UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL
INSTRUCTION H(1) (a) AND (b) OF FORM 10-Q AND IS THEREFORE FILING THIS FORM
WITH THE REDUCED DISCLOSURE FORMAT
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OF 15(d) OF THE
SECURITIES ACT OF 1934
Commission file number: 333-58055
PECO Energy Transition Trust
(Exact name of registrant as specified in its charter)
Delaware 51-0382130
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
c/o First Union Trust Company, N. A.
One Rodney Square, 920 King Street
Wilmington, Delaware 19801
(Address of principal executive offices) (Zip Code)
(302) 888-7532
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes X No
---------- ----------
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PECO ENERGY TRANSITION TRUST
STATEMENTS OF NET ASSETS AVAILABLE FOR TRUST ACTIVITIES
(Millions of Dollars)
<TABLE>
<CAPTION>
<S> <C> <C>
September 30, December 31,
1999 1998
----------------- -----------------
(Unaudited)
ASSETS
Current Assets:
Cash and Cash Equivalents $ 86.7 $ -
Current portion of Intangible Transition Property 134.7 -
----------------- -----------------
Total Current Assets 221.4 -
Noncurrent Assets:
Unamortized Debt Issuance Costs 23.4 2.1
Intangible Transition Property 3,883.1 -
----------------- -----------------
TOTAL ASSETS 4,127.9 2.1
----------------- -----------------
LIABILITIES
Current Liabilities:
Due to Related Party, Net 58.4 1.9
Accrued Interest Expense 23.1 -
Accrued Expenses - 0.2
Current portion of Transition Bonds 120.0 -
----------------- -----------------
Total Current Liabilities 201.5 2.1
Long-term Debt:
Transition Bonds 3,832.5 -
----------------- -----------------
TOTAL LIABILITIES 4,034.0 2.1
----------------- -----------------
NET ASSETS AVAILABLE FOR TRUST ACTIVITIES $ 93.9 $ -
================= =================
</TABLE>
See Notes to Financial Statements.
2
<PAGE>
PECO ENERGY TRANSITION TRUST
STATEMENT OF CHANGES IN NET ASSETS AVAILABLE FOR TRUST ACTIVITIES
(Unaudited)
(Millions of Dollars)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 (a) 1999 1998 (a)
--------- -------- -------- --------
ADDITIONS
Contributions by Trust Grantor $ - $ - $ 20.0 $ -
ITC Collections 145.9 - 222.2 -
Due From Related Party 11.9 - 53.0 -
Deferred Debt Issuance Costs - 1.1 23.1 1.1
Deferred Discount on Transition Bonds - - 5.4 -
Intangible Transition Property - - 4,080.2 -
Interest Income 1.7 - 1.7 -
Other - - .3 -
--------- -------- -------- --------
TOTAL ADDITIONS 159.5 1.1 4,405.9 1.1
--------- -------- -------- --------
DEDUCTIONS
Due to Related Party - 1.1 111.4 1.1
Transition Bonds - - 4,000.0 -
Interest Expense 66.1 - 130.0 -
Amortization of Debt Issuance Costs .8 - 1.6 -
Amortization of Intangible Transition Property 41.0 - 62.3 -
Amortization of Debt Discount .1 - .7 -
Service Fee Expense 3.0 - 6.0 -
--------- -------- -------- --------
TOTAL DEDUCTIONS 111.0 1.1 4,312.0 1.1
--------- -------- -------- --------
CHANGES IN NET ASSETS AVAILABLE FOR TRUST ACTIVITIES 48.5 - 93.9 -
--------- -------- -------- --------
NET ASSETS AVAILABLE FOR TRUST ACTIVITES
AT BEGINNING OF PERIOD 45.4 - - -
--------- -------- -------- --------
NET ASSETS AVAILABLE FOR TRUST ACTIVITIES
AT END OF PERIOD $ 93.9 $ - $ 93.9 $ -
========= ======== ======== ========
</TABLE>
(a) PECO Energy Transition Trust was formed on June 23, 1998. At inception, a
$5,000 contribution was made by the Trust Grantor.
See Notes to Financial Statements.
