As filed with the Securities and Exchange Commission on June 29, 1998
Registration No. 333-______
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------
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)
Delaware 51-0382130
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
-----------------------
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. |_|
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
====================================================================================================================================
Title of securities Amount to be Proposed maximum Proposed maximum Amount of
being registered registered aggregate offering aggregate registration fee
price per unit* offering price*
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Transition Bonds $1,000,000 100% $1,000,000 $295
====================================================================================================================================
</TABLE>
*Estimated solely for the purpose of calculating the registration fee.
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>
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.
SUBJECT TO COMPLETION, DATED ________, 1998
Prospectus Supplement
(To Prospectus dated __________, 1998)
PECO Energy Transition Trust
$
_____[%] Transition Bonds, Series 199_-_
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 Issuer was formed for the purpose of
purchasing and owning Intangible Transition Property, issuing Transition Bonds
from time to time and pledging its interest in Intangible Transition Property
and other 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) 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 associated with the Transition Bonds. The Seller will
sell Intangible Transition Property to the Issuer as described in the
Prospectus. See "The Sale and Servicing Agreement" 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 will be issued pursuant to the Indenture between the Issuer and the
Bond Trustee as described in this Prospectus Supplement and the Prospectus.
THE SERIES ___ BONDS ARE OBLIGATIONS OF THE ISSUER ONLY AND WILL BE SECURED ONLY
BY INTANGIBLE TRANSITION PROPERTY AND THE OTHER COLLATERAL AS DESCRIBED IN THIS
PROSPECTUS SUPPLEMENT AND IN THE PROSPECTUS. THE ISSUER IS A SPECIAL PURPOSE
ENTITY THAT HAS NO PROPERTY OTHER THAN INTANGIBLE TRANSITION PROPERTY AND THE
OTHER COLLATERAL. 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 22 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-23 of this Prospectus Supplement and on page
102 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, societe
anonyme and the Euroclear System.]
[Underwriters]
The date of this Prospectus Supplement is __________, 1998.
<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 "PLAN OF
DISTRIBUTION" IN THE PROSPECTUS.
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 quarterly and annual 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 such Series.
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 Summary of Terms are defined in this Prospectus
Supplement or in the Prospectus. Reference is made to the Index of Principal
Definitions in this Prospectus Supplement and the Prospectus for the location of
the definition of capitalized terms which appear in this Prospectus Supplement.
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 22 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.
<TABLE>
<CAPTION>
Initial Class
Principal Class Term- Expected
Class Balance ination Date Final Payment Date Bond Rate
- ----- ------------- ------------ ------------------ ---------
<S> <C> <C> <C> <C>
</TABLE>
Series Issuance Date: ______________, 199_.
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 interest
payment 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, 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
S-2
<PAGE>
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 Monthly
Allocation Date is set forth in this Prospectus
Supplement under "The Series ___
Bonds--Overcollateralization." See also "The
Indenture--Credit Enhancement" and "--Allocations
and Payments" in the Prospectus.
Capital Subaccount. Upon the issuance of the
Series ___ Bonds, the Seller will make a capital
contribution of $_________ to the Capital
Subaccount (the "Required Capital Amount"). See
"The Indenture--Credit Enhancement" and
"--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 Indenture--Credit
Enhancement" in the Prospectus.
Optional Redemption: The Issuer may redeem the Series ___ Bonds on any
Payment Date [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, on the date PECO
Energy is obligated to pay Liquidated Damages
under the Sale and Servicing 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 and Servicing Agreement if such
breach continues beyond a 90-day grace period and
has a material adverse effect on the Transition
Bondholders. See "The Series ___ Bonds--Mandatory
Redemption" in this Prospectus Supplement.
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 Pennsylvania Electricity
Generation Consumer Choice and Competition Act
(the "Competition Act") and the Qualified Rate
Order issued on May 14, 1998 (the "QRO") by the
Pennsylvania Public Utility Commission (the
"PUC"). In order to securitize a portion of its
Stranded Cost recovery, PECO Energy will sell to
the Issuer Intangible Transition
S-3
<PAGE>
Property, which represents the irrevocable right
of PECO Energy or its successor or assignee to
collect Intangible Transition Charges. See "The
QRO and the Intangible Transition Charges" and
"The Competition Act--Securitization of Stranded
Costs" in the Prospectus.
Intangible Transition Charges: As more fully described under "The Competition
Act--Securitization 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
Calculated Overcollateralization Level and any
other credit enhancement provided for the
Transition Bonds. 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 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 Monthly
Allocation 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: 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.
Ratings: The [Class ___] Series ___ Bonds are rated ____
by Standard & Poor's Rating Group, ____ by
Moody's Investors Service, Inc., ____ by Fitch
IBCA, Inc. and ____ by Duff & Phelps Credit
Rating Co.
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.
S-4
<PAGE>
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-5
<PAGE>
THE SERIES ___ BONDS
The Series ___ Bonds will be issued under and secured by a base indenture
between the Issuer and the Bond Trustee and the Series ___ Supplemental
Indenture thereto (together with any other Supplemental Indentures, the
"Indenture"). The following summary does not purport to be complete and is
subject to, and qualified in its entirety by reference to, the terms and
provisions of the Indenture described in "The Transition Bonds" and "The
Indenture" in the Prospectus and by reference to the terms and provisions of the
Series ___ Bonds and the Indenture.
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>
________, 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 __________________________________.
Interest
Interest on each Class of the Series ___ Bonds will accrue from the Series
Issuance Date at the 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
related Record Date.
[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 interest payment shall be [the close of
business on the last day of the calendar month] preceding such Payment Date.
S-6
<PAGE>
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.
The entire unpaid principal amount of the Series ___ Bonds will be due and
payable on ________, the Series 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 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 are
deposited in the Collection Account in accordance with the Seller's forecasts.
"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.
S-7
<PAGE>
TABLE 2
Expected Amortization Schedule
<TABLE>
<CAPTION>
Payment Date Outstanding Class Principal Balance
------------ -----------------------------------
Class Class Class
----- ----- -----
Series Issuance Date
<S> <C> <C> <C> <C>
, 199_
, 199_
, 2000
, 2000
, 2001
, 2001
, 2002
[Etc.]
</TABLE>
There can be no assurance that the Class Principal Balance of any Class of
the Series ___ Bonds will be reduced at the rates indicated in the foregoing
table. The actual reductions in such Class Principal Balances may be slower than
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.
Optional Redemption
[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 date of redemption, on the date PECO Energy is obligated to pay Liquidated
Damages under the Sale and Servicing 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 and Servicing Agreement if such breach continues beyond a 90-day
grace period and has a material adverse effect on the Transition Bondholders.
Overcollateralization
The Overcollateralization Amount for the Series ___ Bonds is $_______
million. 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 Series ___ Bonds. The
Calculated Over-
S-8
<PAGE>
collateralization Level for each Monthly Allocation Date for all Transition
Bonds is set forth below. See also "The Indenture--Credit Enhancement" and
"--Allocations and Payments" in the Prospectus.
TABLE 3
Payment Date Calculated Overcollateralization Level
------------ --------------------------------------
[To be Provided at the time of Issuance]
Other Credit Enhancement
Reserve Subaccount. ITC Collections available on any Monthly Allocation
Date in excess of (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
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, the Seller
will make a capital contribution of $_________ to the Issuer (the "Required
Capital Amount"). 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 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 Indenture--Credit Enhancement" and "--Allocations
and Payments" in the Prospectus.
[Other To Be Provided at the Time of Issuance]
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. 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.
S-9
<PAGE>
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. See
Tables 5, 6, 7 and 8 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 and capacity
and fixed distribution charges. This will be reflected in the calculation
thereof.
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:
S-10
<PAGE>
TABLE 4
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-11
<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-12
<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 from retail electricity
of $________ for the [quarter][year] ended _________, 199_.
S-13
<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 5), retail electric usage by Rate Class (Table 6), and retail electric
revenues by Rate Class (Table 7) 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-14
<PAGE>
TABLE 5
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 notes to
Table 4 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
S-15
<PAGE>
electric generation suppliers will remain electric generation suppliers or that
they will provide consolidated billing to the same number of Customers.]
TABLE 6
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 notes to
Table 4 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%.
S-16
<PAGE>
There can be no assurance that future usage growth rates for PECO Energy will be
similar to historical experience.
TABLE 7
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 notes to
Table 4 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 10 largest
Customers represented approximately ____% of PECO Energy's revenues. There can
be no assurance that current Customers
S-17
<PAGE>
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
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 8
Delinquency and Loss
Delinquencies (30 days+) as Percentage of Total Billed Revenues for the Period
Ended __/__/__
Residential %
Small Commercial
and Industrial %
Large Commercial
and Industrial %
Net Write-Offs as Percentage of Total Billed Revenues for the Period Ended
__/__/__
Residential %
Small Commercial
and Industrial %
Large Commercial
and Industrial %
SERVICING
Servicer Advances
[To Be Provided at Issuance]
CERTAIN 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
S-18
<PAGE>
price at 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. 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 at 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 from the Issuer 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.
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
S-19
<PAGE>
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-20
<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:
<TABLE>
<CAPTION>
Principal Amount of
Transition Bonds to Be Purchased
[Class ___] [Class ___] [Class ___]
Series Series Series
Underwriters Bonds Bonds Bonds
------------ ----------- ----------- -----------
$ $ $
<S> <C> <C> <C>
-------------------- --------- ----------- -----------
Total $ $ $
========== =========== ===========
</TABLE>
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 of the offering size, which creates a syndicate short position.
Stabilizing transactions permit bids
S-21
<PAGE>
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 has 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 the Underwriters' 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").
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-22
<PAGE>
INDEX OF PRINCIPAL DEFINITIONS
Set forth below is a list of the defined terms used in the 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" in the Prospectus.
TERM PAGE
---- ----
Adjustment Date......................................................... S-4
Calculation Date........................................................ S-4
Class Principal Balance................................................. S-3
Competition Act......................................................... S-3
Customer................................................................ S-14
DTC................................................................... Cover
Exchange Act............................................................ S-1
Indenture............................................................... S-6
Intangible Transition Charges......................................... Cover
Intangible Transition Property........................................ Cover
Interest................................................................. 18
Issuer................................................................ Cover
OID..................................................................... S-19
Optional Redemption..................................................... S-8
Overcollateralization Amount............................................. S-3
Parties in Interest..................................................... S-20
Payment Date.......................................................... Cover
PECO Energy........................................................... Cover
Plan Assets............................................................. S-20
Plans....................................................................S-20
Principal................................................................ 18
PUC..................................................................... S-3
QRO..................................................................... S-3
Rate BLI................................................................ S-13
Rate EP................................................................. S-13
Rate GS................................................................. S-12
Rate HT................................................................. S-13
Rate OP................................................................. S-12
Rate PD................................................................. S-13
Rate POL................................................................ S-12
Rate R.................................................................. S-12
Rate R-H................................................................ S-12
Rate SL-E............................................................... S-12
Rate SL-P............................................................... S-12
Rate SL-S............................................................... S-12
Rate TL................................................................. S-13
S-23
<PAGE>
TERM PAGE
---- ----
Rating Agency........................................................... S-22
Record Date............................................................. S-2
Required Capital Amount................................................. S-3
SEC..................................................................... S-1
Series Principal Balance................................................ S-2
Series ___ Bonds...................................................... Cover
Underwriters............................................................ S-21
Underwriting Agreement.................................................. S-21
S-24
<PAGE>
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.
SUBJECT TO COMPLETION, DATED ____________, 1998
Prospectus
PECO Energy Transition Trust
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 ____________, 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 and certain other property
(collectively, the "Collateral") and will rank on a parity with all other Series
of Transition Bonds. See "The Indenture--Security" and "--Issuance of Additional
Series" 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) 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 associated with the Transition Bonds. 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 Intangible Transition Property,
issuing Transition Bonds from time to time and pledging its interest in
Intangible Transition Property and other 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"), PECO Energy will sell Intangible
Transition Property to the Issuer pursuant to a Sale and Servicing Agreement
(the "Sale and Servicing Agreement"), between PECO Energy, as seller and
servicer (in such capacities, "Seller" and "Servicer"), and the Issuer.
THE TRANSITION BONDS ARE OBLIGATIONS OF THE ISSUER ONLY AND WILL BE SECURED ONLY
BY INTANGIBLE TRANSITION PROPERTY AND THE OTHER COLLATERAL AS DESCRIBED IN THIS
PROSPECTUS AND THE RELATED PROSPECTUS SUPPLEMENT. THE ISSUER IS A SPECIAL
PURPOSE ENTITY THAT HAS NO PROPERTY OTHER THAN INTANGIBLE TRANSITION PROPERTY
AND THE OTHER COLLATERAL. 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 22 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
<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 quarterly and annual 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, including a description of any applicable indices, (iv)
the date or dates on which interest and principal will be payable (each, a
"Payment Date"), (v) the Expected Final Payment Date of the Series and, if
applicable, each Class thereof, (vi) the termination date for the Series (the
"Series Termination Date") and, if applicable, each Class thereof (each, a
"Class Termination Date"), (vii) the Series Issuance Date, (viii) the place or
places for payments with respect to the Series, (ix) the initial authorized
denominations, (x) the redemption provisions for the Series, (xi) the Expected
Amortization Schedule for the Series, (xii) the Overcollateralization Amount
with respect to the Series, (xiii) the pro forma Intangible Transition Charges
as of the Series Issuance
3
<PAGE>
Date giving effect to all Series, (xiv) the Calculation Dates and Adjustment
Dates for the Series, (xv) the terms of any credit enhancement applicable to the
Series and (xvi) 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 was contracted to rate the Transition
Bonds of any Class or Series at the time of issuance thereof (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").
