications
44. This settlement resolves, with prejudice, all of the issues
specifically addressed herein and precludes the Joint Petitioners from asserting
contrary positions with respect to any such issue during subsequent litigation
provided, however, that this settlement is made without admission against or
prejudice to any factual or legal positions which any of the Joint Petitioners
may assert (i) in the event that the Commission does not issue a final,
non-appealable Order approving this settlement without modification; or (ii) in
other Pennsylvania utilities' Restructuring proceedings before the Commission
under Section 2806(D) of the Electric Competition Act and related appeals; or
(iii) other proceedings before the Commission or other forums as long as such
positions are not in derogation of this settlement. The Joint Petitioners agree
that this Settlement shall not constitute or be cited as controlling precedent
in any other proceedings, including Pennsylvania utilities' restructuring
proceedings before the Commission under Section 2806(D). This settlement is
determinative and conclusive of all of the issues addressed herein and
constitutes a final adjudication as to the Joint Petitioners of the matters
thereof.
45
<PAGE>
In addition, this settlement is expressly conditioned upon the Commission's
approval of all of the specific terms and conditions contained herein without
modification. If the Commission should fail to grant such approval, or should
modify any of the terms and conditions herein, this settlement will terminate
and be of no force and effect. The Joint Petitioners will make best efforts to
support this settlement and to secure its approval by the Commission.
It is expressly understood and agreed that this settlement constitutes a
negotiated resolution solely of PECO's restructuring proceedings at Docket Nos.
R-00973877, R-00973953 and P-00971265 and the related court appeals and other
actions listed in Part S herein.
IV. PUBLIC INTEREST CONSIDERATIONS
The Joint Petitioners submit that this settlement is in the public interest
and should be approved in full for the following reasons:
45. Customers Will Receive Rate Reductions. The settlement enables all
customers to receive significant guaranteed rate reductions.
45a. Competition will be promoted. Customers will receive substantial
shopping credits that will allow shopping customers to achieve significant bill
savings in addition to the guaranteed rate cut and that will promote
competition. Moreover, the size of the shopping credit and other provisions of
this settlement will insure that a fully competitive market for electricity will
be created and functioning by January 1, 1999.
46
<PAGE>
46. Transmission And Distribution Charges Will Be Capped For An Additional
Four Years. The settlement provides that the cap on PECO's transmission and
distribution charges, which otherwise would expire on June 30, 2001, will be
extended until June 30, 2005.
47. Generation Rates Will Be Capped For An Additional Five Years. The
settlement provides that a cap on PECO's generation rates, which otherwise would
expire on December 31, 2005, will be in place, at somewhat higher levels than
provided in the Electric Competition Act (66 Pa. C.S. ss.2804(4)), until
December 31, 2010. In addition to the guaranteed rate cuts, non-shopping
customers shall be served by providers of last resort or default service that
will offer electric service at market-determined prices on January 1, 2001.
48. Universal Service Coverage Will Be Expanded. The settlement builds upon
PECO's CAP Rate pilot and provides for open enrollment for eligible customers in
that program, subject to an initial maximum participation level of 100,000
customers which will be reviewed when it is reached. As such, PECO's existing
customer assistance programs could more than double their enrollment in the next
several years. In addition, the budget for the Low-Income Usage Reduction
Program is doubled which will promote energy conservation and affordable
service.
49. Economic Development and the Environment Will Benefit. Vigorous
competition unleashed by the shopping credits and the guaranteed rate reductions
will be of benefit to business and industry as well as to residential consumers.
The settlement also
47
<PAGE>
provides for a sustainable development fund, an expanded Rate RS, and a
renewable pilot program.
50. The Securitization Of Stranded Assets Will Be Facilitated. The
settlement provides for the Commission to issue a Qualified Rate Order
authorizing PECO to securitize up to $4.0 billion of its recoverable stranded
assets and costs.
51. Substantial Litigation And Associated Costs Will Be Avoided. The
settlement amicably resolves a number of important and contentious issues raised
in the proceeding and, at the same time, provides for the withdrawal of various
actions currently pending before state and federal courts. The administrative
and appellate burden and costs to litigate these matters, including likely
future appeals, to conclusion would be substantial.
52. The Settlement Is Consistent With Commission Policies Promoting
Negotiated Settlements. The Joint Petitioners arrived at the settlement terms
after conducting extensive discovery, submitting comprehensive testimony and
engaging in in-depth discussions. The settlement terms and conditions constitute
a carefully crafted package representing reasonable negotiated compromises on
the issues addressed herein. Thus, this settlement is consistent with the
Commission's rules and practices encouraging negotiated settlements (see 52 Pa.
Code ss.5.231, 69.391, 69.401).
48
<PAGE>
V. CONCLUSION
WHEREFORE, the Joint Petitioners, intending to be legally bound,
respectfully request that the Commission: (1) approve the settlement terms and
conditions set forth in the Joint Petition without modification; (2) amend the
Commission's Restructuring Order, Reconsideration Order, Compliance Order and
Second Compliance Order as necessary to implement the proposed settlement; (3)
approve the Tariff Supplements attached as Appendix A to become effective
pursuant to the terms set forth therein; (4) issue the Qualified Rate Order set
forth in Appendix D hereto; and (5) approve PECO's transfer of generating assets
as set forth herein.
49
<PAGE>
The undersigned counsel or representatives certify that they have full
authority to enter into this settlement and to act on behalf of their respective
parties, and each is executing this agreement as a duly authorized
representative of such party.