3
<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 provides retail
electric and natural gas service to the public in its traditional service
territory and retail electric generation service throughout Pennsylvania
pursuant to Pennsylvania's Customer Choice Program. PECO Energy also engages in
the wholesale marketing of electricity on a national basis.
PETT was organized for the special purpose of purchasing and owning
Intangible Transition Property (ITP), issuing transition bonds (Transition
Bonds), pledging its interest in ITP and other collateral to the bond trustee to
secure the Transition Bonds, and performing activities that are necessary and
suitable to accomplish these purposes. ITP represents the irrevocable right of
PECO Energy, or its successor or assignee, to collect a non-bypassable
Intangible Transition Charge (ITC) from customers pursuant to a Qualified Rate
Order (QRO) issued on May 14, 1998 by the Pennsylvania Public Utility Commission
(PUC) in accordance with the Pennsylvania Electricity Generation Customer Choice
and Competition Act (Competition Act) enacted in Pennsylvania in December 1996.
The QRO authorizes the ITC to be sufficient to recover up to $4 billion of PECO
Energy's stranded costs and an amount sufficient to recover the aggregate
principal amount of the 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.
PETT's organizational documents require it to operate in such a manner
that it should not be consolidated in the bankruptcy estate of PECO Energy in
the event PECO Energy becomes subject to such a proceeding, and both PECO Energy
and PETT have treated the transfer of ITP to PETT as a sale under the
Competition Act. The Transition Bonds are debt obligations of PETT.
For financial reporting and federal and Commonwealth of Pennsylvania
income and franchise tax purposes, the transfer of ITP to PETT has been treated
as a financing arrangement and not as a sale. Furthermore, the results of
operations of PETT are consolidated with PECO Energy for financial and income
tax reporting purposes.
2. SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying financial statements as of September 30, 1999 and for
the three and nine months then ended are unaudited, but include all adjustments
that PETT considers necessary for a fair presentation of such financial
statements. All adjustments are of a normal, recurring nature. The year-end
balance sheet data was derived from audited financial statements but do not
include all disclosures required by generally accepted accounting principles.
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
4
<PAGE>
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 an original
maturity of three months or less to be cash equivalents.
Unamortized Debt Issuance Costs
The costs associated with the issuance of the Transition Bonds have
been capitalized and are being amortized over the life of the Transition Bonds.
Income Taxes
PETT is a wholly owned subsidiary of PECO Energy and has elected not to
be taxed as a corporation for federal income tax purposes. PETT is being treated
as a division of PECO Energy and not as a separate taxable entity.
Derivative Financial Instruments
Hedge accounting is applied only if the derivative reduces the risk of
the underlying hedged item and is designed at inception as a hedge, with respect
to the hedged item. If a derivative instrument ceased to meet the criteria for
deferral, any gains or losses, would be currently recognized in income. PETT
does not hold or issue derivative financial instruments for trading purposes.
3. TRANSITION BONDS
On March 25, 1999, PETT, an independent statutory business trust
organized under the laws of Delaware and a wholly owned subsidiary of PECO
Energy, issued $4 billion aggregate principal amount of Transition Bonds to
securitize a portion of PECO Energy's authorized stranded cost recovery. The
Transition Bonds are solely obligations of PETT, secured by ITP sold by PECO
Energy to PETT concurrently with the issuance of the Transition Bonds and
certain other collateral related thereto.
5
<PAGE>
<TABLE>
<CAPTION>
The terms of the Transition Bonds are as follows:
Approximate
Face Amount Bond Expected Final
Class (millions) Rate Maturity Maturity
<S> <C> <C> <C> <C>
A-1 $244.5 5.48% March 1, 2001 March 1, 2003
A-2 $275.4 5.63% March 1, 2003 March 1, 2005
A-3 $667.0 6.02% (a) March 1, 2004 March 1, 2006
A-4 $458.5 5.80% March 1, 2005 March 1, 2007
A-5 $464.6 6.10% (a) September 1, 2007 March 1, 2009
A-6 $993.4 6.05% March 1, 2007 March 1, 2009
A-7 $896.6 6.13% September 1, 2008 March 1, 2009
<FN>
(a) The Class A-3 and A-5 Transition Bonds bears interest at floating
rates. The rates provided for each such class above are as of September
30, 1999.
