AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 10, 1999
REGISTRATION NO. 333-58055
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------------------
AMENDMENT NO. 4 TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------------------
PECO ENERGY TRANSITION TRUST
(Exact name as specified in registrant's Certificate of Trust)
<TABLE>
<S> <C> <C>
Delaware c/o First Union Trust Company National Association 51-0382130
(State or other jurisdiction of One Rodney Square, 920 King Street (I.R.S. Employer
incorporation or organization) Wilmington, Delaware 19801 Identification Number)
(302) 888-7532
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
</TABLE>
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.|_|
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
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 $4,000,000,000 100% $4,000,000,000 $1,112,017
=================================================================================================================================
</TABLE>
* Estimated solely for the purpose of calculating the registration fee.
** Of this amount, $295 was paid on June 29, 1998, and the balance of
$1,111,722 was paid on February 22, 1999.
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.
1
<PAGE>
SUBJECT TO COMPLETION DATED MARCH 10, 1999
PROSPECTUS SUPPLEMENT TO PROSPECTUS DATED MARCH __, 1999
PECO ENERGY TRANSITION TRUST
ISSUER
PECO ENERGY COMPANY
SELLER AND SERVICER
SERIES 1999-A
$ TRANSITION BONDS
THE ISSUER WILL ISSUE:
<TABLE>
<CAPTION>
CLASS A-1 CLASS A-2 CLASS A-3 CLASS A-4 CLASS A-5
---------------- ---------------- -------------------- ---------------- --------------------
<S> <C> <C> <C> <C> <C>
Principal Amount $ $ $ $ $
Price $ ( %) $ ( %) $ ( %) $ ( %) $ ( %)
Underwriter's Commission $ ( %) $ ( %) $ ( %) $ ( %) $ ( %)
Proceeds to the Issuer $ ( %) $ ( %) $ ( %) $ ( %) $ ( %)
Bond Rate % % LlBOR + %* % LIBOR + %*
Interest Paid Semi-Annual Semi-Annual Semi-Annual Semi-Annual Semi-Annual
Optional Redemption No No On or After No On or After
February 28, 2001 February 28, 2001
All Series 1999-A Bonds are subject to optional redemption in whole once the outstanding principal
balance has been reduced to less than 5% of the initial principal balance.
First Payment Date
Expected Final Payment
Date
Class Termination Date
<CAPTION>
CLASS A-6 CLASS A-7
---------------- ----------------
<S> <C> <C>
Principal Amount $ $
Price $ ( %) $ ( %)
Underwriter's Commission $ ( %) $ ( %)
Proceeds to the Issuer $ ( %) $ ( %)
Bond Rate % %
Interest Paid Semi-Annual Semi-Annual
Optional Redemption No No
First Payment Date
Expected Final Payment
Date
Class Termination Date
</TABLE>
* Calculated as described under "The Series 1999-A Bonds--Interest" in this
prospectus supplement.
THESE SECURITIES ARE HIGHLY STRUCTURED. BEFORE YOU PURCHASE THESE
SECURITIES, YOU SHOULD CAREFULLY CONSIDER THE RISK FACTORS BEGINNING ON
PAGE 26 IN THE ACCOMPANYING PROSPECTUS AND ON PAGE S-9 IN THIS PROSPECTUS
SUPPLEMENT.
o THESE SECURITIES ARE OBLIGATIONS OF THE ISSUER ONLY. THESE SECURITIES DO NOT
REPRESENT OBLIGATIONS OF PECO ENERGY OR ANY ENTITY OTHER THAN THE ISSUER.
THESE SECURITIES ARE NOT OBLIGATIONS OF THE PENNSYLVANIA PUBLIC UTILITY
COMMISSION OR ANY OTHER GOVERNMENTAL AGENCY OR INSTRUMENTALITY.
o THE ISSUER IS A SPECIAL PURPOSE ENTITY THAT HAS NO PROPERTY OTHER THAN THE
COLLATERAL, AND THE COLLATERAL IS THE SOLE SOURCE OF PAYMENT FOR THESE
SECURITIES.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED
THAT THIS PROSPECTUS SUPPLEMENT OR THE ACCOMPANYING PROSPECTUS IS ACCURATE
OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
SALOMON SMITH BARNEY
GOLDMAN, SACHS & CO.
LEHMAN BROTHERS
FIRST CHICAGO CAPITAL MARKETS, INC. FIRST UNION CAPITAL MARKETS CORP.
COMMERCE CAPITAL MARKETS, INC.
JANNEY MONTGOMERY SCOTT INC.
PRYOR, MCCLENDON, COUNTS & CO., INC.
THE INFORMATION IN THIS PROSPECTUS SUPPLEMENT IS NOT COMPLETE AND MAY BE
CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THE ISSUER IS NOT
SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE
IS NOT PERMITTED.
<PAGE>
YOU SHOULD RELY ONLY ON THE INFORMATION IN THIS PROSPECTUS SUPPLEMENT AND
THE ACCOMPANYING PROSPECTUS. THE ISSUER HAS NOT AUTHORIZED ANYONE TO PROVIDE YOU
WITH INFORMATION THAT IS DIFFERENT. THE INFORMATION IN THIS PROSPECTUS
SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS IS CORRECT ONLY AS OF THE DATE OF
THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS.
TABLE OF CONTENTS
WHERE TO FIND INFORMATION IN THESE DOCUMENTS................ S-1
SUMMARY OF TERMS............................................ S-2
RISK FACTORS................................................ S-9
THE SERIES 1999-A BONDS..................................... S-10
General................................................... S-10
Distributions from the Series 1999-A Subaccount........... S-10
Interest.................................................. S-10
The Swap Counterparties................................... S-15
Principal................................................. S-16
The Interest Rate Swap Agreements......................... S-20
Optional Redemption....................................... S-22
Mandatory Redemption...................................... S-22
Overcollateralization..................................... S-22
Other Credit Enhancement.................................. S-26
Reports to Holders of Series 1999-A Bonds................. S-26
DESCRIPTION OF INTANGIBLE TRANSITION PROPERTY............... S-27
The Intangible Transition Charges......................... S-27
Adjustments to the Intangible Transition Charges.......... S-29
DESCRIPTION OF THE SELLER'S BUSINESS........................ S-30
SERVICING................................................... S-30
Monthly Servicing Fee..................................... S-30
Servicer Advances......................................... S-30
MATERIAL TAX MATTERS........................................ S-30
ERISA CONSIDERATIONS........................................ S-31
UNDERWRITING................................................ S-32
RATINGS..................................................... S-33
INDEX OF PRINCIPAL DEFINITIONS.............................. S-34
<PAGE>
WHERE TO FIND INFORMATION IN THESE DOCUMENTS
We provide information to you about the Transition Bonds in two separate
documents that progressively provide more detail: (a) the accompanying
prospectus, which provides general information, some of which may not apply to
your Series of Transition Bonds and (b) this prospectus supplement, which
describes the specific terms of your Series of Transition Bonds. This prospectus
supplement and the accompanying prospectus together contain complete information
about the offering of your Series of Transition Bonds. You are urged to read
both documents. In particular, you should read the information under the heading
"Risk Factors," beginning on Page 26 of the accompanying prospectus and on Page
S-9 of this prospectus supplement.