- ----------------------------------------------- ---------------
Paul R. Bonney, Esquire April 29, 1998
Counsel for PECO Energy Company
- ----------------------------------------------- ---------------
Christopher B. Craig, Esquire April 29, 1998
Counsel for Senator Vincent J. Fumo
- ----------------------------------------------- ---------------
Irwin A. Popowsky, Esquire April 29, 1998
Counsel for Office of Consumer Advocate
- ----------------------------------------------- ---------------
Bernard Ryan, Esquire April 29, 1998
Counsel for Office of Small Business Advocate
- ----------------------------------------------- ---------------
Kenneth L. Mickens, Esquire April 29, 1998
Counsel for Office of Trial Staff
- ----------------------------------------------- ---------------
David Kleppinger, Esquire April 29, 1998
Counsel for Philadelphia Area
Industrial Energy Users Group
- ----------------------------------------------- ---------------
Lance S. Haver April 29, 1998
50
<PAGE>
- ----------------------------------------------- ---------------
Steven P. Hershey, Esquire April 29, 1998
Philip A. Bertocci, Esquire
Counsel for CEPA
- ----------------------------------------------- ---------------
Roger Clark, Esquire April 29, 1998
Counsel for Environmentalists
- ----------------------------------------------- ---------------
Paul L. Zeigler, Esquire April 29, 1998
Counsel for Delaware Valley Energy Consortium
- ----------------------------------------------- ---------------
Kenneth Zielonis, Esquire April 29, 1998
Counsel for Pennsylvania Retailers' Association
- ----------------------------------------------- ---------------
Audrey Van Dyke, Esquire April 29, 1998
Counsel for U.S. Department of the Navy
- ----------------------------------------------- ---------------
Joe Inabinet April 29, 1998
For Action Alliance of Senior
Citizens of Greater Philadelphia
- ----------------------------------------------- ---------------
John Earwood April 29, 1998
For Department of Aging
- ----------------------------------------------- ---------------
Kenneth G. Hurwitz, Esquire April 29, 1998
Counsel for Southeastern Pennsylvania
Transportation Authority
51
<PAGE>
- ----------------------------------------------- ---------------
Daniel Clearfield, Esquire April 29, 1998
Counsel for Enron Power Marketing, Inc.
- ----------------------------------------------- ---------------
Joseph A. Dworetzky, Esquire April 29, 1998
Counsel for NEV, East LLC
- ----------------------------------------------- ---------------
Craig A. Doll, Esquire April 29, 1998
Counsel for Conectiv Energy
- ----------------------------------------------- ---------------
William T. Hawke, Esquire April 29, 1998
Counsel for Mid-Atlantic Power
Supply Association
- ----------------------------------------------- ---------------
Albert Benincasa April 29, 1998
For Skipping Stone
- ----------------------------------------------- ---------------
Douglas F. John, Esquire April 29, 1998
NorAm Energy Management, Inc. and
Electric Clearinghouse, Inc.
- ----------------------------------------------- ---------------
Usher Fogel, Esquire April 29, 1998
Counsel for Pennsylvania Petroleum Association
and Pennsylvania Association of Plumbing,
Heating, Cooling Contractors, Inc.
52
<PAGE>
- ----------------------------------------------- ---------------
Otto F. Hofmann, Esquire April 29, 1998
Counsel for Pennsylvania Rural
Electric Association
53
<PAGE>
The undersigned counsel or representatives certify that they have full
authority to enter into this settlement and to act on behalf of their respective
parties, and each is executing this agreement as a duly authorized
representative of such party.
- ----------------------------------------------- ---------------
April 29, 1998
- ----------------------------------------------- ---------------
April 29, 1998
- ----------------------------------------------- ---------------
April 29, 1998
- ----------------------------------------------- ---------------
April 29, 1998
- ----------------------------------------------- ---------------
April 29, 1998
54
<PAGE>
The undersigned counsel certify that they have full authority to act on
behalf of their respective parties in this proceeding and they do not object to,
and will abide by, the terms of this settlement of the PECO restructuring
proceedings and related appeals.
- ----------------------------------------------- ---------------
Paul E. Nordstrom, Esquire April 29, 1998
Counsel for Allegheny Power System, Inc.
- ----------------------------------------------- ---------------
Terrance J. Fitzpatrick, Esquire April 29, 1998
Counsel for GPU Energy, Inc.
- ----------------------------------------------- ---------------
Paul E. Russell, Esquire April 29, 1998
Counsel for Pennsylvania Power &
Light Co.
55
<PAGE>
The undersigned counsel certify that they have full authority to act on
behalf of their respective parties in this proceeding and they do not object to,
and will abide by, the terms of this settlement of the PECO restructuring
proceedings and related appeals.
- ----------------------------------------------- ---------------
April 29, 1998
- ----------------------------------------------- ---------------
April 29, 1998
- ----------------------------------------------- ---------------
April 29, 1998
- ----------------------------------------------- ---------------
April 29, 1998
- ----------------------------------------------- ---------------
April 29, 1998
56
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement of PECO Energy
Transition Trust (PETT) on Amendment No. 1 to Form S-3 (File No. 333-58055) of
our report dated June 26, 1998 on our audit of the financial statements of PETT
as of June 26, 1998 and for the period June 23, 1998 (date of trust inception)
to June 26, 1998.
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
September 17, 1998
PENNSYLVANIA
PUBLIC UTILITY COMMISSION
Harrisburg, PA 17105-3265
Public Meeting held May 14, 1998
Commissioners Present:
John M. Quain, Chairman, Statement attached
Robert K. Bloom, Vice Chairman
John Hanger Statement attached
David W. Rolka
Nora Mead Brownell
Application of PECO Energy Company for Docket Nos. R-000973953
Approval of its Restructuring Plan Under Section and P-0971265
2806 of the Public Utility Code, et al.
F I N A L O R D E R
BY THE COMMISSION:
On April 29, 1998, PECO Energy Company ("PECO" or the "Company"); Senator
Vincent J. Fumo; the Office of Consumer Advocate ("OCA"); the Office of Small
Business Advocate ("OSBA"); the Office of Trial Staff ("OTS"); the Philadelphia
Area Industrial Energy Users Group ("PAIEUG"); Lance S. Haver; the Consumers
Education and Protective Association, et al. ("CEPA") (which includes the
Consumers Education and Protective Association, the Tenant Action Group, ACORN
and John W. Long, Jr.); Community Legal Services; the Environmentalists; the
Delaware Valley Energy Consortium; Pennsylvania Retailers' Association; U.S.
Department of the Navy; Action Alliance of Senior Citizens of Greater
Philadelphia; Pennsylvania Department of Aging; Enron Power Marketing, Inc.
("Enron"); NEV East LLC ("NEV"); Conectiv Energy;
1
<PAGE>
Mid-Atlantic Power Supply Assoc. ("MAPSA",); Skipping Stone; Pennsylvania
Petroleum Association and Pennsylvania Association of Plumbing, Heating, Cooling
Contractors, Inc.; Allegheny Power System, Inc. ("APS"); GPU Energy Inc.