4
<PAGE>
TABLE OF CONTENTS
Page
----
AVAILABLE INFORMATION....................................................... 2
REPORTS TO TRANSITION BONDHOLDERS........................................... 3
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE............................. 3
PROSPECTUS SUPPLEMENT....................................................... 3
PROSPECTUS SUMMARY.......................................................... 8
RISK FACTORS................................................................ 22
Unusual Nature of Intangible Transition Property......................... 22
Servicing................................................................ 25
The Electric Industry Generally.......................................... 28
Bankruptcy; Creditors' Rights............................................ 30
The Transition Bonds..................................................... 32
PECO ENERGY COMPANY......................................................... 34
THE COMPETITION ACT......................................................... 34
General ................................................................ 34
Recovery of Stranded Costs............................................... 35
Securitization of Stranded Costs......................................... 35
PECO ENERGY'S RESTRUCTURING PLAN............................................ 37
General ................................................................ 37
The Settlement........................................................... 37
Provider of Last Resort.................................................. 41
THE QRO AND THE INTANGIBLE TRANSITION CHARGES............................... 42
The QRO ................................................................ 42
The Intangible Transition Charges........................................ 44
Electric Generation Suppliers............................................ 45
LITIGATION.................................................................. 47
THE SELLER AND SERVICER..................................................... 48
Retail Electric Service Territory........................................ 48
Customers and Operating Revenues......................................... 48
Forecasting Customers and Usage.......................................... 56
Billing Process.......................................................... 60
Credit Policy and Procedures; Collection Process......................... 60
Electric Generation Suppliers............................................ 63
Year 2000 Compliance..................................................... 63
5
<PAGE>
THE ISSUER.................................................................. 64
USE OF PROCEEDS............................................................. 65
THE TRANSITION BONDS........................................................ 66
General ................................................................ 66
Interest and Principal................................................... 67
Redemption............................................................... 68
Credit Enhancement....................................................... 68
Book-Entry Registration.................................................. 69
Definitive Transition Bonds.............................................. 72
CERTAIN WEIGHTED AVERAGE LIFE AND YIELD CONSIDERATIONS...................... 73
THE SALE AND SERVICING AGREEMENT............................................ 74
Sale and Assignment of Intangible Transition Property.................... 74
Seller Representations and Warranties.................................... 75
Servicing Procedures..................................................... 77
Servicer Advances........................................................ 78
Servicing Compensation................................................... 78
Servicer Covenants....................................................... 79
Servicer Representations and Warranties.................................. 79
Servicer Indemnification................................................. 80
Statements to Issuer and Bond Trustee.................................... 80
Evidence as to Compliance................................................ 81
Certain Matters Regarding the Servicer................................... 81
Servicer Defaults........................................................ 82
Rights Upon Servicer Default............................................. 82
Successor Servicer....................................................... 82
Amendment................................................................ 82
Termination.............................................................. 83
Governing Law............................................................ 83
THE INDENTURE............................................................... 83
Security ................................................................ 83
Issuance of Additional Series............................................ 83
Collection Account....................................................... 84
Allocations and Payments................................................. 86
Reports to Transition Bondholders........................................ 88
Modification of Indenture................................................ 88
Modifications to the Sale and Servicing Agreement........................ 89
Events of Default; Rights Upon Event of Default.......................... 90
Certain Covenants........................................................ 91
List of Transition Bondholders........................................... 93
Annual Compliance Statement.............................................. 93
Bond Trustee's Annual Report............................................. 93
Satisfaction and Discharge of Indenture.................................. 93
6
<PAGE>
Legal Defeasance and Covenant Defeasance................................. 93
The Bond Trustee......................................................... 95
Governing Law............................................................ 95
CERTAIN TAX MATTERS......................................................... 96
Certain U.S. Federal Income Tax Considerations........................... 96
Tax Status of the Trust and of the Transition Bonds...................... 96
Taxation of United States Transition Bondholders......................... 97
Information Reporting and Backup Withholding............................. 97
Taxation of Foreign Transition Bondholders............................... 98
Certain State Tax Matters................................................ 99
ERISA CONSIDERATIONS........................................................ 99
PLAN OF DISTRIBUTION........................................................100
RATINGS.....................................................................101
LEGAL MATTERS...............................................................101
INDEX OF PRINCIPAL DEFINITIONS..............................................102
7
<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 22 in this Prospectus.
The following summary is qualified in its entirety by the more detailed
information appearing elsewhere in this Prospectus and the related Prospectus
Supplement. All capitalized terms used in this Prospectus are defined in this
Prospectus, and prospective investors should refer to the Index of Principal
Definitions for the location in this Prospectus 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. 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. Under the Competition Act, the PUC may also
authorize an electric utility or its designee to
issue transition bonds to securitize the allowed
recovery of stranded costs.
Pursuant to the Competition Act, the PUC authorized
PECO Energy to recover $5.26 billion of stranded
costs (referred to in this Prospectus as PECO
Energy's "Stranded Costs"). The PUC 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 a special property right created pursuant to
the Competition Act and the QRO, namely Intangible
Transition Property, comprised of the irrevocable
right to receive nonbypassable customer charges
called Intangible Transition Charges. The QRO
authorizes Intangible Transition Charges sufficient
to recover $4 billion of the Stranded Costs,
including an amount sufficient to pay 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").
To fund the purchase of Intangible Transition
Property, the Issuer will sell the Transition Bonds
offered hereby and pledge its interest in
8
<PAGE>
Intangible Transition Property under the Indenture to
secure the Transition Bonds. Under the Competition
Act, the Intangible Transition Charges constituting
Intangible Transition Property are irrevocable and
are subject to periodic adjustments designed to
increase or decrease future estimated collections to
pay certain expenses, 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 which
consists of Intangible Transition Property, an
assignment of the Issuer's rights under the Sale and
Servicing Agreement, the Collection Account and all
amounts or investment property on deposit therein or
credited thereto from time to time, all other
property of whatever kind (other than certain cash
amounts described herein) owned from time to time by
the Issuer, if any, all present and future claims,
demands and causes in respect of any or all of the
foregoing and all payments on or under and all
proceeds in respect of any or all of the foregoing.
See "The Indenture--Security" in this Prospectus.
The following diagram represents a general summary of
the parties to the transactions contemplated hereby,
their roles and their relationships to the other
parties.
<TABLE>
<S> <C> <C> <C> <C> <C>
-----------------
| |
| PECO ENERGY |
| (Seller and |
| Parent) |
-----------------
ITC Collections* ITP** $
------------- ---------- --------------- $ -----------------
| | | | | PECO Energy |--------------- | PECO ENERGY |
| Customers -- | EGS***-- | (Servicer) | Monthly | TRANSITION |
| | | | | |Servicing Fee | TRUST |
| | | | | |----------------| (Issuer) |
------------- ---------- ---------------ITC Collections*-----------------
| | |Transition | $
| ITC Collections* | | Bonds |
| | |
--------------------------------- -----------------
| |
| Transition |
| Bondholders |
| |
- ------------------------ -----------------
</TABLE>
* collections of Intangible Transition Charges
** Intangible Transition Property
*** electric generation suppliers
Issuer: PECO Energy Transition Trust, a Delaware statutory
business trust formed by PECO Energy on June 23,
1998, for the purpose of purchasing and owning
Intangible Transition Property, issuing Transition
Bonds from time to time and pledging its interest in
Intangible Transition Property and other Collateral
to the Bond Trustee under the Indenture in
9
<PAGE>
order 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. 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, telephone number, 302-888-7532. Two
additional trustees have been appointed by PECO
Energy. See "The Issuer" in this Prospectus.
Bond Trustee: ____________________ will serve as the Bond Trustee.
The corporate trust office of the Bond Trustee is
located at ________________________________________
____________________ telephone number, __________.
PECO Energy,
Seller and
Servicer: PECO Energy, as Seller, will sell Intangible
Transition Property to the Issuer on each Series
Issuance Date under the terms of the Sale and
Servicing Agreement. See also "Risk
Factors--Bankruptcy; Creditors' Rights--Bankruptcy of
Seller--True Sale or Financing" PECO Energy, as
Servicer, will service Intangible Transition Property
for the Issuer under the terms of the Sale and
Servicing Agreement.
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
adversely affect the timing of payments to Transition
Bondholders or cause Transition Bondholders to suffer
losses of their investment in Transition Bonds.
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: the limitation of adjustments
to the Intangible Transition Charges or the failure
of the PUC to implement timely adjustments to the
Intangible Transition Charges; 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; federal preemption of the Competition Act
adversely affecting Intangible Transition Property;
limitations on the rights and remedies of the Issuer
against the Seller for breaches of representations
and warranties; the resignation or removal of the
Servicer; inaccurate forecasts of the aggregate
electricity usage of Customers or delinquency and
write-offs relating to ITC Collections; problems in
billing and metering by, and collections by and from,
electric generation suppliers; 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
10
<PAGE>
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 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 an asset
type such as 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.
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, and may be
subject to optional and mandatory redemption.
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
22.
Source of Payment;
Intangible Transition
Charge: The Transition Bonds will be payable primarily from
ITC Collections, whether paid by Customers directly
to the Servicer or indirectly through electric
generation suppliers. The Intangible Transition
Charges will be nonbypassable charges and will be
payable by designated existing and future Customers.
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 Sale and 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
11
<PAGE>
projected future usage of electricity by Customers
within that Customer Category, expected delinquencies
and write-offs within that Customer Category, and
future payments and expenses relating to 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 is outstanding may be
implemented quarterly or monthly. Such adjustments
are designed to result in the outstanding principal
balance of each 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 the Monthly Allocation 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 requests with the
PUC for such adjustments (each, an "Adjustment
Request") on May 14 of each year and on such
additional 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 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 earlier of (i) the
Payment Date after which all interest on and
principal of Transition Bonds of that Series have
been paid in full and (ii) the 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 issuance by the PUC of the QRO and the PUC's
declaration that 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 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
12
<PAGE>
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 can be grouped into
three broader categories: Residential; Small
Commercial and Industrial; and Large Commercial 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 or to receive separate
bills for services provided by their electric
generation supplier and their electric distribution
company or to have the electric generation supplier
render a consolidated bill including its 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, the payments in respect of the
Intangible Transition Charges owing by such Customers
will, in effect, be owed by the electric generation
supplier rather than by the Customer. See "The QRO
and the Intangible Transition Charges--Electric
Generation Suppliers" and "Risk
Factors--Servicing--Electric Generation Suppliers"
in this Prospectus.
13
<PAGE>
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 Indenture does not limit the amount of
Transition Bonds that can be issued. 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
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 of Additional Series," including
the Rating Agency Condition. See "Risk Factors--The
Transition Bonds--Considerations of Additional Series
and Other Financings" and "The Transition Bonds" in
this Prospectus.
Payment Dates: The Payment Date with respect to any Series of
Transition Bonds will be the day or 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").
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 principal balance specified
for such Payment Date in the amortization schedule
(the "Expected Amortization Schedule") set forth in
the Prospectus Supplement for such Series on such
Payment 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--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
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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 sufficient to make interest
payments on the related Series when due, to make
principal payments in accordance with the Expected
Amortization Schedule for each Series, to pay fees
and expenses and to fund the Overcollateralization
Amount for each Series. The "Overcollateralization
Amount" for each Series of Transition Bonds, as
specified in the related Prospectus Supplement, will
be (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 the Monthly Allocation Date
immediately [preceding] any Adjustment Date or
Expected Final Payment Date, as applicable, is
referred to in this Prospectus as the "Calculated
Overcollateralization Level." The Calculated
Overcollateralization Level 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 [ ]
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: Upon issuance of the initial Series of Transition
Bonds, 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")
into which all ITC Collections will be deposited; one
or more subaccounts for each Series (each, a "Series
Subaccount"); a reserve subaccount (the "Reserve
Subaccount"); an overcollateralization subaccount
(the "Overcollateralization Subaccount"); and a
capital subaccount (the "Capital Subaccount"). Unless
the context indicates otherwise, references in this
Prospectus to the Collection Account include each of
the subaccounts contained therein.
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Withdrawals from and deposits to these subaccounts
will be made as described under "The
Indenture--Allocations and Payments" in this
Prospectus.
Reserve Subaccount: ITC Collections available on any Monthly Allocation
Date in excess of (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
this Prospectus) will be allocated to the Reserve
Subaccount. Withdrawals from and deposits to the
Reserve Subaccount will be made as described under
"The Indenture--Allocations and Payments" in this
Prospectus.
Overcollateralization
Subaccount: The Calculated Overcollateralization Level will be
held in the Overcollateralization Subaccount.
Withdrawals from and deposits to 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 the Seller, 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. Withdrawals from and the deposits to the
Capital Subaccount will be made as described under
"The Indenture--Allocations and Payments" 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."
Allocations and Payments: On each Monthly Allocation Date, all amounts in the
General Subaccount including net earnings thereon
will be allocated in the following priority: (i) all
amounts owed by the Issuer to the Bond Trustee and
the Issuer Trustee will be paid to the Bond Trustee
and the Issuer Trustee, respectively; (ii) the
Monthly Servicing Fee and all unpaid Monthly
Servicing Fees from prior Monthly Allocation Dates
will be paid to the Servicer; (iii) all other
operating expenses (including all fees, costs and
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expenses of the Issuer) will be paid, so long as no
Event of Default has occurred and is continuing or
would be caused by such payment, and provided that
the amount paid on each Monthly Allocation Date
pursuant to this clause (iii) may not exceed $33,000
in the aggregate for all Series on any Monthly
Allocation Date; (iv) Interest with respect to each
Series of Transition Bonds and such Monthly
Allocation Date will be transferred to the Series
Subaccount for such Series, taking into account
amounts on deposit therein in respect of Interest as
of such Monthly Allocation Date; (v) any Principal of
any Series or Class of the Transition Bonds payable
as a result of an Event of Default under the
Indenture, any Principal of any Series or Class of
Transition Bonds payable on a Series Termination Date
or Class Termination Date, if applicable, that will
occur prior to the next Monthly Allocation Date and
any Principal and premium on a Series or Class of
Transition Bonds due on a date of redemption 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; (vi) Principal to be paid in
accordance with the Expected Amortization Schedule
with respect to each Series of Transition Bonds will
be transferred to the Series Subaccount for such
Series, taking into account amounts on deposit
therein as of such Monthly Allocation Date in respect
of Principal; (vii) all unpaid operating expenses
will be paid; (viii) the amount by which the
Calculated Overcollateralization Level for the
Monthly Allocation Date immediately [preceding] the
next Adjustment Date or Expected Final Payment Date,
as applicable, exceeds the amount on deposit in the
Overcollateralization Subaccount on such Monthly
Allocation Date will be allocated to the
Overcollateralization Subaccount; (ix) funds up to
the net earnings on amounts in the General Subaccount
since the previous Monthly Allocation Date will be
released to the Issuer free of the lien of the
Indenture; (x) the balance, if any, will be allocated
to the Reserve Subaccount; and (xi) following
repayment of all outstanding Series of Transition
Bonds, the balance, if any, will be released to the
Issuer. See "The Indenture--Allocations and Payments"
in this Prospectus.