This supplement begins with several sections describing these securities:
o Summary of Terms provides important amounts, dates and other terms
of your series;
o The Series 1999-A Bonds describes the key structural features of
these securities; and
o Description of Intangible Transition Property describes the
Intangible Transition Charges that provide for payment of these
securities and refers you to the sections in the accompanying
prospectus where you can find further information about the
Intangible Transition Charges and other Collateral for the
Transition Bonds.
As you read through these sections, cross-references will direct you to
more information in the accompanying prospectus. You can also directly reference
key topics by looking at the table of contents in this prospectus supplement and
the accompanying prospectus.
IF THE TERMS OF YOUR SERIES OF TRANSITION BONDS VARY BETWEEN THIS
PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS, YOU SHOULD RELY ON THE
INFORMATION IN THIS PROSPECTUS SUPPLEMENT.
This prospectus supplement and the accompanying prospectus may be used by
the Underwriters in connection with offers and sales related to market-making
transactions in the Transition Bonds offered by this prospectus supplement and
the accompanying prospectus. The Underwriters may act as principal or agent in
such transactions. Such sales will be made at prices related to prevailing
market prices at the time of sale.
TO UNDERSTAND THE STRUCTURE AND PAYMENT TERMS OF THESE SECURITIES, YOU
MUST CAREFULLY READ THE ACCOMPANYING PROSPECTUS AND THIS PROSPECTUS
SUPPLEMENT IN THEIR ENTIRETY.
S-1
<PAGE>
SUMMARY OF TERMS
The following section is only a summary of selected information for this
document and does not provide you with all the information you will need to make
your investment decision. There is more detailed information in this prospectus
supplement and in the accompanying prospectus. To understand all of the terms of
the offering of the Transition Bonds, carefully read this entire document and
the accompanying prospectus.
Capitalized terms used in this prospectus supplement are defined in this
prospectus supplement or in the accompanying prospectus, and you should refer to
the Index of Principal Definitions on page S-34 of this prospectus supplement,
or if not listed there, to the Index of Principal Definitions on page 109 of the
accompanying prospectus, for the location of the definitions of such terms.
For a discussion of certain material risks associated with an investment in
the Series 1999-A Bonds, you should review the discussion under "Risk Factors,"
which begins on page 26 of the accompanying prospectus and on page S-9 of this
prospectus supplement.
S-2
<PAGE>
SECURITIES OFFERED
SERIES 1999-A TRANSITION BONDS
$_________
<TABLE>
<S> <C>
ISSUER: PECO ENERGY TRANSITION TRUST
SELLER: PECO ENERGY COMPANY ("PECO ENERGY")
SERVICER: PECO ENERGY
SWAP COUNTERPARTY FOR THE
CLASS A-3 BONDS: EITHER GOLDMAN SACHS MITSUI MARINE DERIVATIVE PRODUCTS,
L.P. OR CITIBANK, N.A., NEW YORK
SWAP COUNTERPARTY FOR THE
CLASS A-5 BONDS: EITHER GOLDMAN SACHS MITSUI MARINE DERIVATIVE PRODUCTS,
L.P. OR CITIBANK, N.A., NEW YORK
BOND TRUSTEE: THE BANK OF NEW YORK
PRICING DATE: __________, 1999
SERIES ISSUANCE DATE: __________, 1999
CLEARANCE AND SETTLEMENT: DTC/[CEDEL/EUROCLEAR]
</TABLE>
<TABLE>
<CAPTION>
Series Structure: Initial Class Principal Balance Bond Rate % of Total Series Principal
- ----------------- ------------------------------- --------- ---------------------------
<S> <C> <C> <C>
Class A-1 $_________ _____% _____%
Class A-2 $_________ _____% _____%
Class A-3 $_________ LIBOR+__%* _____%
Class A-4 $_________ _____% _____%
Class A-5 $_________ LIBOR+__%* _____%
Class A-6 $_________ _____% _____%
Class A-7 $_________ _____% _____%
</TABLE>
* Calculated as described under "The Series 1999-A Bonds--Interest" in this
prospectus supplement.
<TABLE>
<S> <C>
Monthly Servicing Fee: Either 1/12 of 0.25% of the outstanding principal balance of the Series
1999-A Bonds as long as Intangible Transition Charges are included in
electric bills sent to Customers or 1/12 of 1.50% of the outstanding
principal balance of the Series 1999-A Bonds if Intangible Transition
Charges are not included in electric bills sent to Customers.
Anticipated Ratings: S&P/Fitch IBCA/Duff & Phelps AAA
Moody's Aaa
Credit Enhancement: ITC Adjustments; Overcollateralization, funded over the life of the Series
1999-A Bonds and expected to be $80 million by the Expected Final Payment
Date; capital of the Issuer, funded upon the issuance of each Series and
expected to be $20 million.
Payment Dates:
First Payment Date:
CLASS A-1 CLASS A-2 CLASS A-3 CLASS A-4 CLASS A-5 CLASS A-6 CLASS A-7
--------- --------- --------- --------- --------- --------- ---------
Expected Final Payment Date: --------- --------- --------- --------- --------- --------- ---------
Class Termination Date: --------- --------- --------- --------- --------- --------- ---------
Optional Redemption: No No On or No On or No No
After After
February February
28, 2001 28, 2001
All Series 1999-A Bonds are subject to optional redemption in whole once
the outstanding principal balance has been reduced to less than 5% of the
initial principal balance.
Record Date: Close of business on the last day of the calendar month before any Payment
Date.