("GPU"); PP&L, Inc. ("PP&L"); Pennsylvania Rural Electric Assoc. ("PREA") (all
such parties collectively referred to as the "Joint Petitioners") submitted a
Joint Petition for Full Settlement of PECO Energy Company's Proposed
Restructuring Plan and Application for a Qualified Rate Order and Application
for Transfer of Generation Assets ("Joint Petition").
The proposed terms and conditions of the Joint Petition represent a
comprehensive settlement which resolves all issues on appeal before Commonwealth
Court and all issues before the U.S. District Court arising from challenges by
the Joint Petitioners to the Commission's final order, reconsideration order and
compliance orders regarding PECO's Application for Approval of its Restructuring
Plan Under Section 2806 of the Public Utility Code(1).
The Joint Petitioners aver that this comprehensive settlement is in the
public interest and, therefore, request that this Commission: (1) approve
without modification the proposed settlement as set forth in the Joint Petition;
(2) amend our final order, reconsideration order and compliance filing orders as
necessary to implement the full settlement; (3) approve the tariff supplements
necessary to implement the proposed
- ----------------
(1) As noted in the certificate of service, copies of the joint Petition and
appendices were served by PECO on all parties to the proceeding by overnight
mail or hand delivery. In addition,
2
<PAGE>
settlement; (4) issue a Qualified Rate Order authorizing PECO to securitize up
to $4.0 billion of stranded assets and costs as proposed in the full
settlement; and (5) approve PECO's transfer of generation assets. The Joint
Petitioners recognized, however, that pursuant to the provisions of Section
703(g) of the Public Utility Code, the Commission is obligated to provide notice
of and opportunity to be heard before it may amend a prior order. In our
tentative order approving the proposed settlement issued April 30, 1998, we
provided for a comment period which closed on May 12, 1998.
In the proposed settlement, all PECO customers will receive a guaranteed 8%
rate reduction effective January 1, 1999, the start date for retail electric
generation competition in PECO's service territory through December 31, 1999,
and 6% rate reduction from January to December 31, 2000. In addition to the
guaranteed rate decreases of 8% and 6%, customers shall receive a system-average
shopping credit of 4.46 cents per KWH on January 1, 1999. Customers that elect
to shop for generation shall receive total rate reductions in 1999 and 2000
equal to the above referenced rate decreases plus savings produced by the
difference between their generation purchase price and their shopping credit.
Moreover, given the 4.46 cents per KWH shopping credit for the years 1999 and
2000 called for in the proposed settlement as well as other specific components
of the proposed settlement, the Joint Petitioners expect the development of a
vibrant competitive market with many alternative electric generation suppliers.
- --------------------------------------------------------------------------------
PECO provided written notice of the proposed settlement by letter to its
customers, posted notices in its office and on its internet web page, and
provided notice by news release.
3
<PAGE>
In addition, the settlement terms and conditions provide that PECO will (1)
recover a substantially smaller amount of stranded cost recovery than it claimed
before the Commission; (2) transfer its generation assets and liabilities and
wholesale power contracts to separate corporate affiliate subject to competitive
safeguards to insure fair dealing; (3) expand its current universal service
programs; (4) accelerate the phase-in to customer choice for al] customer
classes; (5) educate consumers about restructuring; (6) facilitate funding of
sustainable energy and economic development; (7) encourage small renewable
energy technologies; and (8) withdraw all of its appeals before Commonwealth
Court and its civil complaint before the U.S. District Court challenging the
Commission's restructuring orders at Docket No. R-00973953.
The Joint Petitioners, in turn, agree to resolve all objections to PECO's
Restructuring Plan and to withdraw (1)all cases pending before the Commonwealth
Court which challenge the constitutionality of the Electric Competition Act and
the Commission's May 22, 1997 Order at Docket No. R-00973877 in PECO's
securitization proceeding and (2) all appeals pending before Commonwealth Court
which challenge the Commission's restructuring orders at Docket No. R-00913953,
provided that the Joint Petitioners are not barred from raising any factual,
legal or contrary positions in other proceedings as long as such positions are
not in derogation of this settlement.
Comments
We received a number of timely comments as discussed below.
4
<PAGE>
Indianapolis Power & Light Company (IPALCO), a party to this proceeding
which was not a signatory to this settlement, filed an objection to the
settlement, reiterating its position, as advanced before us and before the
Commonwealth Court of Pennsylvania that stranded cost recovery is
unconstitutional. This position was decisively rejected by the Court in
Indianapolis Power & Light Co. v. Pa. P.U.C., -- A.2d --, 1998 Pa. Commw.
LEXIS 328 (May 7, 1998) and we therefore dismiss IPALCO's objections on the
basis of our earlier orders in this case and on the basis of the well reasoned
opinion of the Commonwealth Court of Pennsylvania.
The Office of Consumer Advocate (OCA), a party to this proceeding and
signatory to the settlement, filed four pages of comments supporting the
settlement and urging the Commission to approve it. It urges the Commission to
closely monitor the Philadelphia market to ensure that no "redlining" practices
arise by electric generation companies to the detriment of consumers and also
urges the Commission to continue the consumer protections and information
requirements it has already established. OCA also indicates that it has a
continuing concern that competitive default supplier (CDS) service must be
sufficiently attractive to produce truly competitive bids from a number of
suppliers, since the bid price will serve not only as the price at which CDS
customers are served, but also as the floor at which PECO can provide default
service to its own residential customers. OCA states that it intends to take an
active role in Commission proceedings dealing with CDS issues.
5
<PAGE>
PECO filed comments by letter indicating that a technical review of the
appendices it conducted with settlement co-signatories indicated the need for
some minor technical modifications and corrections to proposed tariff language,
rate summary may sheets and proof of revenues which were agreed to by all
settlement participants It filed revised appendices on May 12, 1998. The rate
summary sheets and proof of revenues reflect a slightly different method of
allocating the settlement-based shopping credit among the customer rate classes
on a proportionally consistent basis. We find that the changes are in the public
interest and in accordance with the provisions of the joint settlement and
Chapter 28. We have reviewed these technical changes (including the proposed
tariff sheets) and hereby approve them.(2) PECO also points out a deficiency
with the ordering paragraph in our tentative order regarding the irrevocability
of the QRO provisions. The tentative order appeared to make a grant of
irrevocability which was overly broad. We have corrected the provision, which
now appears as paragraph 17.
