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 March 31, 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 ____ No _X__
<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>
March 31, December 31,
1999 1998
---------- -------
(Unaudited)
ASSETS
<S> <C> <C>
Cash $ 20.0 $ --
Unamortized Debt Issuance Costs 25.0 2.1
Intangible Transition Property 4,080.2 --
---------- ----
Total Assets 4,125.2 2.1
---------- ----
LIABILITIES
Due to Related Party 110.7 1.9
Accrued Expenses 4.1 0.2
Transition Bonds 3,995.2 --
---------- ----
Total Liabilities 4,110.0 2.1
---------- ----
NET ASSETS AVAILABLE FOR TRUST ACTIVITIES $ 15.2 $ --
========== ====
</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>
Three Months Ended
March 31,
-------------------------------
1999 1998(a)
-------------------------------
ADDITIONS:
<S> <C> <C>
Contributions by Trust Grantor $ 20.0 $ --
Deferred Debt Issuance Costs 23.1 --
Deferred Discount on Transition Bonds 5.4 --
Intangible Transition Property 4,080.2 --
---------- ----
TOTAL ADDITIONS 4,128.7 --
---------- ----
DEDUCTIONS:
Due to Related Party 108.8 --
Transition Bonds 4,000.0 --
Accrued Interest on Transition Bonds 4.1 --
Amortization of Debt Discount 0.6 --
---------- ----
TOTAL DEDUCTIONS 4,113.5 --
---------- ----
CHANGES IN NET ASSETS AVAILABLE FOR TRUST ACTIVITIES 15.2 --
NET ASSETS AVAILABLE FOR TRUST ACTIVITIES AT BEGINNING OF PERIOD -- --
---------- ----
NET ASSETS AVAILABLE FOR TRUST ACTIVITIES AT END OF PERIOD $ 15.2 $ --
========== ====
</TABLE>
(a) PECO Energy Transition Trust was formed on June 23, 1998.
See Notes to Financial Statements.
3
<PAGE>
PECO ENERGY TRANSITION TRUST
NOTES TO CONDENSED 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 will treat the transfer of ITP to PETT as a sale under the Competition
Act. The Transition 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 accompanying condensed financial statements as of March 31, 1999
and for the three 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
condensed 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
4
<PAGE>
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 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.
The terms of the Transition Bonds are as follows:
<TABLE>
<CAPTION>
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 5.18% (a) March 1, 2004 March 1, 2006
A-4 $458.5 5.80% March 1, 2005 March 1, 2007
A-5 $464.6 5.26% (a) September 1, 2007 March 1, 2009
A-6 $993.4 6.05% March 1, 2007 March 1, 2009
A-7 $896.7 6.13% September 1, 2008 March 1, 2009
<FN>
(a) The Class A-3 and A-5 Transition Bonds earn interest at a floating
rate. The rates provided for each such class above are as of March 31,
1999.
</FN>
</TABLE>
5
<PAGE>
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 will use 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. The swaps have a fair value of $3 million which is based on the present
value difference between the contracted rate (i.e., hedged rate) and the market
rates at March 31, 1999. The fixed interest rates of series A-3 and A-5 are
6.577% and 6.943%, respectively.
The aggregate change in fair value of the Transition Bond derivative
instruments that would have resulted from a hypothetical 50 basis point decrease
in the spot yield at March 31, 1999 is estimated to be $5 million. If the
derivative instruments had been terminated at March 31, 1999, this estmated fair
value represents the amount to be paid by PETT to the counterparties.
The aggregate change in fair value of these derivative instruments that
would have resulted from a hypothetical 50 basis point increase in the spot
yield at March 31, 1999 is estimated to be $14.6 million. If the derivative
instruments had been terminated at March 31, 1999, this estimated fair value
represents the amount to be paid by the counterparties to PETT.
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 Bond
issuance transaction, 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 reflected on PETT's Statement of Net Assets
Available for Trust Activities as Due to Related Party.
Copies of the executed form of the 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.
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.
6
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
PECO Energy Transition Trust (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.
RESULTS OF OPERATIONS
For the three months ended March 31, 1999, PETT incurred $4.7 million
of interest expense associated with the transition bonds (Transition Bonds)
issued on March 25, 1999.
DISCUSSION OF LIQUIDITY AND CAPITAL RESOURCES
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% (5.18% on March 31, 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% (5.26% on March 31,
1999) Transition Bonds, Class A-5, $993.4 million aggregate principal amount of
6.05% Transition Bonds, Class A-6, $896.7 million aggregate principal amount of
6.13% Transition Bonds, Class A-7.
YEAR 2000 COMPLIANCE
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 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 of 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 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 investigating the Year 2000 issue as it relates to any
Customer's ability to receive bills sent by PECO Energy or make payments on
bills.