CUSIP Number:
</TABLE>
S-3
<PAGE>
INTRODUCTION
The Pennsylvania Electricity Generation Customer Choice and Competition Act
(the "COMPETITION ACT") was enacted in 1996 and provides for the restructuring
of the electric industry in Pennsylvania, including retail competition for
generation beginning in 1999. Prior to enactment of the Competition Act,
electric utilities, such as PECO Energy, invested in various generation-related
assets, such as electric generating facilities (including nuclear power plants)
and power purchase contracts with third-party generators of electricity, to help
fulfill their duties to serve the public as regulated utilities. The electric
utilities recovered such investments by charging their customers the regulated
rates approved by the Pennsylvania Public Utility Commission.
One of the expected effects of the deregulation of electricity generation
is that rates will be determined by market forces. These market rates may not be
high enough to allow the utilities to recover their investments in
generation-related assets described above.
The Competition Act provides for utilities to recover the anticipated loss
in value of their generation-related assets, known as "STRANDED COSTS," as a
result of the transition from a regulated environment to competition for
electric generation services by placing certain charges on their customers'
bills. These charges are known as "COMPETITIVE TRANSITION CHARGES." Utilities
are authorized to securitize the right to recover all or a portion of these
charges (such right, "INTANGIBLE TRANSITION PROPERTY") through the issuance of
transition bonds, such as the securities described in this prospectus
supplement. Once intangible transition property is securitized, these stranded
costs, plus certain other costs associated with servicing the transition bonds,
are recovered through "INTANGIBLE TRANSITION CHARGES" in customers' electric
bills. Intangible transition charges are allocable from competitive transition
charges and variable distribution charges. Although under the Competition Act,
stranded costs, intangible transition charges and intangible transition property
are terms generally applicable to all Pennsylvania utilities, when used as
capitalized terms in this prospectus supplement and the accompanying prospectus,
they refer to PECO Energy's Stranded Costs, Intangible Transition Charges and
Intangible Transition Property.
Intangible Transition Property was created by the Competition Act and a
qualified rate order issued by the Pennsylvania Public Utility Commission to
PECO Energy on May 14, 1998 (the "QRO"). Intangible Transition Property
represents the irrevocable right of PECO Energy to collect Intangible Transition
Charges from Customers (as defined under the caption "Summary--Customers" in the
accompanying prospectus) to recover through the issuance of transition bonds:
o a portion of PECO Energy's Stranded Costs; and
o the interest, fees, expenses, credit enhancement, swap or hedge
transactions and premiums, if any, associated with transition bonds.
Intangible Transition Charges are nonbypassable: Customers cannot avoid
paying them even if they purchase electricity from a supplier other than PECO
Energy.
On the Series Issuance Date, PECO Energy will sell Intangible Transition
Property which includes the right to receive the proceeds therefrom (i.e., the
Intangible Transition Charges) to the Issuer who will then pledge this property
and certain other property to the Bond Trustee as the collateral for the
Transition Bonds. The other property that makes up the collateral for these
securities is described in this Summary under the subcaption "The Collateral."
S-4
<PAGE>
For more information on the Competition Act, Intangible Transition Property
and Intangible Transition Charges, you should review the material under the
captions entitled "Risk Factors," "The Competition Act," "PECO Energy's
Restructuring Plan" and "The QRO and the Intangible Transition Charges" in the
accompanying prospectus.
The following is a summary of other specific matters related to these
securities:
THE COLLATERAL
The Series 1999-A Bonds will be secured by the collateral (the "COLLATERAL"),
primarily consisting of:
o all the Issuer's right, title and interest in and to the Intangible
Transition Property transferred by the Seller to the Issuer pursuant to the
Intangible Transition Property Sale Agreement (the "SALE AGREEMENT");
o collections of Intangible Transition Charges that are allocated to the
Issuer pursuant to the Master Servicing Agreement among the Issuer, the
Servicer and any other issuers of transition bonds (the "MASTER SERVICING
AGREEMENT");
o the Issuer's rights, except for certain provisions for indemnification of
the Issuer, under the Sale Agreement;
o the Issuer's rights, except for certain provisions for indemnification of
the Issuer, under the Master Servicing Agreement; and
o certain bank accounts of the Issuer and all amounts or investment property
held therein or credited thereto (other than certain cash amounts described
in the accompanying prospectus but including, in the case of the Class A-3
and Class A-5 Bonds, any net receipts under the Interest Rate Swap
Agreements described below).
For a more detailed description of the Collateral for the Transition Bonds, you
should review the material under the captions "The QRO and the Intangible
Transition Charges" and "The Indenture--Security" in the accompanying
prospectus. For a summary of the terms of the Sale Agreement, see "The Sale
Agreement" in the accompanying prospectus. For a summary of the terms of the
Master Servicing Agreement, see "The Master Servicing Agreement" in the
accompanying prospectus.
INTEREST
Holders of each Class of this Series are expected to receive interest at the
Bond Rate for such Class as set forth on the cover of this prospectus
supplement. Interest on the Class A-3 and Class A-5 Bonds will be paid at the
rate equal to the six-month London interbank offered rate ("LIBOR") for
six-month United States dollar deposits, determined as of the applicable
Interest Determination Date, as described below, plus __% and __%, respectively,
so long as payments are being received under the Interest Rate Swap Agreements.
Interest on the Class A-1, Class A-2, Class A-4, Class A-6 and Class A-7 Bonds
will be calculated on the basis of a 360-day year of twelve 30-day months.
Interest on the Class A-3 and Class A-5 Bonds will be calculated on the basis of
the actual number of days from the preceding Payment Date, to but excluding the
next Payment Date, divided by 360, for so long as payments are being received
under the Interest Rate Swap Agreements
With respect to the Class A-3 and A-5 Bonds, if the applicable Swap Counterparty
fails to make any payment due under an Interest Rate Swap Agreement, the holders
of the affected Class will receive the Swap Rate until the Swap Counterparty
pays such amount or alternate arrangements can be made to pay the Bond Rate. See
"The Series 1999-A Bonds--Other Credit Enhancement" is this prospectus
supplement.
You should also review the material under the caption "The Series 1999-A
Bonds--Interest" and "--The Interest Rate Swap Agreements" in this prospectus
supplement.
INTEREST DETERMINATION DATE
The "INTEREST DETERMINATION DATE" will be the day two London Banking Days prior
to the preceding Payment Date (or, in the case of the first Payment Date, the
Series Issuance Date).
S-5
<PAGE>
INTEREST RATE SWAP AGREEMENT
On the Series Issuance Date, the Issuer will enter into an "INTEREST RATE SWAP
AGREEMENT" for the Class A-3 Bonds and an Interest Rate Swap Agreement for the
Class A-5 Bonds with the Swap Counterparty or Counterparties identified in this
prospectus supplement. Each Interest Rate Swap Agreement will have a "NOTIONAL
AMOUNT" as of any Payment Date equal to the principal balance of the Class A-3
Bonds or the principal balance of the Class A-5 Bonds, as applicable, as of the
close of business on the preceding Payment Date. For the first Payment Date, the
Notional Amount of each Interest Rate Swap Agreement will be equal to the
initial Class A-3 Principal Balance or the initial Class A-5 Principal Balance,
as applicable.