We have also received comments from John M. Alvarez, Albert J. Paiste,
Lawrence G. Spielvogel and Storb Incorporated, none of whom were active parties
or filed briefs in the case before us. Messrs. Alvarez and Paiste and Storb
Incorporated generally ask us to deny PECO any stranded cost recovery, something
that we cannot do under the provisions of the Electric Competition Act. Mr.
Spielvogel objects to a variety of minor tariff issues, but does not identify
how the proposed tariff changes violate any
- -----------------
(2) The Commission, however, has jurisdiction to insure that the rates and
tariff sheets accurately implement the settlement in future years, and will
resolve any disputes that may arise regarding implementation of the settlement
terms.
6
<PAGE>
provision of the Public Utility Code or are not in the public interest. We shall
deny the relief sought by these commentors.
Lastly, on May 13, 1998, several of the joint petitioners(3) filed a
stipulation, for Commission approval, dealing with (1) line loss percentages
in PECO's Electric Generation Supplier Tariff; (2) timely provision of
information by PECO to facilitate Locational Marginal Pricing; and (3) tariff
language clarifying the present extent of competitive metering service, an
agreement to discuss systems, procedures and timelines to expand the extent of
competitive metering, and PECO's agreement to a "T&D flex down" information
filing requirement (set forth as Attachment A to the stipulation). Upon review
and consideration of the stipulation and its Attachment A, the Commission hereby
approves the stipulation as filed.
Conclusion
The proposed settlement set forth in the Joint Petition and its appendices
constitutes a comprehensive resolution of the broad array of issues raised by
PECO's restructuring plan under the Electric Competition Act. Consistent with
the fundamental goals of that historic legislation, the settlement provides for
an orderly transition from the current regulated electric utility structure for
generation to a structure under which retail customers will have direct access
to a competitive market for the generation of electricity; moreover, and also
consistent with the legislation, the settlement provides for a fair and
- --------------------------------------------------------------------------------
(3) The stipulation was filed by PECO, Conectiv, NEV, Enron and MAPSA.
7
<PAGE>
reasonable recovery of PECO's transition and stranded costs created by this
transition to a competitive market. In particular, the settlement contains the
following benefits:
o customers will receive a guaranteed rate decrease of 8% during 1999
and 6% during 2000;
o customers will receive a substantial shopping credit (4.46 cents/KWH
on during 1999 and 2000) that will allow shopping customers to achieve
significant bill savings in addition to the guaranteed rate cuts;
o the size of the shopping credit and other provisions of the settlement
will insure that a fully competitive market for electricity will be
created and functioning by January 1, 1999.
o transmission and distribution rates will be capped for an additional
four years (to June 30, 2005);
o the generation rate cap will be extended for an additional five years
(to December 31, 2010);
o provisions that provide for competitive metering, meter reading, and
billing and collection services;
o provisions for codes of conduct and competitive safeguards to insure
fair and non-discriminatory competition;
o universal service programs will be expanded, and economic development
and the environment will benefit;
8
<PAGE>
o substantial litigation and its associated costs and uncertainties will
be avoided (the settlement lists 15 Commonwealth Court actions and 1
Federal Court action to be withdrawn as a part of this proposed
settlement)
We recognize and appreciate the uncounted hours spent by the participants
in preparing this Joint Petition, which presents a negotiated resolution of
important and conflicting interests in a practical and enforceable manner. We
believe that this settlement represents a difficult, but important step in the
advancement of the economies of the greater Philadelphia area and the
Commonwealth, and an historic breakthrough in the creation of retail electric
competition in the Commonwealth. At the same time, the Joint Petition continues
necessary and important safeguards for utility customers which must be preserved
in the public interest.
Upon consideration of the proposed settlement and appendices, and the
comments thereto, we find that the proposed settlement is the public interest;
THEREFORE,
IT IS ORDERED:
1. That in consideration of and reliance upon the representations, mutual
promises and undertakings of the parties to this proposed settlement, including
the express agreement of each signatory to be legally bound by its terms and the
certification of each signatory that he or she has full authority to enter into
the settlement and to act on behalf of their respective parties, the terms of
the proposed full settlement set forth in the Joint Petition and its appendices,
including the technical revisions thereto filed on May 12, 1998 and stipulation
filed May 13, 1998, shall be and are hereby approved as to each and every one of
its terms and conditions and we hereby reconsider and amend our prior orders in
these proceedings as necessary to implement the terms of the full settlement.
Any issue not specifically addressed in the settlement shall be treated and
resolved in accordance with the resolution of that issue adopted by the
Commission at this docket in the Restructuring Order entered December 23, ]997,
the Reconsideration Order entered January 16, 1998,
9
<PAGE>
the Compliance Order entered February 5, 1998 and the Second Compliance Order
entered February 26, 1998.
2. That the Commission hereby approves without condition all aspects of
PECO's transfer or assignment of its generation assets and liabilities and the
wholesale power contracts as set forth in the settlement. The transfer or
assignment may be, in PECO's discretion, to an entity that is an affiliate or
subsidiary of PECO, or a non-affiliate. We hereby grant and issue all approvals
and certificates of public convenience required under the Public Utility Code
regarding the transfer or assignment of PECO's generating assets and liabilities
and wholesale power contracts under the settlement, including but not limited to
approvals under Chapters 5, 11, 19, 21 and 28 of the Public Utility Code.
3. That PECO's recovery of the transition and stranded costs as set forth
in the settlement is just and reasonable and in the public interest and that
securitization of up to $4.0 billion of stranded costs as set forth in the
settlement is just and reasonable and in the public interest.
4. That the application of PECO Energy Company (the "Company") for the
Issuance of a Qualified Rate Order under Sections 2808 and 2812 of the Public
Utility Code, 66 Pa. C.S. ss.2808 and 2812 contained in the Joint Petition for
the Settlement of PECO Energy Company's Proposed Restructuring Plan, filed on
April 22, 1998 (the "Joint Petition"), be, and hereby is, granted, consistent
with this Qualified Rate Order.