7
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
Omitted with respect to PETT pursuant to Instruction H of Form 10-Q.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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.
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
There is nothing to report with regard to this item.
8
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit No. Description
- --------------- ---------------
4.1.1 Trust Agreement for PECO Energy Transition Trust
(incorporated by reference to the same titled exhibit to
PETT's Registration Statement on Form S-3, File No.
333-58055, filed with the Commission on June 29, 1998).
4.1.2 Amended and Restated Trust Agreement for PECO Energy
Transition Trust (incorporated by reference to the same
titled exhibit to PETT's Current Report on Form 8-K filed
with the Commission on March 31, 1999).
4.2 Certificate of Trust for PECO Energy Transition Trust
(incorporated by reference to the same titled exhibit to
PETT's Registration Statement on Form S-3, File No.
333-58055, filed with the Commission on June 29, 1998)
4.3.1 Indenture dated as of March 1, 1999 between PECO Energy
Transition Trust and The Bank of New York (incorporated by
reference to the same titled exhibit to PETT's Current
Report on Form 8-K filed with the Commission on March 31,
1999).
4.3.2 Series Supplement dated as of March 25, 1999 between PECO
Energy Transition Trust and The Bank of New York
(incorporated by reference to the same titled exhibit to
PETT's Current Report on Form 8-K filed with the Commission
on March 31, 1999).
10.1 Intangible Transition Property Sale Agreement dated as of
March 25, 1999 between PECO Energy Transition Trust and PECO
Energy Company (incorporated by reference to the same titled
exhibit to PETT's Current Report on Form 8-K filed with the
Commission on March 31, 1999).
10.2 Master Servicing Agreement dated as of March 25, 1999
between PECO Energy Transition Trust and PECO Energy Company
(incorporated by reference to the same titled exhibit to
PETT's Current Report on Form 8-K filed with the Commission
on March 31, 1999).
27 Financial Data Schedule.
99.1 Form of ISDA Master Agreement (PETT entered into two such
agreements, each dated as of March 18, 1999, with Goldman
Sachs Mitsui Marine Derivative Products, L.P. and Citibank,
N.A., New York, respectively, with respect to the Class A-3
and Class A-5 Transition Bonds, respectively) (incorporated
by reference to the same titled exhibit to PETT's Current
Report on Form 8-K filed with the Commission on March 31,
1999).
99.2 Schedule to the Master Agreement dated as of March 18, 1999
between Goldman Sachs Mitsui Marine Derivative Products,
L.P. and PECO Energy Transition Trust (incorporated by
reference to the same titled exhibit to PETT's Current
Report on Form 8-K filed with the Commission on March 31,
1999).
9
<PAGE>
99.3 Schedule to the Master Agreement dated as of March 18, 1999
between Citibank, N.A., New York and PECO Energy Transition
Trust (incorporated by reference to the same titled exhibit
to PETT's Current Report on Form 8-K filed with the
Commission on March 31, 1999).
99.4 Confirmation Letter Agreement dated March 18, 1999 from
Goldman Sachs Mitsui Marine Derivative Products, L.P. and
confirmed by PECO Energy Transition Trust (incorporated by
reference to the same titled exhibit to PETT's Current
Report on Form 8-K filed with the Commisssion on March 31,
1999).
99.5 Confirmation Letter Agreement dated March 18, 1999 from
Citibank, N.A., New York and confirmed by PECO Energy
Transition Trust (incorporated by reference to the same
titled exhibit to PETT's Current Report on Form 8-K filed
with the Commission on March 31, 1999).
(b) Reports on Form 8-K filed during the reporting period:
Report, dated March 31, 1999 reporting information under "ITEM 5. OTHER
EVENTS" regarding the issuance and sale of $4 billion of
Transition Bonds by PETT on March 25, 1999.
Reports on Form 8-K filed subsequent to the reporting period:
Report, dated May 12, 1999 reporting information under "ITEM 5. OTHER
EVENTS" regarding the Monthly Servicer Certificates and Monthly
Servicer Report for April 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: May 14, 1999 By: /s/ Diana Moy Kelly
-----------------------
Diana Moy Kelly
Beneficiary Trustee
11
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0001064414
<NAME> PECO ENERGY TRANSITION TRUST
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 20
<SECURITIES> 0
<RECEIVABLES> 4,105 <F1>
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 4,125
<CURRENT-LIABILITIES> 115 <F2>
<BONDS> 3,995
0
0
<COMMON> 0
<OTHER-SE> 15
<TOTAL-LIABILITY-AND-EQUITY> 4,125
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<FN>
<F1> Unamortized Debt Issuance Costs of $25 and Intangible Transition Property
of $4,080.
<F2> Due to Related Party of $111 and Accrued Expenses of $4.
</FN>
</TABLE>