Under the Interest Rate Swap Agreements, any payments made to the Issuer by the
applicable Swap Counterparty (a "NET SWAP RECEIPT") will be deposited in the
Class A-3 Subaccount or the Class A-5 Subaccount, as applicable, and any
payments made to the applicable Swap Counterparty by the Issuer (a "NET SWAP
PAYMENT") will be paid out of funds on deposit in the Class A-3 Subaccount or
the Class A-5 Subaccount, as applicable. See "The Series 1999-A Bonds--The
Interest Rate Swap Agreements" and "--Distributions from the Series 1999-A
Subaccount" in this prospectus supplement.
Under certain limited circumstances and in certain circumstances at the
direction of 66 2/3% of the holders of the applicable Class, each Interest Rate
Swap Agreement may be terminated. In the event an Interest Rate Swap Agreement
terminates, the interest on the affected Class will convert to a fixed rate
equal to %, in the case of the Class A-3 Bonds, and %, in the case of the
Class A-5 Bonds. In each case, this fixed rate is referred to as the "SWAP
RATE."
SWAP COUNTERPARTY
Either GOLDMAN SACHS MITSUI MARINE DERIVATIVE PRODUCTS, L.P. or CITIBANK, N.A.,
New York will be the "SWAP COUNTERPARTY" with respect to one or both of the
Interest Rate Swap Agreements. In certain circumstances, a super majority of the
holders of the Class A-3 or Class A-5 Bonds may replace the applicable Swap
Counterparty or terminate the applicable Swap Agreement. See "The Series 1999-A
Bonds--The Swap Counterparties" and "--The Interest Rate Swap Agreements" in
this prospectus supplement.
PRINCIPAL
On each Payment Date, the Bond Trustee will make principal payments in
accordance with the Expected Amortization Schedule set forth under the caption
"The Series 1999-A Bonds--Principal" in this prospectus supplement.
Other than in the event of a redemption, in no event will the principal payment
on any Class on any Payment Date be greater than the amount necessary to reduce
the principal balance of such Class to the amount specified in the Expected
Amortization Schedule for such Class.
CREDIT ENHANCEMENT
Overcollateralization. Overcollateralization is the pledge by the Issuer of
Collateral, in this case Intangible Transition Property, in excess of what is
expected to be needed to cover the repayment of these securities. The
overcollateralization for these securities will be funded over the life of the
Series 1999-A Bonds and is expected to be $80 million by the Expected Final
Payment Date.
Additional Credit Enhancements. In addition, capital of the Issuer (expected to
be $20 million) is available to make payments on these securities under certain
circumstances described in the accompanying prospectus. In addition, Intangible
Transition Charges will be subject to periodic review and adjustment, as
described below in "ITC Adjustment Process."
You should also review the material under the captions, "The Transition
Bonds--Credit Enhancement" and "The Indenture--Allocations and Payments" in the
accompanying prospectus.
OPTIONAL REDEMPTION
The Class A-3 Bonds and the Class A-5 Bonds are subject to optional redemption
in whole or in part at the option of the Issuer on any
S-6
<PAGE>
Payment Date after February 28, 2001 so long as provision is made for payment
of any termination payment due to a Swap Counterparty. The redemption price for
the Class A-3 Bonds and the Class A-5 Bonds is equal to the principal balance
thereof as of the redemption date, plus interest at the applicable Bond Rate
accrued to the redemption date. In addition, the Series 1999-A Bonds may be
redeemed in whole once the outstanding principal balance has been reduced to
less than 5% of the initial principal balance thereof.
You should also review the material under the caption "The Series 1999-A
Bonds--Optional Redemption" in this prospectus supplement.
MANDATORY REDEMPTION
If the Seller is obligated to pay Liquidated Damages under the Sale Agreement,
these securities will be subject to mandatory redemption in whole at a
redemption price equal to the principal balance of these securities plus
interest at the applicable Bond Rate accrued to the redemption date.
For more information about mandatory redemption of the Transition Bonds,
liquidated damages and indemnification payments by the Seller, you should refer
to the material under the caption "The Sale Agreement--Seller Representations
and Warranties" in the accompanying 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 continuing through May 14,
2008 and, commencing January 14, 2008, on the 14th day of each month (or if such
day is not a business day, the immediately preceding business day) until the
Series Termination Date (each a "CALCULATION DATE"). For the annual adjustments
through May 14, 2008, the adjustments are expected to be implemented on or prior
to August 12 of the same year; in the case of the monthly adjustments, the
adjustments are expected to be implemented 30 days after such requests are filed
with the PUC. Each Adjustment Request will be designed to result in the
outstanding principal balance of the Series 1999-A Bonds equaling the amount
provided for in the Expected Amortization Schedule and the amount on deposit in
the Overcollateralization Subaccount equaling the Calculated
Overcollateralization Level by the Payment Date immediately succeeding the next
Adjustment Date.
For a more detailed description of the ITC adjustment process, you should review
the material under the caption "Description of Intangible Transition
Property--Adjustments to the Intangible Transition Charges" and the material
under the caption "The QRO and the Intangible Transition Charges--The Intangible
Transition Charges--The ITC Adjustment Process" in the accompanying prospectus.
TAX STATUS
In the opinion of Ballard Spahr Andrews & Ingersoll, LLP, special tax counsel to
PECO Energy:
o Interest received by a holder of these securities that is a United States
taxpayer will be subject to federal income tax.
o [In the event that the Series 1999-A Bonds are issued at a price lower than
the stated principal amount thereof by more than a de minimis amount, the
excess of the stated principal amount over the issue price will constitute
"original issue discount" ("OID"). A holder of the Series 1999-A Bonds that
is a United States taxpayer will be required to pay tax on the OID income as
it accrues, before it is received by the holder. Consequently, the amount of
interest income that a holder of the Series 1999-A Bonds will be required to
include as income may exceed the amount of interest income actually received
during the taxable year.]
o A holder of the Series 1999-A Bonds will realize a gain from the sale of the
Series 1999-A Bonds to the extent that the proceeds of the sale exceed the
holder's tax basis in these securities. If the holder is a United States
taxpayer, then: (i) the gain will be fully taxable and (ii) the gain may
qualify as long-term capital gain if such holder held the securities for
more than one year.
o If the holder of the Series 1999-A Bonds is not a United States taxpayer,
interest income [including OID] and any gain realized by such holder,
generally, will be
S-7
<PAGE>
exempt from United States federal income and withholding tax.