If on any Monthly Allocation Date funds on deposit in
the General Subaccount are insufficient to make the
allocations contemplated by clauses (i) through (vii)
above, the Bond Trustee will (i) first, draw from
amounts on deposit in the Reserve Subaccount, (ii)
second, draw from amounts on deposit in the
Overcollateralization Subaccount, and (iii) third,
draw from amounts on deposit in the Capital
Subaccount, up to the amount of such shortfall, in
order to make the allocations described above. See
"The Indenture--Allocations and Payments."
On each Payment Date for any Series, the amounts on
deposit in the applicable Series Subaccount (other
than income or other gain, which may be available to
be released to the Issuer free of the lien of the
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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 therefor or, with respect to
any Series of Transition Bonds payable as a result of
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
Transition Bondholders of such Series in respect of
principal of the Transition Bonds of such Series. See
"The Indenture-Allocations and Payments" in this
Prospectus.
"Principal" means, with respect to any Monthly
Allocation Date and any Series of Transition Bonds,
an amount that (i) would reduce the outstanding
principal amount of such Series to the amount
specified on the Expected Amortization Schedule
therefor as of the immediately following Payment Date
therefor or to zero if such Payment Date is after the
Expected Final Payment Date, (ii) with respect to any
Series of Transition Bonds, would be payable as a
result of an Event of Default, or (iii) with respect
to a Series that is subject to redemption, would be
payable as a result of a redemption pursuant to the
Indenture.
"Interest" means, with respect to any Monthly
Allocation Date and any Series of Transition Bonds,
the amount of interest payable with respect to such
Series on the immediately following Payment Date
therefor, including overdue interest and, to the
extent permitted by law, interest thereon.
Expected Final Payment
Dates and Series
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 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
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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, on the date PECO
Energy is obligated to pay Liquidated Damages under
the Sale and Servicing 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") as a result of a
breach by PECO Energy of certain of its
representations relating to Intangible Transition
Property under the Sale and Servicing Agreement if
such breach continues beyond a 90-day grace period
and has a material adverse effect on the Transition
Bondholders. Additional redemption provisions, if
any, for each Series of Transition Bonds will be
specified in the related Prospectus Supplement. See
"The Transition Bonds--Redemption" 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 be issued in the
minimum initial denominations set forth in the
related Prospectus Supplement.
Form of the
Transition Bonds: Unless otherwise provided in the applicable
Prospectus Supplement, each Series and Class of
Transition Bonds will initially be issued only in
book- entry form through DTC. 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 (from whatever
source) and all proceeds of other Collateral, if any,
received by it on each "Remittance Date." As long as
PECO Energy is the Servicer, the Remittance Date is
the 20th day of each month (or if the 20th is not a
Business Day, the immediately succeeding Business
Day), provided that, among other things, (i) PECO
Energy maintains a short-term rating of at least
"A-2" by Standard & Poor's Rating Group ("S&P") and
"P-2"
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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 20th
day of the month to the 20th day of the next month is
referred to in this Prospectus as the "Collection
Period." See "The Sale and Servicing Agreement" in
this Prospectus. Pending deposit into the Collection
Account, ITC Collections 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: 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 (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 Sale and Servicing
Agreement--Servicing Compensation" 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 respect
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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 "Certain Tax
Matters" in this Prospectus.
Ratings: It is a condition of the Underwriters' 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
Reliance 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 Sale and 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 and changes in
projections regarding such rate. See "The Sale and Servicing
Agreement--Servicing Procedures--ITC Adjustment Process" in this Prospectus. The
adjustments to the 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 Monthly
Allocation 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
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
adjustments to the Intangible Transition Charges requested by the Servicer
within 90 days of the Calculation Date. There can be no assurance that the PUC
will approve such requests in accordance with the QRO. Any failure to approve
such adjustments to the Intangible Transition Charges 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 expected 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 date specified as the last Adjustment Date 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 amounts available to make payments with respect to such Series are
expected to be recovered 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.
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 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
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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
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--Changing Regulatory Environment" below.
In the opinion of Ballard Spahr Andrews & Ingersoll, LLP, 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 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, it would appear unlikely
that the Commonwealth could reduce, modify or alter intangible transition
property, or take any 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 (generally the estimated market value of the Intangible
Transition Property at the time of the taking) 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. However, there is no assurance 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, no assurance can be given
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 "--Legal Challenges" below.
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 could
prohibit the recovery of stranded costs, will become law or, if they become law,
what their
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final form or effect will be. 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
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. Further, there is no assurance that the courts would
consider such a preemption a taking. See "--Possible Commonwealth Amendment or
Repeal of the Competition Act" above.
Legal Challenges. The existence of Intangible Transition Property and its
adequacy as a source of payment of principal of and interest on the Transition
Bonds are dependent on relevant provisions of the Competition Act, the QRO and
the Adjustment Requests. If the relevant provisions of the Competition Act, the
QRO or any Adjustment Request 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") approving PECO Energy's restructuring plan (the "Restructuring
Plan") as modified by the settlement (the "Settlement") concerning 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, there are three pending Pennsylvania court actions
challenging the constitutionality of the Competition Act. See "--Limited Rights
and Remedies" below and "Litigation" in this Prospectus.
Limited Rights and Remedies. Under the terms of the Sale and Servicing
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. No assurances are given that the Seller would be
able to pay such Liquidated Damages. See "The Sale and Servicing
Agreement--Seller Representations and Warranties" in this Prospectus. A
determination by a court that, based on laws in effect on the date any
Intangible Transition Property is sold, 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.
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 thereto
voiding the existence of Intangible Transition Property or the adoption of a
federal statute prohibiting the recovery of all stranded costs are examples of
changes in law.
The Seller will not be in breach of any representations and warranties 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 and would not constitute such a breach if the impairment can
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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, cause Transition Bondholders
to suffer a loss of their investment.
Uncertainties Associated with New Asset Type. There are no historical
performance data for an asset type such as 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, so these records may have limited predictive
value with respect to the Intangible Transition Charges and the Transition
Bonds. See "--Servicing--Electric Generation Suppliers" below. Furthermore, the
Servicer does not have any experience administering this specific type of asset.
In addition, in the event of a foreclosure, there is likely to be a limited
market, if any, for Intangible Transition Property, and, therefore, foreclosure
may not be a realistic or practical remedy for the Bond Trustee. See
"--Bankruptcy; Creditors' Rights" below.
Servicing
Reliance on Servicer. The Issuer will rely on the Servicer for the
determination of any adjustments to the Intangible Transition Charges and
submission of Adjustment Requests to the PUC and for the Customer billing and
collection that is necessary to recover the Intangible Transition Charges and,
therefore, necessary to make payments of principal and interest on the
Transition Bonds. If, as a result of its insolvency or liquidation or otherwise,
PECO Energy were to cease servicing Intangible Transition Property, so
determining any adjustments to the Intangible Transition Charges or collecting
the Intangible Transition Charges, 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 so determining appropriate adjustments to
Intangible Transition Charges. Further, under current law, it is possible that
the remedy of shutting off service to a consumer 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 Intangible Transition Property, and
Transition Bondholders could incur a loss. See "The Sale and 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,
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unexpected demographic trends, catastrophes, regulatory initiatives and
compliance with governmental regulations, litigation and various other events,
conditions and circumstances, all of which are beyond the control of the
Servicer and the Seller. 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 on their investment.
For calendar year 1997, forecast usage was 2.7% greater than actual usage.
See "The Seller and Servicer--Forecasting Customers and Usage" in this
Prospectus. The accuracy of the Servicer's historical forecasts is not
necessarily indicative of the accuracy of the Servicer's future forecasts,
particularly in light of changes which 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 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 the electric
distribution companies, including PECO Energy, could make past projections
meaningless as a tool in predicting delinquencies and write-offs in the future.
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. There can be no assurances that actual usage,
delinquencies and write-offs will not be significantly different from future
forecasts thereof.
While the Servicer will 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,
there can be no assurance that such calculation 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--Reliance on Adjustments of the Intangible
Transition Charges" above.
Delays 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 a 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 which
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 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
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pursuant to 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 "--Credit Policy and Procedures; Collection
Process" in this Prospectus.
Credit Policy and Procedures. 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 Commonwealth law, PECO Energy
generally is obligated to provide service to new Customers in its retail
electric service territory, and 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 "--Electric Generation Suppliers" below.
Electric Generation Suppliers. The Restructuring Plan and future orders of
the PUC will set forth guidelines governing customer billing and collection by
electric generation suppliers. Any electric generation supplier that provides
consolidated billing is required to pay the Servicer periodic amounts billed by
the Servicer to the electric generation supplier, including the Intangible
Transition Charges, regardless of the ability of the electric generation
supplier to collect such amounts from Customers. In such event, the collecting
electric generation supplier will, in effect, replace the Customer 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 the Customer. See also "--The Electric Industry Generally--
Shrinking Base of Customers" below. There can be no assurance that each electric
generation supplier 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 in the same manner in which it mitigates such risks
relating to its Customers. The Servicer, on behalf of the Issuer, will pursue
any electric generation supplier 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 Sale
and Servicing Agreement" in this Prospectus. The Servicer will not generally
have the right to pursue Customers of an electric generation supplier that
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 following certain payment
defaults by an electric generation supplier and applicable grace periods. See
"The QRO and the Intangible Transition Charges--Electric Generation Suppliers"
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 with Customer billing and collections could cause delays in
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 pursuant to 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
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"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 suppliers 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.
In addition, to the extent that Customers choose to purchase their
electricity from electric generation suppliers that provide consolidated
billing, the Issuer may be relying on a small number of electric generation
suppliers, 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 that provides
generation service to a large number of Customers may adversely affect the
timing of payments on the Transition Bonds.
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.
Year 2000 Issues. PECO Energy, like all other companies using computers and
automated devices containing microprocessors, 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 and electric generation suppliers
to bill and collect the Intangible Transition Charges, both because of problems
with their own systems and problems 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.
The Electric Industry Generally
Changing Regulatory Environment. The Restructuring Plan provides certain
standards for metering, billing and other activities by electric generation
suppliers. In addition, PECO Energy, the electric generation suppliers and the
other groups involved in the Settlement submitted additional standards, and the
PUC is expected to adopt those standards by order on or about July 1, 1998.
While the Restructuring Plan provides that an electric generation supplier that
bills customers must comply with
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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." Any such changes 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.
Changes in General Economic Conditions and Electricity Usage. General
economic conditions and technological changes that would 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 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. See
"--Unusual Nature of Intangible Transition Property--Reliance on Adjustments of
the Intangible Transition Charges" above and "--Shrinking Base of Customers"
below.
Shrinking Base of Customers. 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.
See also "--Unusual Nature of Intangible Transition Property--Risks of Increased
Intangible Transition Charges" above. Although the Issuer believes that the
likelihood of this scenario occurring is remote, this scenario might cause
Transition Bondholders to fail to receive the full amount to which they are
entitled. Furthermore, the Issuer expects that the applicable Intangible
Transition Charges will be imposed on Customers who only partially
self-generate; however, the ability of the Servicer to collect such Intangible
Transition Charges may be reduced because the Servicer will not have ready
access to data about which consumers are self-generating and will not be able to
exercise complete shut-off rights as an enforcement tool against a
self-generator. Nevertheless, 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. But see "--Servicing--Electric Generation Suppliers" above.
In addition, to the extent that Customers choose to purchase their
electricity from electric generation suppliers that provide consolidated
billing, the Issuer may be relying on a small number of electric generation
suppliers, 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 that provides
generation service to a large number of Customers may adversely affect the
timing of payments on the Transition Bonds.
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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
and Servicing Agreement that the transfer of Intangible Transition Property in
accordance with that agreement is a valid sale and assignment by the Seller to
the Issuer of such Intangible Transition Property. The Seller and Issuer will
also represent and warrant in the Sale and Servicing Agreement that they will
each take the appropriate actions under the Competition Act 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 Intangible Transition
Property as True Sale" in this Prospectus. If the Seller were to become a debtor
in a bankruptcy case and a creditor or bankruptcy trustee of the Seller or the
Seller itself as debtor in possession were to take the position that the sale of
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
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 Sale
and Servicing Agreement provides that the filing of such a notice shall be made.
The Competition Act further provides that any such filing in respect of
transition bonds takes precedence over any other filings. In addition, the Sale
and Servicing 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 Intangible
Transition Property. None of this, however, mitigates the risk of payment delays
and other adverse effects caused by a Seller bankruptcy.
Consolidation of the Issuer and the Seller. If the Seller were to become a
debtor in a bankruptcy case, a creditor or bankruptcy trustee of the Seller or
the Seller itself as a debtor in possession 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 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.
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Status of Intangible Transition Property as Property. The Seller believes,
and the Competition Act provides, that any 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 creditor of, or a bankruptcy trustee for, the Seller or the
Seller itself as debtor in possession would not attempt to take the position
that, because the payments based on Intangible Transition Property are
indirectly usage-based charges, 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 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 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.
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 creditor of, or a bankruptcy trustee for, the
Seller or the Seller itself as debtor in possession 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 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 Intangible
Transition Property came into existence could have priority over the Issuer's
interest in such 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 scheduled
payments.
Enforcement of Rights by Bond Trustee. Upon an Event of Default under the
Indenture, the Competition Act permits the Bond Trustee to enforce the security
interest in Intangible Transition Property and direct the PUC to order the
sequestration and payment to Transition Bondholders of all revenues arising with
respect to 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
is required under the Indenture to 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 Intangible
Transition Property. There can be no assurance that a court would grant either
order.
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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, the Bond Trustee will have a perfected interest in such commingled
funds, and the inclusion thereof (or the attempt to include such amounts) in the
bankruptcy estate of the Servicer 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 Sale and Servicing Agreement
that provide that the Issuer may appoint, or petition 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--Reliance on Servicer" above.
The Transition Bonds
Limited Liquidity. 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. The Transition Bonds will not represent an
interest in or obligation of the Seller, the Issuer Trustee or the Bond Trustee.