</FN>
</TABLE>
PETT used the proceeds of the Transition Bonds to purchase the ITP from
PECO Energy. In accordance with the terms of the Competition Act and the May 14,
1998 QRO, PECO Energy used the proceeds principally to reduce its stranded costs
and related capitalization.
PETT has entered into interest rate swaps to manage interest rate
exposure associated with the issuance of two floating rate series of Transition
Bonds. At September 30, 1999, the fair value of these instruments was $23.3
million based on the present value difference between the contracted rate (i.e.,
hedged rate) and the market rates at that date. The fixed interest rates of
series A-3 and A-5 are 6.58% and 6.94%, respectively. A hypothetical 50 basis
point increase or decrease in the spot yield at September 30, 1999 would have
resulted in an aggregate fair value of these interest rate swaps of $37.5
million or $11.9 million, respectively. If the derivative instruments had been
terminated at September 30, 1999, these estimated fair values represent the
amount to be paid by the counterparties to PETT.
On September 1, 1999, PETT made the first semi-annual principal and
interest payments related to the Transition Bonds of $42.5 million and $106.9
million, respectively.
4. SIGNIFICANT AGREEMENTS AND RELATED PARTY TRANSACTIONS
Under the Master Servicing Agreement entered into by PETT and PECO
Energy dated as of March 25, 1999, PECO Energy, as servicer, is required to
manage and administer the ITP sold to PETT and to collect the ITC related
thereto on behalf of PETT. PETT will pay an annual servicing fee based upon the
outstanding principal amount of the Transition Bonds. Upon closing of the
Transition Bond issuance, PETT recorded an intercompany liability to PECO Energy
in the amount of $110.7 million consisting of: (1) overcollateralization
deposits of $60.1 million, (2) servicing fees of $49.2 million, and (3) trustee
fees of $1.4 million. This liability is included in PETT's Statement of Net
Assets Available for Trust Activities.
Copies of the executed Sale Agreement between PECO Energy, as seller,
and PETT, as purchaser, the Master Servicing Agreement, and the Indenture were
filed with the Securities and Exchange Commission in a Current Report on Form
8-K dated March 31, 1999.
6
<PAGE>
5. LITIGATION
Indianapolis Power and Light Company (IPL) filed an action which sought
to invalidate the Competition Act and thereby preclude PECO Energy from
recovering and securitizing stranded costs. IPL asserted that the Competition
Act discriminates against interstate commerce in violation of the Commerce
Clause of the United States Constitution. The Commonwealth Court of Pennsylvania
dismissed this action. IPL sought review of this dismissal by the United States
Supreme Court. The IPL petition for certiorari was denied by the United States
Supreme Court as reported on PECO Energy Company's Current Report on Form 8-K
dated March 8, 1999. All appeals of the PUC's Final Order dated May 14, 1998
that were being pursued have been resolved and all other appeals that were being
held in abeyance have been withdrawn with prejudice from the Commonwealth Court
of Pennsylvania and the United States District Court.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following analysis of the financial condition and results of
activities of PECO Energy Transition Trust (PETT) is in an abbreviated format
pursuant to Instruction H of Form 10-Q. Such analysis should be read in
conjunction with the Financial Statements and Notes to Financial Statements
included in Item 1 above, and the Note Issuer's Annual Financial Statements and
the Notes to Financial Statements included in its Registration Statement dated
March 18, 1999.
PETT was formed under the laws of Delaware pursuant to a trust
agreement between PETT, PECO Energy Company (PECO Energy), First Union Trust
Company, N.A., acting thereunder not in its individual capacity but solely as
issuer trustee of PETT, and two beneficiary trustees appointed by PECO Energy.
PETT is currently governed by an amended and restated trust agreement among the
same parties. On November 3, 1999, PECO Energy Company, in its capacity as
Grantor under such amended and restated trust agreement, removed one of the
beneficiary trustees and appointed a replacement beneficiary trustee.
Excluding the effects of the purchase of ITP from PECO Energy Company,
additions for the three and nine months ended September 30, 1999 were $159.5
million and $325.7 million, respectively. These additions primarily represent
the recovery of ITC. Excluding the effects of the issuance of transition bonds
(Transition Bonds), deductions for the three and nine months ended September 30,
1999 were $111.1 million and $312.0 million, respectively, and included: $66.1
million and $130.0 million, respectively, of interest charges associated with
the Transitiion Bonds issued on March 25, 1999; amortization charges related to
the ITC of $41.0 million and $62.3 million, respectively, and servicing fees of
$3.0 million and $6.0 million, respectively.