The Issuer recommends that all prospective investors consult their tax advisers
regarding the federal income tax consequences of the ownership and disposition
of the Series 1999-A Bonds in light of their particular circumstances, as well
as the effect of any foreign, state, local or other laws.
For further information regarding the application of U.S. federal income tax
laws, you should see the sections captioned "Material Tax Matters" appearing in
this prospectus supplement and in the accompanying prospectus.
SERVICER'S AND ISSUER'S
MAILING ADDRESS AND
TELEPHONE NUMBER OF
PRINCIPAL EXECUTIVE OFFICE:
The mailing address of PECO Energy is P.O. Box 8699, Philadelphia, Pennsylvania
19101, and its telephone number is (215) 841-4000. The mailing address of the
Issuer is c/o First Union Trust Company National Association, One Rodney Square,
920 King Street, Wilmington, Delaware 19801, and its telephone number is (302)
888-7532.
S-8
<PAGE>
RISK FACTORS
TERMINATION OF SWAP COULD CAUSE A LOSS.
Termination Events under both of the Interest Rate Swap Agreements include
(i) illegality (described under the heading "The Series 1999-A Bonds--The
Interest Rate Swap Agreements" in this prospectus supplement), (ii) a Swap
Counterparty Downgrade Event that is not cured (see "The Series 1999-A
Bonds--The Interest Rate Agreements") and (iii) the acceleration or redemption
of the related Class of Series 1999-A Bonds. "SWAP EVENTS OF DEFAULT" include
the failure of the Issuer or the Swap Counterparty to pay any amount when due
(if not remedied). Upon the occurrence of a Termination Event described under
(i) above, the applicable Interest Rate Swap Agreement will terminate
automatically. Upon the occurrence of a Termination Event described under (ii)
in the first sentence of this paragraph or the Swap Event of Default described
in the second sentence of this paragraph related to the Swap Counterparty,
66 2/3% of the holders of the affected Class may vote to terminate the
applicable Interest Rate Swap Agreement. Upon the occurrence of a Termination
Event described under (iii) above or the Swap Event of Default described in the
second sentence of this paragraph related to the Issuer, the Swap Counterparty
may terminate the applicable Interest Rate Swap Agreement. Upon the occurrence
of a Termination Event described under (iii) above, the Issuer may also
terminate the applicable Interest Rate Swap Agreement. When an Interest Rate
Swap Agreement is terminated, the affected Class of Series 1999-A Bonds will
receive a fixed rate of interest equal to its Swap Rate. The Swap Rate could be
substantially more or less than the Bond Rate on the affected Class at the time
of the termination, which could adversely affect the yield to maturity, and
holders of that Class could suffer a loss.
In addition, even if an Interest Rate Swap Agreement has been terminated
and the Class A-3 or Class A-5 Bonds or both have been converted to the Swap
Rate, the Class A-3 and the Class A-5 Bonds will still be subject to optional
redemption on or after February 28, 2001.
RATINGS DOWNGRADE OF THE CLASS A-3 AND CLASS A-5 BONDS COULD CAUSE A LOSS FOR
HOLDERS OF THOSE BONDS.
If a Swap Counterparty's rating falls below the required ratings specified
in the applicable Interest Rate Swap Agreement, and (i) such Swap Counterparty
fails to make Satisfactory Arrangements as described under the heading "The
Series 1999-A Bonds--The Interest Rate Swap Agreements" in this prospectus
supplement, (ii) the Swap Agent is unable to find a suitable replacement Swap
Counterparty as described under the heading "The Series 1999-A Bonds--The
Interest Rate Swap Agreements" in this prospectus supplement and (iii) 66 2/3%
of the holders of the affected Class do not vote to terminate the applicable
Interest Rate Swap Agreement, the affected Class may be downgraded by the Rating
Agencies. In such event, the trading price of such Class may be reduced, and
holders of such Class could suffer a loss on their investment.
INTEREST PAYMENTS ON CLASS A-3 AND CLASS A-5 BONDS DEPENDENT ON SWAP
COUNTERPARTY.
If a Swap Counterparty fails to make any Net Swap Payment, the holders of
the affected Class will receive interest at the applicable Swap Rate until the
Swap Counterparty pays such Net Swap Payment or alternate arrangements can be
made to pay the Bond Rate. See "The Series 1999-A Bonds--Other Credit
Enhancement" in this prospectus supplement.
S-9
<PAGE>
THE SERIES 1999-A BONDS
The Series 1999-A Bonds will be issued under and secured pursuant to a base
indenture dated as of _____________ between the Issuer and The Bank of New York,
as bond trustee (the "BOND TRUSTEE") as supplemented by the Series 1999-A
Supplemental Indenture thereto (as so supplemented, the "INDENTURE"). The
following summary does not purport to be complete and is subject to, and
qualified by reference to, the terms and provisions of the Indenture and by the
terms and provisions of the Series 1999-A Bonds.
GENERAL
The Series 1999-A Bonds will be issued on the Series Issuance Date and will
be comprised of the Classes listed above under "Summary of Terms--Securities
Offered."
Interest and principal relating to the Series 1999-A Bonds will be paid
through DTC or, if the Series 1999-A Bonds are no longer in book-entry form,
will be payable at the offices of The Bank of New York at 101 Barclay Street,
New York, New York 10286. Generally, payment will be made by check mailed
first-class, postage prepaid to a holder's address as it appears on the
transition bond register on each Record Date. For Series 1999-A Bonds registered
on a Record Date in the name of the nominee of Cede & Co., payments will be made
by wire transfer in immediately available funds to the account designated by
such nominee, except as described below. The final installment of principal and
premium, if any, payable with respect to any Series 1999-A Bond will be payable,
after prior notice to the holder, only upon presentation and surrender of the
Series 1999-A Bond at a place specified in such notice.
DISTRIBUTIONS FROM THE SERIES 1999-A SUBACCOUNT
Amounts distributed from the Series Subaccounts as described in "The
Indenture--Allocations and Payments" in the accompanying prospectus will be
applied among the Classes of the Series 1999-A Bonds and the Class A-3 and Class
A-5 Subaccounts on each Payment Date as follows: (i) with respect to interest,
to each Class on a pro rata basis based on the amount of interest payable to
such Class (and in the case of the Class A-3 and Class A-5 Bonds, based on the
gross amount due to the Swap Counterparty based on the Swap Rate) on such
Payment Date and (ii) with respect to principal, to each Class as described
under "--Principal" in this section.