Intangible Transition Property owned by the Issuer and certain other assets of
the Issuer (which are expected to be minimal) are the only source of payments 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).
Considerations of Additional Series and Other Financings. 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 of Additional Series" 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
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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 Intangible Transition Property held by the
Issuer and Intangible Transition Property held by such other entities. 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.
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. 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 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 except in the event of a redemption or acceleration, the Transition
Bonds are not expected to be retired earlier than scheduled. 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.
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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,
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. Electric distribution and transmission services will remain
regulated by the PUC. 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.
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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 the "competitive
transition charges." The 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 the
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.
Securitization of Stranded Costs
The Competition Act authorizes the PUC to approve, by adopting a qualified
rate order, the issuance of transition bonds as a mechanism to mitigate stranded
costs and reduce customer rates. 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 the utilities'
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.
The Competition Act provides that simultaneously with the imposition of
intangible transition charges, either the utility's rates for electric service
or competitive transition charges shall be reduced by an amount equal to the
revenue requirement of the transition or stranded costs for which transition
bonds have been successfully 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 relevant paragraphs of
the 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 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.
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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 conducted 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 a
utility's customer elects 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 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 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
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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.
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
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 Competition Act
and the PUC Restructuring Order were preempted by the Federal Power Act and
violative of 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, including two actions, still pending, that alleged that the manner in
which the Competition Act was passed by the Pennsylvania legislature violates
the Pennsylvania Constitution. See "Litigation."
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, approved by the PUC on May 14, 1998, resolved issues on appeal
before the Commonwealth Court and the Eastern District Court by parties to the
Settlement. The parties also agreed not to challenge PECO Energy's
securitization of Stranded Costs, the Settlement or any order of the PUC
approving the Settlement. The Settlement was effective on May 14, 1998 and will
expire on December 31, 2010.
The Settlement
Recovery of Stranded Costs. The Settlement authorizes PECO Energy to
recover $5.26 billion of Stranded Costs over a 12-year transition period
beginning January 1, 1999 and ending December 31, 2010, together with a return
of 10.75% thereon. Recovery of Stranded Costs is to be through competitive
transition charges (with respect to PECO Energy, the "Competitive Transition
Charges") or, at PECO Energy's election, Intangible Transition Charges designed
to recover together the $5.26 billion
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of Stranded Costs, plus the allowed return. The Competitive Transition Charges
will be established assuming annual growth in sales of 0.8% and will be
reconciled annually to actual sales.
The following table shows the estimated levels of Competitive Transition
Charges for the years 1999 through 2010, based on estimated 0.8% annual sales
growth assumed in the Settlement.
TABLE 1
Annual Stranded Cost
Amortization And Return
<TABLE>
<CAPTION>
Annual CTC Revenue Excluding gross receipts tax(3)
Year Sales and/or ITC(2) Total Return @ 10.75% Amortization
- ---- ---------- ------------- -------- --------------- ------------
MWh(1) ($)/kWh ($000) ($000) ($000)
<S> <C> <C> <C> <C> <C>
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.
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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 below
included as part of the Settlement anticipate the benefits of the
securitization, and no rate adjustment will be made upon issuance of transition
bonds. As part of its approval of the Settlement, the PUC issued the QRO. See
"The QRO and the Intangible Transition Charges" in this Prospectus.
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 continue to receive generation services from
PECO Energy.
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)
<S> <C> <C> <C> <C> <C> <C>
($)/kWh ($)/kWh ($)/kWh ($)/kWh ($)/kWh ($)/kWh
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 as 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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Competitive Metering and Billing. 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 electric generation suppliers may act as agents to provide a single
bill and provide associated billing and collection services to their retail
customers located in PECO Energy's retail electric service territory. The
PUC-licensed electric generation suppliers may also finance, install, own,
maintain, calibrate and remotely read advanced meters for service to their
retail customers located in PECO Energy's service territory. An electric
generation supplier 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.
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 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 shall 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 provide electric generation
service to all retail electric customers in its retail electric service
territory that do not choose or cannot choose to purchase power from alternative
suppliers (referred to as serving as the "provider of last resort") through
December 31, 2010, subject to the 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 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 chosen from the Customers not
already assigned to Competitive Default Service and served by electric
generation suppliers other than PECO
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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 default customers, 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 determines 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.
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 not exceed ten years from the date of issuance
and in no event have a final maturity 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 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 were sold, payment
schedules, interest rate and other financing costs and the final plans for PECO
Energy's use of the proceeds of such offering with the PUC. Notwithstanding such
filing, the final structure of each such issuance 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 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 related to the transition bonds. The PUC
found that good cause had been shown to extend the payment period for imposing
Intangible Transition Charges to December 31, 2010.
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Upon the successful issuance of the Transition Bonds, PECO Energy is
directed by the QRO to implement reductions in Competitive Transition Charges or
other regulated rates (including PECO Energy's distribution rates) in an amount
equal to the Intangible Transition Charges associated with each transition bond
issuance.
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 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 year of Intangible
Transition Charges collection for any series of transition bonds shall be
quarterly or monthly if necessary to insure 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 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. 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
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.
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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 the 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 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. See Tables 5, 6, 7 and 8 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 thereof.
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. 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.
44
<PAGE>
The Servicer (or electric generation supplier) will continue to bill the
Intangible Transition Charges and make ITC Collections 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) 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 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 Sale and 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 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 on the earlier of (i) the Payment Date after which all
interest on and principal of all Series of Transition Bonds have been paid or
distributed in full and (ii) the date specified in the related Prospectus
Supplement for such Series.
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 Monthly Allocation 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.
Electric Generation Suppliers
The Restructuring Plan gives 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 separate
billing from both. Any electric generation supplier that provides consolidated
billing is required to pay the utility amounts billed by the utility to the
electric generation supplier, including the Intangible Transition Charges,
regardless of the electric generation supplier's ability to collect such amounts
from its Customers. In such event, the collecting electric generation supplier
will, in effect, 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
45
<PAGE>
amounts payable to the Servicer directly from all of the electric generation
supplier's consolidated billing Customers following certain payment defaults by
an electric generation supplier and the expiration of the applicable grace
period. See "The QRO and the Intangible Transition Charges--Electric Generation
Suppliers" and "Risk Factors--Servicing--Electric Generation Suppliers."
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. In addition, PECO Energy, the electric generation
suppliers and other groups submitted additional standards, and the PUC is
expected to adopt those standards by order on or about July 1, 1998. In
addition, the PUC has determined that if an electric generation supplier
provides consolidated billing, the electric generation supplier 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 ITC Collections. 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. See "Risk Factors--The Electric Industry Generally--Changing
Regulatory Environment" in this Prospectus.
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)
46
<PAGE>
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 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 constitutional provisions as a
matter of law. In similar cases, Pennsylvania courts have interpreted the
"original purpose" and "single subject" requirements with deference to the
legislature. However, the courts decide each such challenge on its particular
facts, and there are no cases finding these constitutional procedural
requirements met under facts directly analogous to those regarding the
Competition Act. Accordingly, the outcome of the Union and Fumo Actions cannot
be predicted. If such actions are successful, Transition Bondholders may suffer
a loss of their investment.
The remaining 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. It has also
petitioned the PUC for review of the PUC's Final Order, including the QRO, on
the basis of its action. 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 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. Accordingly, Transition Bondholders may suffer a loss of their
investment.
47
<PAGE>
A determination that 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, could affect the ability of PECO Energy
to impose the Intangible Transition Charges and could adversely affect the
Issuer's ability to make payments on the Transition Bonds. As a result,
Transition Bondholders could suffer a loss of their investment. See "Risk
Factors."
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.
48
<PAGE>
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
49
<PAGE>
installs, owns and maintains any transforming, switching and other
receiving equipment required and where the service is supplied for the
operation of electrified transit and railroad systems and appurtenances.
Total Customers. The following tables show for the last five years the
number of retail electric Customers and the percentage of all retail electric
Customers in all Rate Classes (Table 3), retail electric usage by Rate Class
(Table 4) and retail electric revenues by Rate Class (Table 5). Not all
Customers in all Rate Classes 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.
50
<PAGE>
TABLE 3
Retail Electric Customers For the Year Ended
<TABLE>
<CAPTION>
12/31/93 12/31/94 12/31/95
-------- -------- --------
Average Average Average
Number of % of Number of % of Number of % of
Customers Total Customers Total Customers Total
--------- ----- --------- ----- --------- -----
Residential
<S> <C> <C> <C> <C> <C> <C>
R(1) 1,158,750 79.8% 1,164,470 79.7% 1,167,866 79.6%
R-H 150,468 10.4% 152,393 10.4% 153,513 10.4%
OP(2) 99,478 6.8% 99,258 6.8% 188,339 12.8%
Total (Excludes OP) 1,309,218 90.2% 1,316,863 90.1% 1,321,379 90.0%
Small Commercial
and Industrial
GS 139,067 9.6% 140,241 9.6% 141,653 9.7%
POL(3) 3,304 .2% 3,313 .2% 3,291 .2%
SL-P 9 .0006% 9 .0006% 9 .0006%
SL-S 405 .02% 395 .03% 391 .03%
SL-E 230 .01% 285 .02% 325 .02%
TL 211 .01% 215 .01% 215 .01%
BLI(4) 15 .001% 19 .001% 19 .001%
Total (Excludes POL) 139,937 9.5% 141,164 9.7% 142,612 9.8%
Large Commercial
and Industrial
PD 1,313 .09% 1,213 .08% 1,130 .08%
HT 2,355 .2% 2,314 .2% 2,264 .2%
EP 3 .0002% 3 .0002% 3 .0002%
Total 3,671 .3% 3,530 .3% 3,397 .3%
Total 1,452,826 100% 1,461,557 100% 1,467,388 100%
========= ===== ========= ===== ========= =====
</TABLE>
<TABLE>
<CAPTION>
12/31/96 12/31/97
-------- --------
Average Average
Number of % of Number of % of
Customers Total Customers Total
--------- ----- --------- -----
Residential
<S> <C> <C> <C> <C>
R(1) 1,169,654 79.5% 1,177,996 79.4%
R-H 154,794 10.5% 155,865 10.5%
OP(2) 98,781 6.7% 98,417 6.6%
Total (Excludes OP) 1,324,448 90.0% 1,333,861 89.9%
Small Commercial
and Industrial
GS 142,431 9.7% 144,142 9.7%
POL(3) 3,173 .2% 3,067 .2%
SL-P 10 .0006% 10 .0006%
SL-S 442 .03% 408 .03%
SL-E 319 .02% 396 .03%
TL 216 .01% 171 .01%
BLI(4) 63 .004% 108 .007%
Total (Excludes POL) 143,481 9.8% 145,235 9.8%
Large Commercial
and Industrial
PD 1,047 .07% 1,231 .08%
HT 2,252 .2% 2,077 .2%
EP 3 .0002% 3 .0002%
Total 3,302 .3% 3,311 .3%
Total 1,471,231 100% 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.
51
<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
-------- -------- --------
% of % of % of
MWh Total MWh Total MWh Total
--- ----- --- ----- --- -----
Residential
<S> <C> <C> <C> <C> <C> <C>
R(1) 7,336,119 22.7% 7,380,127 22.5% 7,669,938 22.8%
R-H 2,552,675 7.9% 2,653,978 8.1% 2,625,621 7.8%
OP(2) 374,758 1.1% 378,298 1.2% 364,856 1.1%
Total 10,263,552 31.7% 10,412,403 31.8% 10,660,415 31.7%
Small Commercial
and Industrial
GS 5,613,800 17.3% 5,945,233 18.1% 6,213,330 18.4%
POL(3) 9,232 .03% 9,050 .03% 9,160 .03%
SL-P 85,851 .3% 90,717 .3% 91,689 .3%
SL-S 24,083 .07% 20,965 .06% 1,938 .006%
SL-E 38,739 .1% 42,430 .1% 44,644 .1%
TL 39,358 .1% 38,457 .1% 39,336 .1%
BLI(4) 81,874 .3% 74,930 .2% 69,543 .2%
Total 5,892,937 18.2% 6,221,782 19% 6,469,640 19.3%
Large Commercial
and Industrial
PD 1,347,526 4.2% 1,298,117 3.7% 1,213,554 3.6%
HT 14,366,187 44.3% 14,324,131 43.7% 14,655,439 43.6%
EP 499,860 1.5% 521,951 1.6% 594,543 1.8%
Total 16,213,572 50.0% 16,144,199 49.3% 16,463,535 49.0%
Total 32,370,061 100% 32,778,384 100% 33,593,590 100%
========== ==== ========== ==== ========== ====
</TABLE>
<TABLE>
<CAPTION>
12/31/96 12/31/97
-------- --------
% of % of
MWh Total MWh Total
--- ----- --- -----
Residential
<S> <C> <C> <C> <C>
R(1) 7,474,224 22.7% 7,548,861 22.8%
R-H 2,807,279 8.5% 2,600,231 7.9%
OP(2) 375,823 1.1% 365,605 1.1%
Total 10,657,327 32.3% 10,514,697 31.8%
Small Commercial
and Industrial
GS 6,400,620 19.4% 6,680,070 20.2%
POL(3) 9,002 .03% 8,721 .03%
SL-P 88,820 .3% 81,474 .2%
SL-S 16,908 .05% 15,700 .05%
SL-E 47,017 .1% 44,367 .1%
TL 39,681 .1% 39,461 .1%
BLI(4) 71,260 .2% 65,724 .2%
Total 6,673,306 20.3% 6,935,517 21.0%
Large Commercial
and Industrial
PD 1,130,530 3.4% 1,069,260 3.2%
HT 13,845,485 42.0% 13,922,827 42.1%
EP 638,800 1.9% 594,319 1.8%
Total 15,614,815 47.4% 15,586,407 47.2%
Total 32,945,448 100% 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.
52
<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.