5. That, to the extent specified this Qualified Rate Order, PECO Energy
Company's filings, testimony and exhibits submitted to the Commission in
conjunction with PECO Energy Company's January 22, 1997 Application for a
Qualified Rate Order, at Docket No. R-00973877 (the "January QRO Application"),
and its Proposed Restructuring Plan, at Docket No. R-00973953 (the
"Restructuring Filing"), are hereby incorporated herein by reference.
6. That this Commission determines that it is just and reasonable and in
the public interest for PECO Energy Company to recover from its customers,
through intangible Transition Charges as and to the extent authorized in
paragraph 8 of this Qualified Rate Order, $4.0 billion of the $5.26 billion of
the Company's Transition or Stranded Costs approved by the Commission for
recovery from customers.
7. That this Commission authorizes the issuance of Transition Bonds in an
aggregate principal amount not to exceed $4 billion and finds that the issuance
of such amount of Transition Bonds is in the public interest. Provided that the
rate reductions specified in the Joint Petition are implemented as provided in
paragraph 9 of this Qualified Rate Order, this Commission hereby determines that
all savings that may be
10
<PAGE>
accomplished through securitization will be passed on to customers through the
rate reductions in paragraph 9, and the PECO Energy Company is not required to
pass on additional savings to customers at the time of issuance of any
Transition Bonds authorized by this Qualified Rate Order or the refinancing
thereof.
8. That this Commission authorizes PECO Energy Company to impose on, and
collect from its customers, either directly or through bills rendered by
electric generation suppliers or any subsequently selected providers of last
resort, through non-bypassable charges applied to the bill of every customer of
electric services within the geographic area that comprised the Company's
certificated service territory on the effective date of the Electric Competition
Act, whether such customer was a customer on the effective date of the Electric
Competition Act or became a customer after that effective date (i) Competitive
Transition Charges as provided in the Joint Petition in an amount sufficient to
permit the Company to recover the full amount of its Transition or Stranded
Costs as authorized for recovery in the Joint Petition, and (ii) Intangible
Transition Charges in an amount sufficient to recover the aggregate principal
amount of 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 (the
Transition or Stranded Costs, which includes principal of or interest on
Transition Bonds, costs for credit enhancement, servicing fees and other related
costs and expenses permitted to be recovered in (ii) above through the
Intangible Transition Charges collectively, the "Qualified Transition
Expenses"). The Commission finds that such recovery and the imposition of such
Competitive Transition Charges and Intangible Transition Charges is in the
public interest and is just and reasonable. The Commission finds that good cause
has been shown to extend the payment period for imposing the Competitive
Transition Charges and the Intangible Transition Charges to December 31, 2010.
The Intangible Transition Charges shall be collected over periods of time and
in such amounts as are necessary to amortize each series of Transition Bonds in
accordance with the terms thereof, but in no event shall be charged to customers
after December 31, 2010. Notwithstanding anything else in this Qualified Rate
Order, but subject to the terms of the Joint Petition, the Intangible Transition
Charges shall be collected from customers in an amount sufficient to discharge
the Transition Bonds in accordance with their terms.
9. Upon the successful issuance of Transition Bonds authorized by this Qualified
Rate Order and the imposition of Intangible Transition Charges related thereto,
PECO Energy Company is directed to implement the following adjustments to its
rates: (A) if the Transition or Stranded Costs for which Transition Bonds are
issued are then recovered through the Competitive Transition Charges authorized
under paragraph 8 hereof, the Company shall reduce the Competitive Transition
Charges imposed on its customers by an amount equal to the Intangible Transition
Charges associated with such
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Transition Bond issuance; (B) if the Transition or Stranded Costs for which
Transition Bonds are issued are not then being recovered through the Competitive
Transition Charges, (i) the Company shall reduce its base rates by an amount
equal to the Intangible Transition Charges associated with such Transition Bond
issuance and (ii) the aggregate amount of Competitive Transition Charges
authorized in paragraph 7 of this Qualified Rate Order that the Company may in
the future impose on its customers shall be reduced by an amount equal to the
Intangible Transition Charges associated with such Transition Bond issuance. The
reductions specified in (A) and (B) above shall be implemented on the following
terms: (a) if the Transition Bonds are issued in one or more series, a
corresponding reduction shall be calculated and implemented corresponding to
each such series; (b) the rate reduction shall be applied to bills using the
method and allocation set forth in the Company's QRO Filing and Restructuring
Filing, as adjusted by the Joint Petition; and (c) the Intangible Transition
Charges associated with the Transition Bonds issued on that date shall be
applied to bills simultaneously with the rate reduction or reduction of the
Competitive Transition Charges.
10. That the Competitive Transition Charges and the Intangible Transition
Charges shall be applied to customer bills using the methodology and allocation
set forth in the Company's QRO Filing and its Restructuring Filing, as adjusted
by the Joint Petition. Pursuant to 66 Pa. C.S. ss.2808(f) and ss.2812(b)(5), the
Commission authorizes the Company to make annual adjustments (each, an "Annual
Adjustment") to the Intangible Transition Charges if collections of such
Intangible Transition Charges fall below the amount necessary to ensure the
receipt by the Transition Bond trustee of revenues sufficient to recover fully
the Qualified Transition Expenses consistent with this Commission's Order,
provided, however, that adjustments during the final calendar year of ITC
collection for any series of Transition Bonds shall be done quarterly or
monthly, if necessary, in order to ensure full recovery of Intangible Transition
Charges. The revenues received by the Transition Bond trustee through the
Intangible Transition Charges shall be determined to be sufficient for this
purpose if and only if the revenues so received through the Intangible
Transition Charges are sufficient to amortize the Transition Bonds, fund any
reserves and to pay premiums, if any, thereon (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 thereof
and as consistent with the terms of this Qualified Rate Order and the Joint
Petition. For each Annual Adjustment, the Company shall file with this
Commission: (a) an accounting of Intangible Transition Charges received by the
Transition Bond trustee for the previous annual period; (b) a statement of any
over- or under-receipts; (c) the charge or credit to be added to Intangible
Transition Charges to ensure that the Intangible Transition Charges revenue
received by the Transition Bond trustee will be sufficient to amortize the
Qualified Transition Expenses in accordance with the amortization schedule for
Transition Bonds to be determined at the time of issuance of each series of
Transition
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Bonds, and the corresponding reduction or increase in the Competitive Transition
Charges or, if Competitive Transition Charges have not been imposed, the
Company's distribution rates; and (d) any proposal by the Company to modify the
reconciliation methodology. Pursuant to 66 Pa. C.S. ss.2812(b)(5), this
Commission shall approve all Annual Adjustments within 90 days of the Company's
Annual Adjustment filing.