On the Business Day preceding each Payment Date, the amounts on deposit in
the Series 1999-A Subaccount with respect to Class A-3 and A-5 Bonds (other than
net income or other gain, which, so long as no Event of Default has occurred and
is continuing, shall be released to the Issuer free of the lien of the
Indenture) will be allocated to the applicable Class Subaccount in accordance
with the prior paragraph up to the gross amount, if any, owed to the applicable
Swap Counterparty. On such day, Net Swap Payments will be paid from, or Net Swap
Receipts will be deposited into, such Class Subaccount. On the related Payment
Date, amounts in the Class A-3 Subaccount and Class A-5 Subaccount will be paid
as interest to the holders of the Class A-3 Bonds and the Class A-5 Bonds,
respectively. See "The Indenture--Allocations and Payments" in the accompanying
prospectus.
INTEREST
Interest on each Class of the Series 1999-A Bonds will accrue from the
Series Issuance Date at the respective Bond Rates indicated in the section at
the beginning of this prospectus supplement entitled "Securities Offered." The
interest will be payable on each Payment Date, commencing ______ __, 1999, to
the persons in whose names the Series 1999-A Bonds of each Class are registered
at the close of business on the Record Date therefor.
Interest on the Class A-1, Class A-2, Class A-4, Class A-6 and Class A-7
Bonds will be calculated on the basis of a 360-day year of twelve 30-day months.
Interest on the Class A-3 and Class A-5 Bonds will be calculated on the basis of
the actual number of days from the preceding Payment Date to but
S-10
<PAGE>
excluding the next Payment Date divided by 360, for so long as payments are
being received under the Interest Rate Swap Agreements.
Interest on the Class A-3 and Class A-5 Bonds will be paid at the rate
equal to LIBOR, plus __% and __%, respectively, for so long as payments are
being received under the Interest Rate Swap Agreements. Under certain limited
circumstances and in certain circumstances at the direction of 66 2/3% of the
holders of the applicable Class, both as described in "--The Interest Rate Swap
Agreements," either or both of the Interest Rate Swap Agreements may be
terminated, in which case the interest rate on the affected Classes will convert
to the applicable Swap Rate. The amount of interest payable on the Class A-3 and
Class A-5 Bonds from time to time will be determined as follows:
(i) Determination of LIBOR. _______________________, as Agent Bank
(together with any successor Agent Bank under the Interest Rate Swap
Agreements, the "AGENT BANK") will determine the interest rate payable on
the Class A-3 and Class A-5 Bonds in accordance with the following
provisions:
(a) On the second day on which dealings in deposits in U.S. dollars
are transacted in the London interbank market (a "LONDON BANKING DAY")
immediately preceding the first day of each Interest Accrual Period (as
defined below) and on the Interest Determination Date, the Agent Bank
will determine LIBOR based on the offered rate for deposits in U.S.
dollars for the six-month period commencing on the first day of such
Interest Accrual Period that appears on the page, USD-LIBOR-BBA, of the
Dow Jones Telerate Service as of 11:00 a.m., London time, on such
Interest Determination Date (such display page being the "TELERATE
PAGE"). Notwithstanding the foregoing, if no offered rate appears, LIBOR
for such Interest Accrual Period will be determined as if the parties
had specified the rate described in clause (b) below. The interest rate
applicable to the Class A-3 and Class A-5 Bonds for the Interest Accrual
Period relating to an Interest Determination Date shall be the sum of
LIBOR as determined by the Agent Bank on the most recent Interest
Determination Date plus ____% for the Class A-3 Bonds and ___% for the
Class A-5 Bonds.
(b) With respect to an Interest Determination Date on which no
offered rate appears on the Telerate Page, the Agent Bank will request
the principal London office of each of four major banks in the London
interbank market, selected by the Agent Bank, to provide the Agent Bank
with its offered quotation for six-month deposits in U.S. dollars for
the applicable Interest Accrual Period, commencing on the second London
Banking Day immediately following such Interest Determination Date, to
prime banks in the London interbank market at approximately 11:00 a.m.,
London time, on such Interest Determination Date and in a principal
amount not less than $1 million that is representative for a single
transaction in U.S. dollars in such market at such time. If at least two
such quotations are provided, LIBOR for the relevant Interest Accrual
Period will be the arithmetic mean of such quotations. If fewer than two
quotations are provided, LIBOR for such Interest Accrual Period will be
the arithmetic mean of the rates quoted at approximately 11:00 a.m. in
the City of New York, on such Interest Determination Date by three major
banks in the City of New York selected by the Agent Bank for loans in
U.S. dollars to leading European banks, for the Interest Accrual Period,
commencing on the second London Banking Day immediately following such
Interest Determination Date and in a principal amount not less than $1
million that is representative for a single transaction in U.S. dollars
in such market at such time; provided, however, that if any of the banks
so selected by the Agent Bank are not quoting as mentioned in this
sentence, the interest rate in effect for such Interest Accrual Period
will be the interest rate in effect on such Interest Determination Date.
There will be no maximum or minimum interest rate.
Notwithstanding the foregoing, in the event that an Interest Rate Swap
Agreement with respect to the Class-A-3 or the Class A-5 Bonds has been
terminated, or in any period when the applicable Swap Counterparty fails to make
any Net Swap Payments due under the related Interest Rate Swap Agreement, the
interest rate for the related Class of Bonds will be the applicable Swap Rate,
which is the rate payable by the Issuer under the applicable Interest Rate Swap
Agreement (calculated on the
S-11
<PAGE>
basis of a 360-day year consisting of twelve 30-day months), effective as of the
first day of the Interest Accrual Period in which the termination of such
Interest Rate Swap Agreement occurs.
(ii) Calculation of Interest Due. The Agent Bank will, as soon as
practicable after 11:00 a.m. (London time) on each Interest Determination
Date, determine the interest rate applicable to, and calculate the amount
of interest payable on, the Class A-3 Bonds and the Class A-5 Bonds for the
relevant Interest Accrual Period. Interest payments will be made in an
amount equal to the product of:
(the actual number of days in the related Interest Accrual Period divided
by 360)
x
(LIBOR + __% for Class A-3 Bonds, as applicable)
or
(LIBOR + __% for Class A-5 Bonds, as applicable)
x
(the principal balance of the relevant Class, as of the close of business
on the preceding Payment Date (or, in the case of the first Payment Date, as of
the Series Issuance Date)).