53
<PAGE>
TABLE 5
Retail Electric Revenues (dollars in thousands) For the Year Ended
<TABLE>
<CAPTION>
12/31/93 12/31/94 12/31/95
-------- -------- --------
% of % of % of
$(000s) Total $(000s) Total $(000s) Total
------- ----- ------- ----- ------- -----
<S> <C> <C> <C> <C> <C> <C>
Residential
R(1) 1,028,264 32.1% 1,037,528 32.2% 1,082,737 32.5%
R-H 259,123 8.1% 264,684 8.2% 269,747 8.1%
OP(2) 25,173 .8% 25,321 .8% 25,134 .8%
Total 1,312,560 41.0% 1,327,534 41.2% 1,377,618 41.3%
Small Commercial
and Industrial
GS 660,072 20.6% 687,782 21.3% 728,349 21.9%
POL(3) 1,872 .06% 1,842 .06% 1,887 .06%
SL-P 14,028 .4% 14,407 .4% 14,596 .4%
SL-S 7,725 .2% 6,648 .2% 6,148 .2%
SL-E 7,813 .2% 8,512 .3% 9,032 .3%
TL 4,412 .1% 4,327 .1% 4,480 .1%
BLI(4) 6,820 .2% 6,082 .2% 5,711 .2%
Total 702,742 21.9% 729,599 22.6% 770,205 23.1%
Large Commercial
and Industrial
PD 127,744 4.0% 122,102 3.8% 115,491 3.4%
HT 1,019,514 31.8% 1,003,922 31.1% 1,024,012 30.7%
EP 40,468 1.3% 41,919 1.3% 45,234 1.4%
Total 1,187,725 37.1% 1,167,943 36.2% 1,184,737 35.6%
Total 3,203,027 100% 3,225,076 100% 3,332,560 100%
========= ==== ========= ==== ========= ====
</TABLE>
<TABLE>
<CAPTION>
12/31/96 12/31/97
-------- --------
% of % of
$(000s) Total $(000s) Total
------- ----- ------- -------
<S> <C> <C> <C> <C>
Residential
R(1) 1,059,589 32.3% 1,078,275 32.5%
R-H 280,930 8.6% 273,611 8.3%
OP(2) 25,879 .8% 25,425 .8%
Total 1,366,398 41.7% 1,377,311 41.5%
Small Commercial
and Industrial
GS 738,796 22.5% 778,198 23.5%
POL(3) 1,855 .06% 1,805 .05%
SL-P 13,685 .4% 12,916 .4%
SL-S 5,116 .2% 4,236 .1%
SL-E 9,494 .3% 8,777 .3%
TL 4,520 .1% 4,375 .1%
BLI(4) 5,865 .2% 5,468 .2%
Total 779,331 23.8% 815,776 24.6%
Large Commercial
and Industrial
PD 108,056 3.3% 101,513 3.1%
HT 975,971 29.8% 973,872 29.4%
EP 46,979 1.4% 46,994 1.4%
Total 1,131,006 34.5% 1,122,379 33.9%
Total 3,276,735 100% 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.
Concentrations. For the period ended _________, 1998, 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
54
<PAGE>
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 (30 days+) as a Percentage of Billed Retail Electric
Revenues For the Year Ended
<TABLE>
<CAPTION>
12/31/93 12/31/94 12/31/95 12/31/96 12/31/97
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Residential 8.24% 8.06% 7.72% 8.55% 8.36%
Small Commercial 0.82% 0.60% 0.59% 1.02% 1.23%
and Industrial
Large Commercial 0.31% 0.30% 0.24% 0.19% 0.18%
and Industrial
Total 3.84% 3.76% 3.50% 4.09% 4.05%
</TABLE>
55
<PAGE>
TABLE 7
Net Write-Offs as a Percentage of Billed Retail Electric Revenues
For the Year Ended
<TABLE>
<CAPTION>
12/31/93 12/31/94 12/31/95 12/31/96 12/31/97
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Residential 4.31% 4.26% 4.52% 4.56% 4.79%
Small Commercial 0.66% 0.64% 0.86% 0.72% 0.65%
and Industrial
Large Commercial 0.23% 0.22% 0.11% 0.09% 0.14%
and Industrial
Total 1.99% 1.97% 2.10% 2.09% 2.18%
</TABLE>
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 and permit trends within PECO Energy's retail electric service
territory and the surrounding counties. Regional Financial Associates ("RFA"),
an independent economic forecasting and consulting firm, 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.
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<PAGE>
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 RFA 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. Per Table 3, there were 108
BLI Customers in 1997. None of them will be charged Intangible Transition
Charges through Rate Class BLI.
The usage of Customers in the Large Commercial and Industrial category is
estimated in two stages. Usage for the top 10 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 10 Customers is derived in
consultation with the appropriate sales representatives for each of such
Customers. 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 RFA forecasts, 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
energy efficient appliances, new energy conservation technologies and the
Customer's ability to acquire these new products.
For calendar year 1997, the forecasted number of Customers was .24% less
than actual customers. For calendar year 1997, the forecast usage was 2.7%
greater than actual usage. Summaries of the total annual forecasted and actual
number of PECO Energy Customers and their usage (by Customer Category) since
1993 are shown below. 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.
57
<PAGE>
TABLE 8
Forecasted Number of Customer Variance for the Year Ended December 31,
<TABLE>
<CAPTION>
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
Residential
<S> <C> <C> <C> <C> <C>
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>
58
<PAGE>
TABLE 9
Forecasted Customer Usage (in kWh) Variance for the Year Ended December 31,
<TABLE>
<CAPTION>
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
Residential
<S> <C> <C> <C> <C> <C>
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%)
RH
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>
59
<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.
Credit Policy and Procedures; Collection Process
Under the Sale and 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 RH. 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 June 30, 1998, there were approximately [______] Customers
enrolled in the CAP Rate Program accounting for $[_________] of revenues during
1998.
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.
60
<PAGE>
Collection Process for Residential & 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 billing date. PECO Energy's Residential and
Small Commercial and Industrial 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
is used to segment Customers into 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 for 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.
61
<PAGE>
Collection Process for Large Commercial and Industrial Customers. PECO
Energy's Large Commercial and Industrial collection process is based on
providing special handling of accounts and attention to detail because of the
importance of each Customer as a source of revenue. The delinquency of
individual Customers may result from differing circumstances, and it is the
operational policy of PECO Energy in serving these accounts to have a firm
understanding of individual Customers so that the collection strategy can be
matched to the particular account while ensuring that regulations are followed
and collection actions are performed legally. PECO Energy's goal 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 for 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;
62
<PAGE>
(x) To the balance due for prior charges for energy and
capacity (if PECO Energy is the provider of last
resort);
(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.
Electric Generation Suppliers
The Servicer, on behalf of the Issuer, will pursue any electric generation
supplier 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 the 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 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 non-residential customers after
the charges are communicated to the electric generation supplier, then PECO
Energy may provide notice of breach to the electric generation supplier at any
time thereafter, at PECO Energy's discretion. Upon notice of a breach, the
electric generation supplier will have 20 calendar days to cure such breach. If
the electric generation supplier has not cured such breach within 20 calendar
days, PECO Energy may terminate consolidated billing by the electric generation
supplier 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 to forward ITC Collections
to PECO Energy, as Servicer. See "Risk Factors--Servicing--Electric Generation
Suppliers" in this Prospectus.
Year 2000 Compliance
PECO Energy, like all other companies using computers and automated devices
containing microprocessors, 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 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
63
<PAGE>
investigating the Year 2000 issue as it relates to Customers' abilities 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 "Trust Agreement") between PECO Energy, as grantor and sole
owner of all beneficial interests in the Issuer, and the Issuer Trustee and the
other Trustees identified below. The assets of the Issuer will consist of
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 organized 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.
The Issuer's business will be managed by no fewer than one and no more than
three trustees appointed from time to time by PECO Energy, however, subject to
certain conditions PECO Energy may appoint additional Trustees. 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 creditor, relative, supplier, employee, officer,
director, manager or contractor 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. 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 following two people are Beneficiary Trustees as of the date of this
Prospectus. The Beneficiary Trustees and the Issuer Trustee have served since
the establishment of the Issuer. The Trustees will devote such time as is
necessary to the affairs of the Issuer.
Name Age Title
- ---- --- -----
Diana Moy Kelly 44 Beneficiary Trustee
George R. Shicora 51 Beneficiary Trustee
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<PAGE>
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 Takai
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 of $__________ 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 and the Sale and Servicing Agreement. As
permitted by Delaware law, the Trust Agreement limits the personal liability of
each Trustee to the Issuer and PECO Energy for monetary damages resulting from
breaches of such Trustee's duty of care. The Trust Agreement provides that
Trustees will be indemnified against liabilities incurred in connection with
their services on behalf of the Issuer, including liabilities under applicable
securities laws.
The Trust Agreement provides that the trust created thereunder will
terminate and property held by the trust will be distributed to PECO Energy
thirty years from the date of its formation or sooner, at the option 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.
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 Intangible Transition Property
from PECO Energy. PECO Energy proposes using the proceeds it receives from the
sale of Intangible Transition Property to reduce Stranded Costs and related
capitalization.
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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
Supplemental 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 in its entirety 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 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 Payment Date or Payment Dates for such Series;
(v) the Expected Final Payment Date of the Series and, if
applicable, each Class thereof;
(vi) the Series Termination Date and, if applicable, the Class
Termination Dates;
(vii) the Series Issuance Date;
(viii) the place or places for payments with respect to the Series;
(ix) the initial authorized denominations;
(x) the redemption provisions, if any, of the Series;
(xi) the Expected Amortization Schedule for the Series;
(xii) the Overcollateralization Amount with respect to the Series;
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(xiii) the Calculation Dates and Adjustment Dates for the Series;
(xiv) the pro forma Intangible Transition Charges as of the Series
Issuance Date giving effect to all Series;
(xv) the terms of any credit enhancement applicable to the Series;
and
(xvi) any other terms of such Series or Class that are not
inconsistent with the provisions of the Indenture.
Unless otherwise specified in the applicable Prospectus Supplement, 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, except
as set forth below. 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 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.
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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, on the date PECO Energy is obligated to pay
Liquidated Damages under the Sale and Servicing 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 Intangible Transition
Property under the Sale and Servicing Agreement if such breach continues beyond
a 90-day grace period and has a material adverse effect on the Transition
Bondholders.
Additional redemption provisions, if any, for the 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. Unless otherwise specified in the applicable Supplemental
Indenture, 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. 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 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.
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 as described above. In addition, for any Series of Transition
Bonds, additional credit enhancement may be provided with respect thereto or one
or more Classes thereof. 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
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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
Unless the applicable Prospectus Supplement relating to a Series of
Transition Bonds indicates that the Transition Bonds of such Series or a Class
thereof will be issued as definitive Transition Bonds, 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"). 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 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
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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
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.
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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 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.
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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 "Certain 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.
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
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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 such 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 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 is later than forecasted will result
in a longer weighted average life. In addition, if a larger
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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 AND SERVICING AGREEMENT
The following summary describes certain general terms and provisions of the
Sale and Servicing Agreement pursuant to which the Seller is selling and the
Issuer is purchasing Intangible Transition Property and the Servicer is
undertaking to service Intangible Transition Property. The Sale and Servicing
Agreement may be supplemented by the Issuer and the Servicer, with the consent
of the Bond Trustee, as necessary, with respect to any particular Series of
Transition Bonds. The form of the Sale and 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
in its entirety by reference to, the provisions of the Sale and Servicing
Agreement.
The Seller may sell Intangible Transition Property 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.
ITC Collections will be pro rated among Intangible Transition Property held by
the Issuer and Intangible Transition Property held by such other entities. The
sale of Intangible Transition Property to an entity other than the Issuer will
be subject to the condition, among others, that such issuance will satisfy the
Rating Agency Condition.
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 and Servicing Agreement, the
Seller will sell and assign to the Issuer, without recourse, except as provided
therein, Intangible Transition Property in the amount set forth in the related
Prospectus Supplement. 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 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, 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.
"Initial Intangible Transition Property" means Intangible Transition
Property sold to the Issuer on the Initial Transfer Date pursuant to the Sale
and Servicing Agreement, and "Subsequent Intangible Transition Property" means
Intangible Transition Property sold to the Issuer on any Subsequent Transfer
Date pursuant to the Sale and Servicing Agreement.
The Seller's accounting records and computer systems will reflect the sale
and assignment of Intangible Transition Property to the Issuer.
Each sale of Intangible Transition Property under the Sale and Servicing
Agreement is subject to the following conditions:
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(i) the Seller will have delivered to the Issuer a duly executed
written instrument of sale and assignment in the form required by the Sale
and Servicing Agreement;
(ii) as of the Initial Transfer Date or the Subsequent Transfer Date,
as applicable, the Seller will not be insolvent and will not be made
insolvent by such sale;
(iii) the Rating Agency Condition will have been satisfied with
respect to such sale;
(iv) 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 and Servicing Agreement shall exist and no
Servicer Default shall have occurred and be continuing; and
(v) as of the Initial Transfer Date or the Subsequent Transfer Date,
as applicable, the Issuer will have sufficient funds available to pay the
purchase price for Intangible Transition Property to be sold on such date,
and all conditions in the Indenture to the issuance of the Series of
Transition Bonds to provide such funds will have been satisfied.