11. That this Commission determines that the methodology under which the
Company will recover the Intangible Transition Charges authorized by this
Qualified Rate Order satisfies the provisions of 66 Pa. C.S. ss.2812(g), which
require that the methodology not shift inter-class or intra-class and that the
methodology maintains consistency with the allocation methodology for utility
production plant used by the Commission in the Company's last base rate
proceeding.
12. That this Commission concludes that it is in the public interest to,
and authorizes the Company and any Assignee to (a) assign, sell, transfer or
pledge Intangible Transition Property in an amount sufficient to recover all its
Qualified Transition Expenses (such term includes all right, title and interest
of the Company or any Assignee in this Qualified Rate Order) and in all
revenues, collection, claims, payments, money or proceeds arising from
Intangible Transition Charges pursuant to this Qualified Rate Order to the
extent this Qualified Rate Order and the rates and other charges authorized
hereunder are declared irrevocable and (b) issue, sell and refinance, in
reliance on this Qualified Rate Order, one or more series of Transition Bonds,
each series in one or more classes secured by the Intangible Transition Property
created by this Qualified Rate Order; provided that the final maturity of any
series of Transition Bonds shall not exceed 10 years from the date of issuance
and in no event shall any Transition Bond have a final maturity after December
31, 2010. Notwithstanding the foregoing, the Company retains sole discretion
regarding whether to assign, sell or otherwise transfer Intangible Transition
Property created hereby or to issue or cause the Transition Bonds to be issued
or refinanced.
13. That the Company or any Assignee may refinance the Transition Bonds in
a face amount not to exceed the unamortized principal thereof. That, if the
Company or any Assignee refinances the Transition Bonds, the Intangible
Transition Charges authorized in this Qualified Rate Order shall be adjusted in
accordance with the true-up mechanism described in paragraph 10 of this
Qualified Rate Order to ensure the receipt by the Transition Bond Trustee of
revenues sufficient to pay all principal, interest, redemption premiums, if any,
credit enhancement, reserves, servicing fees, and other costs and expenses with
respect to Transition Bonds issued in that refinancing. The revenues received by
the Transition Bond Trustee through the Intangible Transition Charges shall be
determined to be sufficient for this purpose if and only if the revenues so
received through the Intangible Transition Charges provide for the amortization
of
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Transition Bonds in accordance with any amortization schedule set forth in any
prospectus or other offering document provided to the holders of the refinanced
bonds after payment of interest, reserves, fees and expenses.
14. That this Commission directs that PECO Energy Company use the proceeds
from the assignment, sale, transfer or pledge of Intangible Transition Property
and the issuance and sale of Transition Bonds principally to reduce the
Company's Transition or Stranded Costs set forth in paragraph 6 of this Order
and in the Joint Petition and to reduce related capitalization. The Commission
authorizes the Company to reduce the Company's existing capitalization through
retirement of outstanding debt and preferred stock and through stock buybacks,
dividends and market purchases of common stock in such proportions as the
Company determines.
15. That PECO Energy Company shall file with this Commission, no later than
120 days after the issuance or refinancing of Transition Bonds, a description of
the final structure of each issuance or refinancing of such Transition Bonds,
including the principal amount, the price at which each such series and/or class
of Transition Bonds were sold, payment schedules, the interest rate and other
financing costs, and the final plans for the Company's use of the proceeds of
such offering. Notwithstanding such filing, the final structure of each such
issuance or refinancing shall not be subject to change or revision by this
Commission after the date of such issuance or refinancing.
16. That, to the extent that the Company, or any Assignee, assigns, sells,
transfers, or pledges any interest in the Intangible Transition Property created
hereby, this Commission authorizes the Company to contract, for a specified fee,
with such Assignee for the Company to continue to operate the system to provide
electric services to the Company's customers, to impose and collect the
applicable Intangible Transition Charges for the benefit and account of the
Assignee, to make periodic adjustments of Intangible Transition Charges
contemplated under paragraph 10 of this Qualified Rate Order, and 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). This Commission also
authorizes the Company to contract with the Assignee and an alternative party,
which may be a trustee, that the alternative party will replace the Company
under its contract with the Assignee and perform the obligations of the Company
contemplated in this Qualified Rate Order. The obligations of the Company (a)
shall be binding upon the Company, its successors and assigns and (b) shall be
required by this Commission to be undertaken and performed by the Company and
any other entity which provides transmission and distribution services to a
person that was a customer of the Company located within the Company's
certificated territory on January 1, 1997, or that became a customer of electric
services within such territory after January 1, 1997, and is still located
within such territory, as a
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condition to providing service to such customer or municipal entity providing
such services in place of the Company by the Company or other entity.
17. That this Commission hereby declares that paragraphs 4 through 19 of
this Qualified Rate Order shall be irrevocable for purposes of Section 2812 of
the Public Utility Code, 66 Pa. C.S. ss.2812, and accordingly agrees that it
will not directly or indirectly, by any subsequent action, reduce, postpone,
impair or terminate this Qualified Rate Order or the Intangible Transition
Charges authorized to be imposed or collected under this Qualified Rate Order.
This Commission further declares that the right, title and interest of the
Company and any Assignee in this Qualified Rate Order and the Intangible
Transition Charges, the rates and other charges authorized hereby and all
revenues, collections, claims, payments, money or proceeds of or arising from
the same constitutes Intangible Transition Property. PECO Energy Company shall
have the irrevocable right to issue Transition Bonds in accordance with this
Qualified Rate Order until December 31, 2010.
18. That PECO Energy may apply to the Commission for supplements to this
Qualified Rate Order, not inconsistent with the terms and provisions hereof and
the Joint Petition, as PECO Energy Company deems necessary to enable the
issuance of Transition Bonds authorized hereunder.