The "INTEREST ACCRUAL PERIOD" with respect to any Payment Date shall be the
period from and including the preceding Payment Date (or, in the case of the
first Payment Date, from and including the Series Issuance Date) to and
excluding such Payment Date. The determination of the interest rate and the
interest payments for the Class A-3 Bonds and the Class A-5 Bonds by the Agent
Bank shall, in the absence of manifest error, be final and binding upon all
parties.
(iii) Notice of Interest Rate and Interest Payment. The Agent Bank
will notify the Issuer, the Bond Trustee and any Paying Agents of the
interest rate and the interest payments due on the Class A-3 Bonds and the
Class A-5 Bonds for each Interest Accrual Period and the relevant Payment
Date as soon as possible after their determination but in no event later
than the first Business Day of any Interest Accrual Period.
(iv) Determination or Calculation by ____________. If the Agent Bank
fails to determine an interest rate or calculate interest due in accordance
with paragraph (ii) above at any time or for any reason, __________ shall
determine the interest and calculate the interest due in accordance with
paragraph (ii) above, and each such determination or calculation shall be
deemed to have been made by the Agent Bank. The determination by the Agent
Bank of any interest rate and calculation thereby of any interest due
shall, in the absence of manifest error, be final and binding on all
parties.
(v) Agent Bank. The Issuer will agree that, so long as any of the
Class A-3 Bonds or Class A-5 Bonds remain outstanding, there will at all
times be an Agent Bank. The Issuer may, upon written notice to the Agent
Bank and the Bond Trustee, terminate the appointment of the Agent Bank for
any reason. Notice of any such termination will be given by the Bond
Trustee to Transition Bondholders within ten days of such termination. If
(x) any person is unable or unwilling to continue to act as the Agent Bank,
or (y) the appointment of the Agent Bank is terminated, then the Issuer
will appoint a successor Agent Bank to act as such in its place and notify
the Bond Trustee of such appointment, provided that neither the resignation
nor removal of the Agent Bank shall take effect until a successor has been
appointed. Notice of any appointment of a successor Agent Bank will be
given by the Bond Trustee to the holders of the Class A-3 and Class A-5
Bonds within ten days of such appointment. Any successor Agent Bank will be
a banking institution organized under the laws of any state or of the
United States with capital and surplus of at least $50 million and which is
an active dealer in LIBOR-based securities.
The record date with respect to any Payment Date shall be the close of
business on the last day of the calendar month preceding such Payment Date (the
"RECORD DATE").
S-12
<PAGE>
The "MONTHLY ALLOCATED INTEREST BALANCE" as of the Series Issuance Date for
the Series 1999-A Bonds and each Monthly Allocation Date is shown below. These
balances are used for the allocation of funds in the Collection Account between
different Series of Transition Bonds on each Monthly Allocation Date. There are
no consequences if the full amount of these allocations is not made on any
Monthly Allocation Date. In addition, these balances will change from time to
time with the issuance of each new Series, the redemption or refunding of a
Class or Series and each periodic adjustment to the Intangible Transition
Charges. The Monthly Allocated Interest Balances are calculated using the
applicable Swap Rate for the Class A-3 and Class A-5 Bonds and the applicable
Bond Rate for all other Classes of Series 1999-A Bonds.
TABLE 1
MONTHLY ALLOCATED INTEREST BALANCE
MONTHLY
ALLOCATED
MONTHLY ALLOCATION DATE INTEREST BALANCE
- ----------------------- ----------------
April __, 1999...................
May __, 1999.....................
June __, 1999....................
July __, 1999....................
August __, 1999..................
September __, 1999...............
October __, 1999.................
November __, 1999................
December __, 1999................
January __, 2000.................
February __, 2000................
March __, 2000...................
April __, 2000...................
May __, 2000.....................
June __, 2000....................
July __, 2000....................
August __, 2000..................
September __, 2000...............
October __, 2000.................
November __, 2000................
December __, 2000................
January __, 2001.................
February __, 2001................
March __, 2001...................
April __, 2001...................
May __, 2001.....................
June __, 2001....................
July __, 2001....................
August __, 2001..................
September __, 2001...............
October __, 2001.................
November __, 2001................
December __, 2001................
January __, 2002.................
February __, 2002................
March __, 2002...................
MONTHLY
ALLOCATED
MONTHLY ALLOCATION DATE INTEREST BALANCE
- ----------------------- ----------------
April __, 2002...................
May __, 2002.....................
June __, 2002....................
July __, 2002....................
August __, 2002..................
September __, 2002...............
October __, 2002.................
November __, 2002................
December __, 2002................
January __, 2003.................
February __, 2003................
March __, 2003...................
April __, 2003...................
May __, 2003.....................
June __, 2003....................
July __, 2003....................
August __, 2003..................
September __, 2003...............
October __, 2003.................
November __, 2003................
December __, 2003................
January __, 2004.................
February __, 2004................
March __, 2004...................
April __, 2004...................
May __, 2004.....................
June __, 2004....................
July __, 2004....................
August __, 2004..................
September __, 2004...............
October __, 2004.................
November __, 2004................
December __, 2004................
January __, 2005.................
February __, 2005................
March __, 2005...................
April __, 2005...................
May __, 2005.....................
June __, 2005....................
July __, 2005....................
August __, 2005..................
September __, 2005...............
October __, 2005.................
November __, 2005................
December __, 2005................
January __, 2006.................
S-13
<PAGE>
MONTHLY
ALLOCATED
MONTHLY ALLOCATION DATE INTEREST BALANCE
- ----------------------- ----------------
February __, 2006................
March __, 2006...................
April __, 2006...................
May __, 2006.....................
June __, 2006....................
July __, 2006....................
August __, 2006..................
September __, 2006...............
October __, 2006.................
November __, 2006................
December __, 2006................
January __, 2007.................
February __, 2007................
March __, 2007...................
April __, 2007...................
May __, 2007.....................
MONTHLY
ALLOCATED
MONTHLY ALLOCATION DATE INTEREST BALANCE
- ----------------------- ----------------
June __, 2007....................
July __, 2007....................
August __, 2007..................
September __, 2007...............
October __, 2007.................
November __, 2007................
December __, 2007................
January __, 2008.................
February __, 2008................
March __, 2008...................
April __, 2008...................
May __, 2008.....................
June __, 2008....................
July __, 2008....................
August __, 2008..................
S-14
<PAGE>
THE SWAP COUNTERPARTIES
The Swap Counterparty for each of the Class A-3 and A-5 Interest Rate Swap
Agreements will be one of Goldman Sachs Mitsui Marine Derivative Products, L.P.