On March 25, 1999, PETT issued $244.5 million aggregate principal
amount of 5.48% Transition Bonds, Class A-1, $275.4 million aggregate principal
amount of 5.63% Transition Bonds, Class A-2, $667.0 million aggregate principal
amount of LIBOR+0.125% (6.02% on September 30, 1999) Transition Bonds, Class
A-3, $458.5 million aggregate principal amount of 5.80% Transition Bonds, Class
A-4, $464.6 million aggregate principal amount of LIBOR+0.200% (6.10% on
September 30, 1999) Transition Bonds, Class A-5, $993.4 million aggregate
principal amount of 6.05% Transition Bonds, Class A-6, $896.6 million aggregate
principal amount of 6.13% Transition Bonds, Class A-7.
PECO Energy, servicer of the transition bonds, along with its wholly
owned subsidiary NewCo, has entered into an agreement and Plan of Merger dated
as of September 22, 1999 with Unicom Corporation. It is anticipated that the
surviving corporation of the merger will serve as servicer of the Transition
Bonds in accordance with terms of the Master Servicing Agreement. For additional
information on the proposed merger, see PECO Energy Company's Quarterly Report
on Form 10-Q for the quarter ended September 30, 1999 and its Current Reports on
Form 8-K dated September 22, 1999, September 23, 1999 and September 24, 1999.
PETT relies on the computer systems of PECO Energy in its capacity as
servicer under the Master Servicing Agreement. PECO Energy is faced with the
task of addressing the Year 2000 (Y2K) issue. The Y2K 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
8
<PAGE>
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 Y2K issue could affect the ability of customers to receive bills sent by
PECO Energy or make payments on such bills.
PECO Energy determined that it was required to modify, convert or
replace significant portions of its software and a subset of its system hardware
and embedded technology so that its computer systems will properly utilize dates
beyond December 31, 1999. PECO Energy presently believes that, with these
modifications conversions and replacements, the effect of the Y2K issue has been
mitigated. If such modifications, conversions, and replacements had not been
made or completed in a timely manner, the Y2K issue could have had a material
adverse impact on the operations and financial condition of PECO Energy. The
costs associated with this potential impact are not presently quantifiable. PECO
Energy has not investigated and has no intention of investigating the Y2K issue
as it relates to any customer's ability to receive bills sent by PECO Energy or
make payments on bills.
For additional information on PECO Energy's Y2K project, see PECO
Energy's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Omitted with respect to PETT pursuant to Instruction H of Form 10-Q.
9
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Omitted with respect to PETT pursuant to Instruction H of Form 10-Q.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Omitted with respect to PETT pursuant to Instruction H of Form 10-Q.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Omitted with respect to PETT pursuant to Instruction H of Form 10-Q.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit No. Description
- ----------- -----------
27 Financial Data Schedule.
(b) Reports on Form 8-K filed during the reporting period:
Report, dated September 1, 1999, reporting information under "ITEM 5.
OTHER EVENTS" and "ITEM 7. FINANCIAL STATEMENTS and EXHIBITS"
regarding the reports to the bondholders provision of the
Indenture, dated March 1, 1999.
10
<PAGE>
PECO ENERGY TRANSITION TRUST
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: November 15, 1999 By: /s/ George R. Shicora
----------------------------
George R. Shicora
Beneficiary Trustee
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0001064414
<NAME> PECO ENERGY TRANSITION TRUST
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 87
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 221
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 4,128<F1>
<CURRENT-LIABILITIES> 202<F2>
<BONDS> 3,833
0
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 4,034
<SALES> 0
<TOTAL-REVENUES> 274
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 70
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 130
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 74
<EPS-BASIC> 0
<EPS-DILUTED> 0
<FN>
<F1>
(1) Includes Intangible Transition Property of $4,018.
<F2>
(2) Due to Related Party, Net of $58, Current Portion of Long-term Debt of $120
and Accrued Expenses of $23.
</FN>
</TABLE>