19. That during some or all of the period during which the Intangible
Transition Charges and the Competitive Transition Charges approved by this
Qualified Rate Order are being collected, the generation component of the
Company's charges to customers will be limited by the provisions of 66 Pa. C.S.
ss.2804(4) (pertaining to rate caps) and the provisions of the Joint Petition.
For purposes of 66 Pa. C.S. ss.2804(4)(ii), the generation component of the
Company's charges includes Competitive Transition Charges, Intangible Transition
Charges, and other generation charges. If the combined total of these elements
would cause the generation component of the Company's charges to exceed the rate
cap specified in 66 Pa. C.S. ss.2804(4) and the Joint Petition, the Company
shall retain whatever right it may have under the existing provisions of the
statute as limited by the Joint Petition to request relief from the rate cap,
but if it does not seek such relief or that relief is denied, the Company shall
adjust the non-securitized elements of its generation charges, rather than the
Intangible Transition Charges approved by this Qualified Rate Order, to bring
the charges into compliance with the rate cap provisions of 66 Pa. C.S.
ss.2804(4) and the Joint Petition.
20. That pursuant to 52 Pa. Code ss.1.2(c), the Commission hereby waives
the requirements of its regulations at 52 Pa. Code as necessary and appropriate
to implement the joint petition and this final order.
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21. That a copy of this final order shall be served upon all parties to
PECO's restructuring proceeding at Docket Nos. R-00973953 and P-00971265.
BY THE COMMISSION
James J. McNulty
Acting Secretary
(SEAL)
ORDER ADOPTED. May 14, 1998
ORDER ENTERED: MAY 14, 1998
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Internal Revenue Service Department of the Treasury
Index Numbers: Washington, DC 20224
61.00-00 61.03-00
61.43-00 451.01-00
Person to Contact:
Thomas M. Preston
Thomas P. Hill, Jr. Telephone Number:
Vice President & Controller 202-622-4443
PECO Energy Company Refer Reply To:
2301 Market Street CC:DOM:FI&P:2/PLR-105800-97
Philadelphia, PA 19101 Date: DEC 19 1997
Legend
Company = PECO Energy Company
EIN: 23-0970240
Trust = Business Trust
State A = Pennsylvania
State B = Delaware
Statute = Title 66 Pa. Consolidated Statutes,
Section 2801, Electricity
Generation Customer Choice and
Competition Act
Date 1 January 1, 1999
Date 2 January 1, 2000
Date 3 January 1, 2001
Date 4 = January 22, 1997
a = $3.877 billion
b = $3.6 billion
c = $23.8 million
d = $149.4 million
e = .5%
Dear Mr. Hill:
This letter is in reply to the letter dated March 21, 1997, as well as
other correspondence, requesting a ruling on the proposed transaction described
below.
FACTS
Company, a calendar year taxpayer using the accrual method of accounting,
is an investor-owned electric utility in State A engaged in the generation,
transmission, distribution and
<PAGE>
sale of electricity and the distribution and sale of natural gas within a
designated territory. As such, Company has a monopoly within a designated
territory and is subject to regulation by both the State A Public Utility
Commission (PUC) and the Federal Energy Regulatory Commission (FERC).
State A is deregulating its electric utility industry. As a result,
Company's customers will be allowed to contract directly with alternative
suppliers of electricity, and Company will compete with other parties to sell
electricity.
The Statute was enacted in December, 1996, to provide for the restructuring
of the electric utility industry in State A through the unbundling of electric
services into separate generation, transmission and distribution services with
open retail competition for generation. Electric distribution and transmission
services will remain regulated by the PUC. Full electric generation competition
will be phased in, in three steps. Direct retail access is to be phased in for
one-third of each customer class by Date 1 for an additional one-third by Date
2, and for all remaining customers by Date 3.
The Statute requires utilities to submit to the PUC restructuring plans
that address the "stranded costs" that will result from competition. Stranded
costs include regulatory assets, nuclear decommissioning costs and long-term
purchased power commitments, for which full recovery is allowed, and other
costs, including investment in generating plants, spent-fuel disposal,
retirement costs and reorganization costs, for which an opportunity for recovery
is allowed in an amount determined by the PUC as just and reasonable. These
costs, after mitigation by the utility, are to be recovered through the
competitive transition charge (CTC) approved by the PUC and collected from
distribution customers for up to nine years.
As a mechanism for the mitigation of CTCs and the reduction of customer
rates, the Statute authorizes an electric utility to securitize its stranded
costs through the issuance of Transition Bonds either directly by the utility,
or by a finance subsidiary or third party assignee of the utility. To facilitate
this securitization, the Statute authorizes the creation of a property right to
collateralize the Transition Bonds. This property right, called intangible
transition property (ITP), represents the right to collect from customers
amounts sufficient to recover the utility's stranded costs, pay the expenses of
issuing and servicing the Transition Bonds, and fund any necessary reserve
accounts. The amounts are collected by imposing intangible transition charges
(ITCs). ITP is created upon the issuance by the PUC of an irrevocable qualified
rate order (QRO) authorizing the ITCs. An irrevocable QRO may not be modified by
the Company, the PUC, the State or any instrumentality thereof.
ITCs are imposed on customers located in the utility's certificated
territory and must be paid whether or not the customers purchase electricity
from the utility. ITCs are calculated as a percentage of expected total base
rate revenue to be collected by customer rate class, the collection of which
will, likely be dependent on, inter alia, a utility's ability to forecast the
usage, delinquencies, charge-offs, and payment lags of customers in each rate
class. The PUC may approve periodic adjustments to the ITC, but only in
accordance with the Statute and the QRO.
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Company will assign its ITP to the Trust, a newly-formed,
bankruptcy-remote, wholly owned State B business trust formed by the Company
solely for this purpose. The Trust will not elect to be treated as an
association taxable as a corporation under section 301.7701-3(b)(1) of the
Procedure and Administration Regulations. Under the Statute, the transfer of ITP
to a subsidiary or assignee of the utility, pursuant to an irrevocable QRO,
shall be treated as an absolute transfer of the utility's right, title and
interest as in a true sale, and not as a pledge or other financing other than
for state income and franchise tax purposes.
For each QRO declared irrevocable by the PUC, the Trust will issue
Transition Bonds in the form of debt securities in one or more series, and one
or more tranches of each series. Different series may have different maturities
and coupon rates. The Transition Bonds will be recourse to the Trust and will be
secured on a pari passu basis by the ITP and the equity and assets of the Trust.