Seller Representations and Warranties
In the Sale and Servicing Agreement, the Seller will make representations
and warranties to the Issuer as of the Initial Sale Date and any Subsequent
Transfer Date to the effect, among other things, that:
(i) the information provided by the Seller to the Issuer with respect
to the Intangible Transition Property is correct in all material respects;
(ii) Intangible Transition Property being sold on that date is owned
by the Seller;
(iii) at the Initial Transfer Date or the Subsequent Transfer Date, as
applicable, the applicable Intangible Transition Property being sold on
that date has been validly transferred and sold to the Issuer free and
clear of all security interests, liens, charges and encumbrances, and all
filings (including filings with the PUC under the Competition Act)
necessary in any jurisdiction to give the Issuer a first priority perfected
ownership interest in such Intangible Transition Property will have been
made;
(iv) under the laws of the Commonwealth and the United States in
effect on the Initial Transfer Date or the Subsequent Transfer Date, as
applicable:
(x) the QRO is in full force and effect;
(y) the Transition Bonds are entitled to certain protections
provided in the Competition Act and, accordingly, the provisions of
the QRO relating to Intangible Transition Property and Intangible
Transition Charges are not revocable by the PUC;
(z) subject to the Commonwealth's right to limit or alter or in
any way impair or reduce the value of Intangible Transition Property
as set forth in the Competition Act or as a reasonable exercise of the
Commonwealth's sovereign powers, which right may be exercised only if
the Transition Bonds are fully discharged or
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adequate provision is made by law for the protection of the Transition
Bondholders, none of the Commonwealth, the PUC or the Issuer may
revoke, limit, alter or modify Intangible Transition Property or the
QRO, or any rights thereunder, in a manner adversely affecting the
Transition Bondholders;
(xx) the QRO and the process by which the QRO was issued comply
with all applicable laws, rules and regulations, and there is no order
by any court providing for the revocation, limitation or other
impairment of the QRO, Intangible Transition Property or the
Intangible Transition Charges or which seeks to enjoin the performance
of any obligations under the QRO; and
(yy) no other approval or filing with any governmental body is
required in connection with the creation of Intangible Transition
Property, except those that have been obtained or made;
(v) the assumptions used in calculating the Intangible Transition
Charges related to Intangible Transition Property are reasonable and made
in good faith;
(vi) (x) Intangible Transition Property constitutes a current property
right; and
(y) Intangible Transition Property includes, without limitation,
(A) the right to recover, through Intangible Transition Charges, all
of the Seller's Qualified Transition Expenses described in the QRO in
the aggregate amount at least equal to all interest due on the
Transition Bonds, the Overcollateralization Amount relating to each
Series of Transition Bonds, Monthly Servicing Fees and other fees,
costs and expenses in respect of the Transition Bonds and amounts
sufficient to pay principal of each Series of Transition Bonds in
accordance with the Expected Amortization Schedules therefor until
they have been paid in full, and (B) all right, title and interest in
the QRO applicable to the Transition Bonds and to all revenues,
collections, claims, payments, money, or proceeds of or arising from
the Intangible Transition Charges applicable to the Transition Bonds
set forth in the QRO; and
(vii) 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 and to execute, deliver and perform its obligations
under the Sale and Servicing Agreement;
(viii) the execution, delivery and performance of the Sale and
Servicing Agreement have been duly authorized by the Seller by all
necessary corporate action;
(ix) the Sale and Servicing 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;
(x) the consummation of the transactions contemplated by the Sale and
Servicing Agreement do not conflict with the Seller's articles of
incorporation or bylaws or any agreement to which the Seller is a party or
bound, result in the creation of imposition of any lien upon the
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Seller's properties (other than the lien of the Seller's mortgage on its
interest in the Sale and Servicing Agreement) or violate any law or any
order, rule or regulation applicable to the Seller or its properties;
(xi) except for Adjustment Requests, no governmental approvals,
authorizations or filings are required for the Seller to execute, deliver
and perform its obligations under the Sale and Servicing Agreement except
those which have previously been obtained or made; and
(xii) except as disclosed to the Issuer, no court or administrative
proceeding or investigation is pending or, to the Seller's best knowledge,
threatened (x) asserting the invalidity of, or seeking to prevent the
issuance of the Transition Bonds or the consummation of the transactions
contemplated by the Sale and Servicing Agreement, the Indenture, the Trust
Agreement or any of the other documents relating to the Transition Bonds or
(y) seeking a determination that might materially adversely affect the
performance by the Seller of its obligations under such documents.
The Seller will agree to make efforts, consistent with efforts it would
make with respect to its own property, to take such legal or administrative
actions, including defending against or instituting and pursuing legal actions
and appearing or testifying in hearings or similar proceedings, 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 Intangible
Transition Property by legislative enactment or constitutional amendment adverse
to the holders of the Transition Bonds. The Seller will also agree to take any
legal or administrative action, including defending against or instituting and
pursuing legal actions, as may be reasonably necessary to protect the Issuer
from claims, state actions or other actions or proceedings of third parties
which, if successfully pursued, would result in a breach of the representations
described in clauses (ii), (iii), (iv) and (vi). If the Seller breaches any of
its representations and warranties described in (ii), (iii), (iv), (vi) and (x)
above, the Seller will pay the Bond Trustee Liquidated Damages. If the Seller
breaches any of the other representations and warranties described above, the
Seller will indemnify, defend and hold harmless the Issuer and the Bond Trustee,
for itself and on behalf of the Transition Bondholders, against any costs,
expenses, losses, damages, claims and liabilities incurred as a result thereof
up to the amount of Liquidated Damages.
Servicing Procedures
General. The Servicer, as agent for the Issuer, 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 and electric generation
suppliers, as applicable) and posting all ITC Collections, (ii) responding to
inquiries of Customers, the electric generation suppliers and the PUC with
respect to Intangible Transition Property and the related Intangible Transition
Charges, (iii) accounting for ITC Collections and furnishing monthly and annual
statements to the Issuer and the Bond Trustee and (iv) taking action in
connection with adjustments to the Intangible Transition Charges as described
below. See also "The QRO and the Intangible Transition Charges--Electric
Generation Suppliers."
The Intangible Transition Charges will be assessed on Customers, regardless
of whether the Customer purchases its electricity from the Servicer or from
another electric generation supplier. The Servicer expects the applicable
Intangible Transition Charges to be separately identified on each Customer's
bill
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rendered by the Servicer. Bills are sent to each Customer by the Servicer or the
electric generation supplier every 27 to 33 days.
ITC Adjustment Process. The Sale and 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 Monthly
Allocation 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. 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 earlier of (i) the Payment Date on which all interest on and
principal of Transition Bonds of that Series have been paid in full and (ii) the
date specified in the Prospectus Supplement for that Series.
ITC Collections. The Servicer is required to remit to the Bond Trustee for
deposit into the General Subaccount all ITC Collections (from whatever source)
and all proceeds of other Collateral, if any, 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 or late fees from customers.
Servicer Advances
If specified in the related supplement to the Sale and Servicing Agreement,
the Servicer will make advances of interest or principal on the related Series
of Transition Bonds.
Servicing Compensation
The Servicer will be entitled to receive the Monthly Servicing Fee for each
Collection Period and all Series of Transition Bonds on each Monthly Allocation
Date. The Monthly Servicing Fee (together with any portion of the 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 Sale and Servicing Agreement, the Servicer releases the Issuer from
any and all claims, whenever arising from or relating to Intangible Transition
Property or the Servicer's servicing activities with respect thereto.
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Servicer Covenants
In the Sale and Servicing Agreement, the Servicer has covenanted, among
other things, that, in servicing Intangible Transition Property:
(i) it will, in its capacity as both Servicer and Seller, not at any
time assert any security interest, lien, charge or encumbrance against or
with respect to any Intangible Transition Property;
(ii) 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;
(iii) it will follow standards, policies and procedures in performing
its duties as Servicer that are customary in the Servicer's industry;
(iv) it will use all reasonable efforts, consistent with its customary
servicing procedures, to enforce and maintain rights in respect of
Intangible Transition Property;
(v) it will calculate Intangible Transition Charges in compliance with
the Competition Act and the QRO; and
(vi) it will not change the amount of or reschedule the due date of
any scheduled payment of the Intangible Transition Charges, except as
contemplated by the Sale and Servicing Agreement or as required by law or
court order or order of the PUC, provided that the Servicer may take any of
the actions described in this clause to the extent that such action would
be in accordance with customary billing and collection practices of the
Servicer with respect to bill collection activities that it conducts for
itself.
In addition, the Servicer will covenant that it will not at any time
institute against the Issuer any bankruptcy, reorganization or other proceeding
under any federal or state bankruptcy or similar law.
Servicer Representations and Warranties
In the Sale and Servicing Agreement, the Servicer will make representations
and warranties as of the date of the Sale and Servicing Agreement and as of each
Series Issuance Date to the Issuer 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 corporate power and
authority to own its properties and conduct its business as currently owned
or conducted and to execute, deliver and carry out the terms of the Sale
and Servicing Agreement;
(ii) the Servicer's execution, delivery and carrying out of the Sale
and Servicing Agreement have been duly authorized by the Servicer by all
necessary corporate action;
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(iii) the Sale and 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;
(iv) the consummation of the transactions contemplated by the Sale and
Servicing Agreement do not conflict with 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 Sale and Servicing Agreement) or violate any law or any
order, rule or regulation applicable to the Servicer or its properties;
(v) except for the Adjustment Requests, no governmental approvals,
authorizations or filings are required for the Servicer to execute, deliver
and perform its obligations under the Sale and Servicing Agreement, except
those which have previously been obtained or made; and
(vi) except as disclosed to the Issuer, no court or administrative
proceeding or investigation is pending or, to the Servicer's best
knowledge, threatened (x) asserting the invalidity of, or seeking to
prevent the issuance of the Transition Bonds or the consummation of the
transactions contemplated by, the Sale and Servicing Agreement, the
Indenture or the other documents relating to the Transition Bonds or (y)
seeking a determination that might materially and adversely affect the
performance by the Servicer of its obligations thereunder.
Servicer Indemnification
Under the Sale and Servicing Agreement, the Servicer agrees to indemnify
the Issuer and the Bond Trustee for itself and on behalf of Transition
Bondholders against any costs, expenses, losses, damages, claims and liabilities
that may be imposed on or 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 Sale
and Servicing Agreement or the Servicer's reckless disregard of its obligations
and duties under the Sale and Servicing Agreement or (ii) the Servicer's breach
of any of its representations and warranties under the Sale and 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 (i) the Calculated Overcollateralization
Level for all Series as of such Calculation Date, (ii) the Transition Bond
Balance and the Projected Transition Bond Balance for each Series as of such
Calculation Date and (iii) a comparison of the amount on deposit in the
Overcollateralization Subaccount and the Calculated Overcollateralization Level
as of such Calculation 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 Collection Account on such Remittance Date. 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.
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Evidence as to Compliance
The Sale and Servicing Agreement will provide that a firm of independent
public accountants will furnish to the Issuer Trustee and the Bond Trustee, 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 Sale and 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 Sale and Servicing Agreement will also provide for delivery to the
Issuer and the Bond Trustee, on or before March 31 of each year, a certificate
signed by an officer of the Servicer stating that the Servicer has fulfilled its
obligations under the Sale and 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 and the Bond Trustee notice of certain Servicer
Defaults under the Sale and Servicing Agreement.
Certain Matters Regarding the Servicer
Under the Sale and Servicing Agreement, PECO Energy may not resign from its
obligations and duties as Servicer, except upon determination that PECO Energy's
performance of such duties is no longer permissible under applicable law. No
such resignation will become effective until a successor servicer has assumed
PECO Energy's servicing obligations and duties under the Sale and Servicing
Agreement.
Under the Sale and Servicing Agreement, the Servicer will not be liable to
the Issuer for taking any action or for refraining from taking any action
pursuant to the Sale and Servicing Agreement, or for errors in judgment;
provided, however, that the Servicer will not be protected 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 the Sale and Servicing Agreement. In
addition, the Sale and Servicing Agreement will provide that the Servicer is
under no obligation to appear in, prosecute or defend any legal action that is
not incidental to its servicing responsibilities under the Sale and Servicing
Agreement or related to its obligation to pay Liquidated Damages or
indemnification and that, in its reasonable opinion, may cause it to incur any
expense or liability.
PECO Energy may assign its obligations under the Sale and Servicing
Agreement to any affiliate, as such term is defined in the Sale and Servicing
Agreement, that is an electric distribution company, provided that the Rating
Agency Condition has been satisfied. Under the circumstances specified in the
Sale and Servicing Agreement, any entity into which the Servicer may be merged
or consolidated, or any entity resulting from any merger or consolidation to
which the Servicer is a party, or any entity succeeding to the business of the
Servicer, which corporation or other entity in each of the foregoing cases
assumes the obligations of the Servicer, will be the successor of the Servicer
under the Sale and Servicing Agreement.
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Additionally, the QRO and the Competition Act require that the Servicer's
responsibility to collect the applicable Intangible Transition Charges and other
obligations under the Sale and Servicing Agreement must be undertaken and
performed by any other entity that provides transmission and distribution
service to the customers.
Servicer Defaults
"Servicer Defaults" under the Sale and Servicing Agreement will include,
among other things (i) any failure by the Servicer to deliver to the Bond
Trustee for deposit in the Collection Account any required payment, which
failure continues unremedied for three Business Days after written notice from
the Issuer or the Bond Trustee is received by the Servicer; (ii) any failure by
the Servicer or the Seller, as the case may be, duly to observe or perform in
any material respect any other covenant or agreement in the Sale and Servicing
Agreement which failure materially and adversely affects Intangible Transition
Property and which continues unremedied for 30 days after the giving of notice
of such failure to the Seller or the Servicer, as the case may be, by the Issuer
or the Bond Trustee and (iii) certain events of insolvency, readjustment of
debt, marshalling of assets and liabilities, or similar proceedings with respect
to the Seller or the Servicer and certain actions by the Seller or the Servicer
indicating its insolvency, reorganization pursuant to bankruptcy proceedings or
inability to pay its obligations.
Rights Upon Servicer Default
As long as a Servicer Default under the Sale and Servicing Agreement
remains unremedied, the Bond Trustee, as assignee of the Issuer, may terminate
all the rights and obligations of the Servicer under the Sale and Servicing
Agreement, whereupon a successor servicer appointed by the Bond Trustee will
succeed to all the responsibilities, duties and liabilities of the Servicer
under the Sale and 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 and the Issuer 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 Sale and
Servicing Agreement. See "Risk Factors--Bankruptcy; Creditors' Rights" in this
Prospectus.
Successor Servicer
If for any reason a third party assumes or succeeds to the role of the
Servicer under the Servicing Agreement (in such role, the "Successor Servicer"),
the Servicing Agreement will require the Servicer to cooperate with the Issuer,
the Bond Trustee and the Successor Servicer in terminating the Servicer's rights
and responsibilities under the Sale and Servicing Agreement, including the
transfer to the Successor Servicer of all cash amounts then held by the Servicer
for remittance or subsequently acquired by the Servicer. The Sale and 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.
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Amendment
The Sale and Servicing Agreement may be amended by the Issuer, the Seller
and the Servicer, with the consent of the Bond Trustee. See "The
Indenture--Modifications to the Sale and Servicing Agreement" in this
Prospectus.
Termination
The obligations of the Servicer, the Seller and the Issuer pursuant to the
Sale and Servicing Agreement will terminate upon and not before the payment to
Transition Bondholders of all amounts required to be paid to them pursuant to
the Sale and Servicing Agreement and the Indenture.