It is anticipated that the Transition Bonds will receive a AAA rating from at
least two nationally recognized statistical rating agencies.
PROPOSED TRANSACTION
On Date 4, the Company filed an application with the PUC for an irrevocable
QRO authorizing the issuance of Transition Bonds in the aggregate principal
amount of a in one or more series. The issuance of this amount of Transition
Bonds by the Trust will return to the Company proceeds sufficient to recover b
of stranded costs, estimated issuance expenses of c and estimated costs
associated with using the proceeds of d. The Trust will establish an Equity
Reserve Account funded in cash by Company or an affiliate in an amount equal to
at least e of the initial aggregate principal amount of Transition Bonds.
Pursuant to a sale and servicing agreement between the Company and the
Trust, Company will act as the servicer of the ITC revenue stream as part of
normal collections and, in this capacity, will bill customers and make
collections on behalf of the Trust, and will make applications to the PUC to
maintain the ITC at a level which allows for full recovery of QTEs in accordance
with the amortization schedule for each series of Transition Bonds. The ITC will
be used by the Trust to make semi-annual payments of principal and interest on
the Transition Bonds and to pay related servicer, trustee and other fees.
Amounts collected by Company in respect of the ITC will be deposited into
its accounts and remitted monthly, or more frequently, to a "Collection Account"
maintained by a bond trustee for the benefit of Transition Bondholders. Company
shall be entitled to arms-length compensation for its servicing activities and
reimbursement for certain of its expenses in the manner set forth in the
documentation applicable to each series. Any investment earnings with respect to
funds collected but not yet remitted to the Collection Account may be applied
toward servicing compensation or paid directly to the Company. Any investment
earnings with respect to funds on deposit in the Collection Account will be
distributed to the Trust and transferred to the Company.
The ITC collected from customers will include an amount attributable to
overcollateralization, which will be equal to at least e of the initial
principal balance of each series
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<PAGE>
of Transition Bonds. That amount will be collected on a pro rata basis over the
term of the Transition Bonds and deposited into an Overcollateralization Reserve
Account. Collections of ITC in excess of the amounts necessary to pay interest
and principal on the Transition Bonds and to fund both the Overcollateralization
Reserve Account and the Equity Reserve Account, will be deposited into an
Overcollections Reserve Account which will be available to pay principal and
interest on the Transition Bonds to the extent future ITC collections are
insufficient. Any amounts remaining in the Overcollections Reserve Account after
payment in full of the Transition Bonds will be returned to the Trust and
transferred to the Company.
The Trust will allocate collections of the ITC (net of expenses) in the
following order: to interest and scheduled principal payments on the Transition
Bonds (Debt Service); to the Overcollateralization Reserve Account (up to the
Overcollateralization Reserve Required Amount); to the Equity Reserve Account
(up to the Equity Reserve Required Amount); and to the Overcollections Reserve
Account. Once amounts on deposit in the Overcollateralization Reserve Account
and the Equity Reserve Account have reached their respective required amounts,
income on any investment will be distributed to the Trust on each Payment Date
and transferred to Company. Investment income on amounts in the Overcollections
Reserve Account will be distributed to the Trust on each Payment Date and
transferred to Company. If ITC collections are insufficient to pay Debt Service
the shortfall will be paid from the following accounts in the following order:
the Overcollections Reserve Account; the Overcollateralization Reserve Account;
and the Equity Reserve Account. Payments will be allocated among the outstanding
series of Transition Bonds pro rata based on the payments required to be made on
each such series in accordance with the amortization schedule for each series.
Company represents that the transfer of the ITP to the Trust will be
regarded as a true sale for bankruptcy purposes.
ISSUES
Does the issuance of the QRO result in gross income to Company?
Are the Transition Bonds obligations of the Company?
LAW
Section 61 of the Internal Revenue Code generally defines gross income as
"income from whatever source derived", except as otherwise provided by law.
Gross income includes income realized in any form, whether in money, property,
or services. Section 1.61-l(a) of the Income Tax Regulations. This definition
encompasses all "accessions to wealth, clearly realized, and over which the
taxpayers have complete dominion." Commissioner v. Glenshaw Glass Co., 348 U.S.
426, 431 (1955), 1955-1 C.B. 207.
The right to collect the CTC is of significant value in producing income
for Company, and State A's action in making the CTC rights transferable has
enhanced that value. Generally, the granting of a transferable right by the
government does not cause the realization of income. Rev.
4
<PAGE>
Rul. 92-16, 1992-1 C.B. 15 (allocation of air emission rights by the
Environmental Protection Agency does not cause a utility to realize gross
income); Rev. Rul. 67-135, 1967-1 C.B. 20 (fair market value of an oil and gas
lease obtained from the government through a lottery is not includible in
income).
The economic substance of a transaction generally governs its federal tax
consequences. Greqory v. Helvering, 293 U.S. 465 (1935), XIV-1 C.B. 193.
Affixing a label to an undertaking does not determine its character. Rev. Rul.
97-3, 1997-2 I.R.B. 5. An instrument secured by property may be an obligation of
the taxpayer or, alternatively, may be a disposition of the underlying property
by the taxpayer. Cf. id. (the Small Business Administration is the primary
obligor of certain guaranteed payment rights that are created under its
participating security program).
CONCLUSIONS
Based on the facts as represented, we rule as follows:
(1) The issuance of the QRO does not result in gross income to Company.
(2) The Transition Bonds are obligations of the Company.
Except as specifically ruled on above, no opinion is expressed or implied
regarding the federal tax aspects of the transaction.
This ruling is directed only to Company. Under section 6110(j)(3) of the
Code, this ruling may not be used or cited as precedent.
5
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A copy of this letter should be attached to the federal income tax return
of Company for the taxable years that include the transaction described in this
letter.
Sincerely yours,
Assistant Chief Counsel
(Financial Institutions & Products)
By:
--------------------------------
Marshall Feiring
Senior Technician Reviewer, Branch 2
cc: Louis W. Ricker
Robert E. McQuiston
Penny S. Indictor
Ballard Spahr Andrews & Ingersoll
1735 Market Street, 51st Floor
Philadelphia, PA 19103
6