Governing Law
The Sale and 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 in its entirety
by reference to, the provisions of the Indenture. See "PECO Energy Company" in
this Prospectus.
Security
To secure the payment of principal of and interest on 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) Intangible
Transition Property and all proceeds thereof, (ii) the Sale and Servicing
Agreement, (iii) the Collection Account and all amounts on deposit therein from
time to time (less $200,000 in the aggregate for all Series), (iv) all other
property of whatever kind owned from time to time by the Issuer, which other
property is expected to be relatively small and (v) all present and future
claims, demands, causes and chooses in action in respect of any or all of the
foregoing, provided that cash distributed to the Issuer from the Collection
Account in accordance with the provisions of the Indenture will not be subject
to the lien of the Indenture. See "--Allocation and Payments" below.
Issuance of Additional Series
The Indenture does not limit the amount of Transition Bonds that can be
issued. 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
established by the Supplemental Indenture for that Series. The terms
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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--Considerations of Additional Series and
Other Financings," "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.
The opinion of counsel will state that all conditions precedent provided
for in the Indenture relating to the authentication and delivery of the
Transition Bonds have been complied with and that (i) the Issuer has the power
and authority to issue the Transition Bonds, (ii) the Transition Bonds applied
for will constitute valid and binding obligations of the Issuer and are entitled
to the benefits of the Indenture, (iii) the Indenture and the Sale and Servicing
Agreement are valid and binding agreements of the Issuer and the Sale and
Servicing Agreement is a valid and binding agreement of the Seller and the
Servicer, (iv) the Issuer has a valid, first priority perfected ownership
interest in Intangible Transition Property pursuant to the Competition Act, (v)
the Bond Trustee has a valid, first priority perfected security interest in the
Issuer's right, title and interest in and to the Collateral pursuant to the
Competition Act.
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 or, if applicable, the most recent revised
Intangible Transition Charges, 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 the Monthly Allocation Date
immediately [preceding] the relevant Adjustment Date or Expected Final Payment
Date, as applicable, taking into account amounts on deposit in the Reserve
Account.
Collection Account
Under the Indenture, the Issuer will establish in the Bond Trustee's name
one or more segregated trust accounts, 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 and the Reserve
Subaccount. All amounts in the Collection Account not allocated to any other
subaccount will be allocated to the General Subaccount. Unless the context
indicates otherwise, references in this Prospectus to the Collection Account
include all of the subaccounts contained therein.
"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 one of the states thereof or the District of Columbia
(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
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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.
Funds in the Collection Account may be invested in any of the following:
(i) direct obligations of, or obligations fully and unconditionally guaranteed
as to the timely payment by, the United States of America, (ii) demand deposits,
time deposits, certificates of deposit or banker's acceptances 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 from
which a rating is available, (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, (vi) 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 (vii) any other investment
permitted by each Rating Agency (collectively, the "Eligible Investments"), in
each case which mature on or before the Business Day preceding the next Payment
Date.
On each Remittance Date, the Servicer will remit to the Bond Trustee for
deposit in the General Subaccount of the Collection Account the amount of ITC
Collections received by the Servicer from two days before the last Remittance
Date to two days before the current Remittance Date. See "The Sale and Servicing
Agreement" in this Prospectus.
Reserve Subaccount. ITC Collections available on any Monthly Allocation
Date in excess of (i) amounts payable in respect of 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
"--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 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
Calculated Overcollateralization Level set forth in the related Supplement as
described under "--Allocations and Payments" in this Prospectus. 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 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
Calculated Overcollateralization Level will be released to the Issuer, free of
the lien of the Indenture.
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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 (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 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. 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" in this Prospectus.
Allocations and Payments
On each Monthly Allocation Date, all amounts in the General Subaccount,
including net earnings thereon, will be allocated in the following priority:
(i) all amounts owed by the Issuer to the Bond Trustee and the Issuer
Trustee will be paid to the Bond Trustee and the Issuer Trustee,
respectively;
(ii) the Monthly Servicing Fee and all unpaid Monthly Servicing Fees
from prior Monthly Allocation Dates will be paid to the Servicer;
(iii) all other operating expenses (including all fees, costs and
expenses of the Issuer) will be paid, so long as no Event of Default has
occurred and is continuing or would be caused by such payment, and provided
that the amount paid on each Monthly Allocation Date pursuant to this
clause (iii) may not exceed $33,000 in the aggregate for all Series on any
Monthly Allocation Date;
(iv) Interest with respect to each Series of Transition Bonds and such
Monthly Allocation Date will be transferred to the Series Subaccount for
such Series, taking into account amounts on deposit therein in respect of
Interest as of such Monthly Allocation Date;
(v) any Principal of any Series or Class of the Transition Bonds
payable as a result of an Event of Default under the Indenture, any
Principal of any Series or Class of Transition Bonds payable on a Series
Termination Date or Class Termination Date, if applicable, that will occur
prior to the next Monthly Allocation Date and any Principal and premium on
a Series or Class of Transition Bonds due on a date of redemption 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;
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(vi) Principal to be paid in accordance with the Expected Amortization
Schedule with respect to each Series of Transition Bonds will be
transferred to the Series Subaccount for such Series, taking into account
amounts on deposit therein as of such Monthly Allocation Date in respect of
Principal;
(vii) all unpaid operating expenses will be paid;
(viii) the amount by which the Calculated Overcollateralization Level
for the Monthly Allocation Date immediately [preceding] the next Adjustment
Date or Expected Final Payment Date, as applicable, exceeds the amount on
deposit in the Overcollateralization Subaccount on such Monthly Allocation
Date will be allocated to the Overcollateralization Subaccount;
(ix) funds up to the net earnings on amounts in the General Subaccount
since the previous Monthly Allocation Date will be released to the Issuer
free of the lien of the Indenture;
(x) the balance, if any, will be allocated to the Reserve Subaccount;
and
(xi) following repayment of all outstanding Series of Transition
Bonds, the balance, if any, will be released to the Issuer free of 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 (vii) above, the Bond Trustee will (i) first, draw from amounts on
deposit in the Reserve Subaccount, (ii) second, draw from amounts on deposit in
the Overcollateralization Subaccount, and (iii) third, draw from amounts on
deposit in the Capital Subaccount, up to the amount of such shortfall, in order
to make the allocations described above.
On each Payment Date for any Series, the amounts on deposit in the
applicable Series Subaccount (other than income or other gain, which may be
available to 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 holders of Transition Bonds 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 therefor or, with respect to any Series of Transition Bonds payable as
a result of 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 in respect of principal of the
Transition Bonds of such Series.
All payments to the holders of Transition Bond of a Series pursuant to
clauses (i) and (ii) above will 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 applicable
Prospectus Supplement for such Series specifies otherwise. All payments to
Transition Bondholders of a Class will be made pro rata based on the respective
principal amounts of Transition Bonds of such Class held by such holders.
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Reports to Transition Bondholders
With respect to each Series of Transition Bonds, on or prior to each
Payment Date, the Bond Trustee will prepare and provide a statement to be
delivered to the holders of Transition Bonds 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 Transition Bond Balance and the Projected Transition Bond
Balance as of the most recent Payment Date;
(ii) the amount on deposit in the Overcollateralization Subaccount and
the Calculated Overcollateralization Level for all Series, in each case as
of the most recent Payment Date;
(iii) the amount on deposit in the Capital Subaccount as of the most
recent Payment Date; and
(iv) the amount, if any, on deposit in the Reserve Subaccount as of
the most recent Payment Date.
Modification of Indenture
With the consent of the holders of a majority of the outstanding Transition
Bonds of each Series or Class to be affected, the Issuer and the 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 (except as
provided below) in any manner the rights of the Transition Bondholders.
Without the consent of the holder of each outstanding Transition Bond of
each Series or Class affected thereby, however, no Supplemental Indenture will:
(i) change the due date of any installment of principal of 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 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) 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;
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(v) reduce the percentage of the aggregate outstanding amount of the
Transition Bonds required to direct the Bond Trustee to direct the Issuer
to sell or liquidate Intangible Transition Property if the proceeds of such
sale would be insufficient to pay the principal amount and accrued but
unpaid interest on the outstanding Transition Bonds;
(vi) 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;
(vii) decrease the Overcollateralization Amount or Required Capital
Amount with respect to any Series;
(viii) change the ITC adjustment process; or
(ix) 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 such Collateral
or deprive the holder of any Transition Bond of the security provided by
the lien of the Indenture.
The Issuer and the Bond Trustee may enter into Supplemental Indentures,
without obtaining the consent of Transition Bondholders, for the purpose of
adding any provisions to, or changing in any manner or eliminating any of the
provisions of, the Indenture or of modifying in any manner the rights of
Transition Bondholders, provided that (i) such action will not in the opinion of
counsel satisfactory to the Bond Trustee materially and adversely affect the
interest of any Transition Bondholder and (ii) the Rating Agency Condition will
have been satisfied with respect thereto.
Any Supplemental Indenture executed in connection with the issuance of one
or more new Series of Transition Bonds will not be considered an amendment to
the Indenture requiring consent of the Transition Bondholders.
Modifications to the Sale and Servicing Agreement
The Indenture will provide that the Issuer will not amend the Sale and
Servicing Agreement without the consent of a majority of the holders of the
outstanding Transition Bondholders of each Series or Class to be affected in any
way that may adversely affect in any manner the interests of any Transition
Bondholders or (i) increase or reduce in any manner the amount of, or accelerate
or delay the timing of, collections of payments in respect of the Intangible
Transition Charges or (ii) reduce the aforesaid percentage of the Transition
Bonds the holders of which are required to consent to any such amendment,
without the consent of the holders of all the outstanding Transition Bonds.
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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 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 each
Series then outstanding; 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.
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 or 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 proceeds of such sale are sufficient to pay in full the
principal of and the accrued interest on the outstanding Transition Bonds;
or
(ii) the Bond Trustee determines that the proceeds of 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.
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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, and 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 or interest
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.
No Transition Bondholder of any Series will have the right to institute any
proceeding with respect to the Indenture, unless:
(i) such holder previously has given to the Bond Trustee written
notice of a continuing Event of Default with respect to such Series;
(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 reasonable
indemnity;
(iv) the Bond Trustee has for 60 days 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, any state thereof or the District of Columbia;
(ii) such entity expressly assumes by a Supplemental Indenture the
Issuer's obligation to make due and punctual payments upon the Transition
Bonds and the performance or observance of every agreement and covenant of
the Issuer under the Indenture;
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(iii) no Default or Event of Default will have occurred and be
continuing immediately after such merger or consolidation;
(iv) the Rating Agency Condition will have been satisfied with respect
to such transaction;
(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 and such
consolidation or merger complies with the Indenture and all conditions
precedent therein provided relating to such transaction;
(vi) none of the Intangible Transition Property, the QRO or PECO
Energy's or the Issuer's rights under the Competition Act or the QRO are
impaired; 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 maintain and
preserve the lien and security interest (and priority thereof) of the Indenture
and will not 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.
The Issuer may not, among other things:
(i) except as expressly permitted by the Indenture or the Sale and
Servicing Agreement, sell, transfer, exchange or otherwise dispose of any
of its assets; or
(ii) 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 Issuer.
The Issuer may not engage in any business other than 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 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 and 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
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capital assets (either realty or personalty) other than Intangible Transition
Property. 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.
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 Sale and Servicing
Agreement. See "The Sale and 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.
Bond Trustee's Annual Report
The Bond Trustee will be required to mail each year to all Transition
Bondholders a brief report relating to 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
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.
Legal Defeasance and Covenant Defeasance
The Issuer may, at any time, terminate (i) all 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
"Covenant Defeasance Option"). The Issuer may exercise the Legal Defeasance
Option with respect
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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, because of an Event of Default under the
Indenture prior to such date. 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 interest on such Transition Bonds to the Expected
Payment Date or redemption date therefor, as applicable;
(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
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(y) since the date of execution of the Indenture, there has been
a change in the applicable federal income tax law,
in either case to the effect that, and 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
______ will be the Bond Trustee under the Indenture. The Bond Trustee may
resign at any time. 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 or if the Bond Trustee becomes insolvent.
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.
Governing Law
The Indenture will be governed by and construed under the laws of the
Commonwealth of Pennsylvania.
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CERTAIN TAX MATTERS
Certain 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.
ALL PROSPECTIVE INVESTORS ARE ADVISED TO 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.
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
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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. 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, (ii) 28% if the
United States Person held the Transition Bond for more than one year but not
more than eighteen months before sale and (iii) 20% if the United States Person
held the Transition Bond for more than eighteen months before sale.
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 its tax 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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<PAGE>
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
98
<PAGE>
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.
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.
Certain 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
99
<PAGE>
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
Transition Bonds of any Class or Series on behalf 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, except as provided in the applicable Prospectus Supplement,
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. 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
100
<PAGE>
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.
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 the Underwriters' 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.
101
<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............................................................. 12
Adjustment Request.......................................................... 12
Annual Accountant's Report.................................................. 81
Beneficiary Trustees........................................................ 64
Bond Rate................................................................... 14
Bond Trustee................................................................ 1
Book-Entry Transition Bonds................................................. 69
Business Day................................................................ 15
Calculated Overcollateralization Level...................................... 15
Calculation Date............................................................ 12
CAP Rate Program............................................................ 60
Capital Subaccount.......................................................... 15
Cede........................................................................ 3
CEDEL....................................................................... 69
CEDEL Participants.......................................................... 71
Class....................................................................... 1
Class Termination Date...................................................... 3
Code........................................................................ 20
Collateral.................................................................. 1
Collection Account.......................................................... 15
Collection Period........................................................... 20
Commonwealth................................................................ 12
Commonwealth Court.......................................................... 37
Competition Act............................................................. 1
Competitive Default Service................................................. 41
Competitive Default Supplier................................................ 41
Competitive Transition Charges.............................................. 37
Cooperative................................................................. 71
Covenant Defeasance Option.................................................. 93
Customer.................................................................... 13
Customer Category........................................................... 13
Delaware Trustee............................................................ 64
Depositaries................................................................ 69
DTC......................................................................... 3
Eastern District Court...................................................... 37
electric distribution companies............................................. 8
electric generation suppliers............................................... 8
Eligible Institution........................................................ 84
Eligible Investments........................................................ 85
ERISA....................................................................... 20
Euroclear................................................................... 69
Euroclear Operator.......................................................... 71
Euroclear Participants...................................................... 71
102
<PAGE>
TERM PAGE
---- ----
Event of Default............................................................ 90
Exchange Act................................................................ 2
Expected Amortization Schedule...............................................14
Expected Final Payment Date................................................. 18
Final Order................................................................. 24
Financial Institution....................................................... 98
Foreign Person.............................................................. 96
Fumo Action................................................................. 47
General Subaccount.......................................................... 15
H.R. 1230................................................................... 23
Indenture................................................................... 1
Independent Trustee......................................................... 64
Initial Intangible Transition Property...................................... 74
Initial Transfer Date....................................................... 74
Insolvency Laws............................................................. 82
Intangible Transition Charges............................................... 1
Intangible Transition Property.............................................. 1
Interest.................................................................... 18
IP&L........................................................................ 24
Issuer...................................................................... 1
Issuer Trustee.............................................................. 10
ITC Collections............................................................. 10
Joint Petition.............................................................. 37
Legal Defeasance Option..................................................... 93
Liquidated Damages.......................................................... 19
Monthly Allocation Date..................................................... 15
Monthly Servicing Fee....................................................... 20
Moody's..................................................................... 20
OID......................................................................... 97
Overcollateralization Amount................................................ 15
Overcollateralization Subaccount............................................ 15
Participants................................................................ 69
Parties in Interest.........................................................100
Payment Date................................................................ 3
PECO Energy................................................................. 1
Plan Assets................................................................. 99
Plans....................................................................... 99
Principal................................................................... 18
Projected Transition Bond Balance........................................... 12
Prospectus Supplement....................................................... 1
PUC......................................................................... 1
PUC Restructuring Order..................................................... 37
QRO......................................................................... 1
Qualified Transition Expenses............................................... 8
Rate BLI.................................................................... 49
Rate Class.................................................................. 13
103
<PAGE>
TERM PAGE
---- ----
Rate EP..................................................................... 49
Rate GS..................................................................... 49
Rate HT..................................................................... 49
Rate OP..................................................................... 48
Rate PD..................................................................... 49
Rate POL.................................................................... 49
Rate R...................................................................... 48
Rate R-H.................................................................... 48
Rate SL-E................................................................... 49
Rate SL-P................................................................... 49
Rate SL-S................................................................... 49
Rate TL..................................................................... 49
Rating Agency............................................................... 4
Rating Agency Condition..................................................... 4
Record Date................................................................. 14
Registration Statement...................................................... 2
Remittance Date............................................................. 19
Required Capital Amount..................................................... 16
Reserve Subaccount.......................................................... 15
Restructuring Plan.......................................................... 24
RFA......................................................................... 56
Rules....................................................................... 70
S&P......................................................................... 19
Sale and Servicing Agreement................................................ 1
SEC......................................................................... 2
Securities Act.............................................................. 2
Seller...................................................................... 1
Series...................................................................... 1
Series Issuance Date........................................................ 1
Series Subaccount........................................................... 15
Series Termination Date..................................................... 3
Servicer.................................................................... 1
Servicer Defaults........................................................... 82
Settlement.................................................................. 24
Stranded Costs.............................................................. 8
Subsequent Intangible Transition Property................................... 74
Subsequent Sale............................................................. 74
Subsequent Transfer Date.................................................... 74
Successor Servicer.......................................................... 82
Tax Counsel................................................................. 96
Terms and Conditions........................................................ 72
Transition Bond Balance..................................................... 12
Transition Bondholder....................................................... 3
Transition Bonds............................................................ 1
Trust Agreement............................................................. 64
Trustees.................................................................... 64
104
<PAGE>
TERM PAGE
---- ----
U.S. Government Obligations................................................. 95
Underwriters................................................................100
Union Action................................................................ 47
United States Person........................................................ 96
United States related person................................................ 99
Winter Moratorium........................................................... 61
105
<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.
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.
F-5
<PAGE>
Notes to Financial Statements, Continued
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 Sale and 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-6
DESCRIPTION OF INTANGIBLE TRANSITION PROPERTY...............................S-9
DESCRIPTION OF THE SELLER'S BUSINESS.......................................S-13
SERVICING..................................................................S-18
CERTAIN TAX MATTERS........................................................S-18
ERISA CONSIDERATIONS.......................................................S-20
UNDERWRITING...............................................................S-21
RATINGS....................................................................S-22
INDEX OF PRINCIPAL DEFINITIONS.............................................S-23
Prospectus
AVAILABLE INFORMATION...................................................... 2
REPORTS TO TRANSITION BONDHOLDERS.......................................... 3
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE............................ 3
PROSPECTUS SUPPLEMENT...................................................... 3
PROSPECTUS SUMMARY......................................................... 8
RISK FACTORS............................................................... 22
PECO ENERGY COMPANY........................................................ 34
THE COMPETITION ACT........................................................ 34
PECO ENERGY'S RESTRUCTURING PLAN........................................... 37
THE QRO AND THE INTANGIBLE TRANSITION CHARGES.............................. 42
LITIGATION................................................................. 47
THE SELLER AND SERVICER.................................................... 48
THE ISSUER................................................................. 64
USE OF PROCEEDS............................................................ 65
THE TRANSITION BONDS....................................................... 66
CERTAIN WEIGHTED AVERAGE LIFE
AND YIELD CONSIDERATIONS................................................. 73
THE SALE AND SERVICING AGREEMENT........................................... 74
THE INDENTURE.............................................................. 83
CERTAIN TAX MATTERS........................................................ 96
ERISA CONSIDERATIONS....................................................... 99
PLAN OF DISTRIBUTION....................................................... 100
RATINGS.................................................................... 101
LEGAL MATTERS.............................................................. 101
INDEX OF PRINCIPAL DEFINITIONS............................................. 102
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......................... *
Trustee's Fees and Expenses............................. *
Legal Fees and Expenses................................. *
Blue Sky Fees and Expenses.............................. *
Accountants' Fees and Expenses.......................... *
Rating Agency Fees...................................... *
Miscellaneous Fees and Expenses......................... *
----
Total........................................... $ *
====
- ----------------------
* To be provided by amendment.
Item 15. Indemnification of 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 indemnity which is otherwise available to such person under the laws of
the State of Delaware.
Item 16. Exhibits
Exhibit No. Description
- ----------- -----------
1.1 Form of Underwriting Agreement.*
4.1 Trust Agreement for PECO Energy Transition Trust.
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.*
8.1 Opinion of Ballard Spahr Andrews & Ingersoll, LLP with respect to
federal tax matters.*
10.1 Form of Sale and Servicing Agreement.*
II-1
<PAGE>
10.2 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 Exhibit 8.1).*
23.2 Consent of Richards, Layton & Finger, P.A. (included in its
opinion filed as Exhibit 5.1).*
23.3 Consent of Coopers & Lybrand, L.L.P. (included in the Prospectus
filed as part of this Registration Statement).
24.1 Power of Attorney (included on page II-4 of this Registration
Statement).
25.1 Statement of Eligibility under the Trust Indenture Act of 1939, as
amended, of ________, as Bond Trustee under the Indenture.*
27.1 Financial Data Schedule.*
99.1 Qualified Rate Order issued May 14, 1998.*
- ----------------------
* To be filed by amendment.
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)(3) of the Securities Act of 1933, as
amended; (ii) to reflect in the prospectus any facts or events arising after the
effective date of the Registration Statement (or the most recent post-effective
amendment thereof) which, individually or in the aggregate, represent a
fundamental change in the information set forth in the Registration Statement.
Notwithstanding the foregoing, any increase or decrease in volume of securities
offered (if the total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) of the Securities Act of 1933,
as amended, if, in the aggregate, the changes in volume and price represent no
more than a twenty percent change in the maximum aggregate offering price set
forth in the "Calculation of Registration Fee" table in the effective
Registration Statement; and (iii) to include any material information with
respect to the plan of distribution not previously disclosed in the Registration
Statement or any material change in such information in the Registration
Statement; provided, however, that (a)(1)(i) and (a)(1)(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.
II-2
<PAGE>
(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, therefore, 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 or
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 it 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 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-3
<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 has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Philadelphia, Commonwealth of Pennsylvania, on June
29, 1998.
PECO ENERGY TRANSITION TRUST
By: /s/ George Shicora
------------------------------------
George Shicora, Beneficiary Trustee
By: /s/ Diana Moy Kelly
------------------------------------
Diana Moy Kelly, Beneficiary Trustee
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
above constitutes and appoints Diana Moy Kelly as their true and lawful
attorney-in-fact and agent, with full power of substitution and resubstitution,
for and in each of their names, place and stead, in any and all capacities to
sign any or all amendments (including post-effective amendments) to this
Registration Statement and any or all other documents in connection therewith,
and to file the same, with all exhibits thereto, with the Securities and
Exchange 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 and about the premises, as fully to all intent and
purposes as might or could be done in person, hereby ratifying and confirming
all that said attorney-in-fact and agent, or her substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
II-4
<PAGE>
INDEX TO EXHIBITS
Exhibit No. Description
- ----------- -----------
1.1 Form of Underwriting Agreement.*
4.1 Trust Agreement for PECO Energy Transition Trust.
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. *
8.1 Opinion of Ballard Spahr Andrews & Ingersoll, LLP with respect to
federal tax matters.*
10.1 Form of Sale and Servicing Agreement.*
10.2 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 Exhibit 8.1).*
23.2 Consent of Richards, Layton & Finger, P.A. (included in its
opinion filed as Exhibit 5.1).*
23.3 Consent of Coopers & Lybrand, L.L.P. (included in the Prospectus
filed as part of this Registration Statement).
24.1 Power of Attorney (included on page II-4 of this Registration
Statement).
25.1 Statement of Eligibility under the Trust Indenture Act of 1939, as
amended, of ________, as Bond Trustee under the Indenture.*
27.1 Financial Data Schedule.
99.1 Qualified Rate Order issued May 14, 1998.*
- ----------------------
* To be filed by amendment.
EXHIBIT 4.1
TRUST AGREEMENT
This TRUST AGREEMENT, dated as of June 23, 1998 (this "Trust Agreement"),
among PECO Energy Company, a Pennsylvania corporation, as grantor (the
"Grantor") and First Union Trust Company, National Association, as Issuer
Trustee (the "Issuer Trustee"), Diana Moy Kelly and George Shicora, each as a
Beneficiary Trustee (jointly, the "Beneficiary Trustees") (the Beneficiary
Trustees and the Issuer Trustee being hereinafter referred to collectively as
the "Trustees"). The Grantor and the Trustees hereby agree as follows:
1. The trust created hereby shall be known as "PECO Energy Transition
Trust" (the "Trust"), in which name the Trustees, or the Grantor to the extent
provided herein, may conduct the business of the Trust, make and execute
contracts, and sue and be sued.
2. The Grantor hereby assigns, transfers, conveys and sets over to the
Trustees the sum of $5,000. The Trustees hereby acknowledge receipt of such
amount in trust from the Grantor, which amount shall constitute the initial
trust estate. The Trustees hereby declare that they will hold the trust estate
in trust for the Grantor. It is the intention of the parties hereto that the
Trust created hereby constitute a business trust under Chapter 38 of Title 12 of
the Delaware Code, 12 Del. C. ss. 3801, et seq. (the "Business Trust Act"), and
that this document constitutes the governing instrument of the Trust. The
Trustees are hereby authorized and directed to execute and file a certificate of
trust with the Delaware Secretary of State in accordance with the provisions of
the Business Trust Act.
3. The Grantor and the Trustees will enter into an amended and restated
Trust Agreement, satisfactory to each such party and substantially in the form
included as an exhibit to the 1933 Act Registration Statement (as defined
below), to provide for the contemplated operation of the Trust created hereby
and the issuance of the Transition Bonds referred to therein (the "Transition
Bonds"). Prior to the execution and delivery of such amended and restated Trust
Agreement, the Trustees shall not have any duty or obligation hereunder or with
respect to the trust estate, except as otherwise required by applicable law or
as may be necessary to obtain prior to such execution and delivery any licenses,
consents or approvals required by applicable law or otherwise.
4. The Grantor and the Trustees hereby authorize and direct the Beneficiary
Trustees (i) to file with the Securities and Exchange Commission (the
"Commission") and execute, in each
<PAGE>
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
Diana Moy Kelly 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.
5. This Trust Agreement may be executed in one or more counterparts.
6. The number of Trustees initially shall be three (3) and thereafter the
number of Trustees shall be such number as shall be fixed from time to time by a
written instrument signed by the Grantor which may increase or decrease the
number of Trustees; provided, however, that to the extent required by the
Business Trust Act, one Trustee shall either be a natural person who is a
resident of the State of Delaware or, if not a natural person, an entity which
has its principal place of business in
2
<PAGE>
the State of Delaware and otherwise meets the requirements of applicable
Delaware law. Subject to the foregoing, the Grantor is entitled to appoint or
remove without cause any Trustee at any time. The Trustees may resign upon
thirty (30) days' prior notice to the Grantor.
7. This Trust Agreement shall be governed by, and construed in accordance
with, the laws of the State of Delaware (without regard to conflict of laws or
principles).
IN WITNESS WHEREOF, the parties hereto have caused this Trust Agreement to
be duly executed as of the day and year first above written.
PECO ENERGY COMPANY, as Grantor
By: /s/ J. Barry Mitchell
-------------------------------------------
Name: J. Barry Mitchell
Title: Vice President,
Finance and Treasurer
FIRST UNION TRUST COMPANY, NATIONAL
ASSOCIATION, not in its individual
capacity but solely as the Issuer
Trustee
By: /s/ Edward L. Truitt, Jr.
-------------------------------------------
Name: Edward L. Truitt, Jr.
Title: Assistant Vice President
DIANA MOY KELLY, not in her
individual capacity but solely as a
Beneficiary Trustee
By: /s/ Diana Moy Kelly
-------------------------------------------
Name: Diana Moy Kelly
GEORGE SHICORA, not in his
individual capacity but solely as a
Beneficiary Trustee
By: /s/ George Shicora
-------------------------------------------
Name: George Shicora
3
EXHIBIT 4.2
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 R. Shicora
- ---------------------------------------