("GSMMDP") or Citibank, N.A., New York ("CITIBANK").
GSMMDP was formed as a Delaware limited partnership in October 1993 to act
as principal in a broad range of over-the-counter interest rate and currency
derivative products. The principal place of business of GSMMDP is 85 Broad
Street, New York, New York 10004.
GSMMDP currently has a "Aaa" financial program rating from Moody's and a
"AA+" counterparty rating from S&P with a negative outlook. The obligations of
GSMMDP under the Interest Rate Swap Agreement are guaranteed by The Goldman
Sachs Group, L.P. ("GROUP").
GSMMDP is 50% owned, directly or indirectly, by each of Group and Mitsui
Marine and Fire Insurance Co., Ltd. ("MITSUI"). GSMMDP also has the benefit of a
support agreement from Group and Mitsui. Under the support agreement, each of
Group and Mitsui have jointly and severally agreed to provide liquidity to
GSMMDP and to ensure that GSMMDP maintains a predetermined level of net worth.
Group currently has long-term debt ratings of "A1" and "A+" from Moody's and
S&P, respectively. Mitsui currently has a long-term debt rating of "AA+" from
S&P and an insurance financial strength rating from Moody's of Aa2.
Citibank was originally organized on June 16, 1812, and now is a national
banking association organized under the National Bank Act of 1864. Citibank is a
wholly owned subsidiary of Citicorp (a Delaware corporation), which is a wholly
owned subsidiary of Citigroup Inc. Citibank is a commercial bank which, along
with its subsidiaries and affiliates, offers a wide range of banking and trust
services to its customers throughout the United States and the world.
As a national bank, Citibank is a regulated entity permitted to engage only
in banking and activities incidental to banking. Citibank's earnings may be
affected by certain monetary policies of the Board of Governors of the Federal
Reserve System. Citibank is primarily regulated by the Office of the Comptroller
of the Currency (the "COMPTROLLER"), which also examines its loan portfolios and
reviews the sufficiency of its allowance for credit losses.
Citibank's deposits at its U.S. branches are insured by the Federal Deposit
Insurance Corporation ("FDIC") and are subject to FDIC insurance assessments.
Citibank may, under certain circumstances, be obligated for the liabilities of
its affiliates that are FDIC-insured depository institutions.
The obligations of Citibank under the applicable Interest Rate Swap
Agreement will not be guaranteed by Citicorp, Citigroup Inc. or any other
affiliate of Citibank.
Citibank currently has long term senior unsecured debt ratings of "Aa2" and
"AA-" from Moody's and S&P and short term senior unsecured debt ratings of "P-1"
and "A-1+" from Moody's and S&P.
The obligations of Citibank under the applicable Interest Rate Swap
Agreement will constitute direct, general unsecured contractual obligations of
Citibank. Legislation enacted as part of the Omnibus Budget Reconciliation Act
of 1993 provides that deposits in U.S. offices and certain claims for
administrative expenses and employee compensation against a U.S. insured
depository institution which has failed will be afforded a priority over other
general unsecured claims, including deposits in non-U.S. offices and claims
under non-depository contracts in all offices, against such an institution in
the "liquidation or other resolution" of such an institution by any receiver.
Such priority creditors (including the FDIC, as the subrogee of insured
depositors) of such depository institution will be entitled to priority over
unsecured creditors in the event of a "liquidation or other resolution" of such
institution.
The Consolidated Balance Sheets of Citibank as of December 31, 1997 and as
of December 31, 1996 are set forth in the Annual Report and Form 10-K of
Citicorp and its subsidiaries for the year ended December 31, 1997 and as of
September 30, 1998 and December 31, 1997 in the Financial Review and Form 10-Q
for the quarter ended September 30, 1998 (the "SEPTEMBER 1998 10-Q").
Consolidated Balance Sheets of Citibank subsequent to September 30, 1998 will be
included in the
S-15
<PAGE>
Form 10-Q's (quarterly) and Form 10-K's (annually) subsequently filed by
Citicorp with the SEC, which will be filed not later than 45 days after the end
of the calendar quarter or 90 days after the end of the calendar year to which
the report relates. For further information regarding Citibank, reference is
made to the September 1998 10-Q and to any subsequent reports on Forms 10-K,
10-Q or 8-K filed by Citicorp with the SEC. All such reports are available from
the SEC, 450 Fifth Street, N.W., Washington, D.C. 20549 or at the Internet World
Wide Web site maintained by the SEC at http://www.sec.gov at prescribed rates.
In addition, Citibank submits quarterly to the Comptroller certain reports
called "Consolidated Reports of Condition and Income for a Bank With Domestic
and Foreign Offices" ("CALL REPORTS"). The Call Reports are on file with, and
publicly available at the Comptroller's offices at 250 E Street, S.W.,
Washington, D.C. 20219. Each Call Report consists of a Balance Sheet, Income
Statement, Changes in Equity Capital and other supporting schedules at the end
of and for the period to which the report relates. The Call Reports are prepared
in accordance with regulatory instructions issued by the Federal Financial
Institutions Examination Council. While the Call Reports are supervisory and
regulatory documents, not primarily accounting documents, and do not provide a
complete range of financial disclosure about Citibank, the reports nevertheless
provide important information concerning the financial condition of Citibank.
Any of the above reports are available upon request, without charge, by
writing or calling Citicorp Corporate Affairs Distribution, 850 Third Avenue,
13th Floor, New York, New York 10043, (212) 559-0233.
Citicorp has been a wholly owned subsidiary of Citigroup Inc., a Delaware
holding company formerly known as Travelers Group Inc. ("TRAVELERS"), since
October 8, 1998, when Citicorp merged with and into a wholly owned subsidiary of
Travelers.
PRINCIPAL
On each Payment Date, the Bond Trustee shall, as of the related Record Date
and subject to the availability of funds for such payments in the Series 1999-A
Subaccount, make principal payments with respect to each Class of Transition
Bonds in accordance with the Expected Amortization Schedule.
To the extent that more than one Class of Series 1999-A Bonds is to receive
payments of principal in accordance with the Expected Amortization Schedule on
any Payment Date, the funds in the Series Subaccount to be paid in respect of
principal will be allocated pro rata between such Classes based on the principal
scheduled to be paid to such Classes in accordance with the Expected
Amortization Schedule on such Payment Date; provided, however, that if one or
more Classes did not receive principal on the prior Payment Date and as a result
their Class Principal Balance was not reduced to the balance indicated in the
Expected Amortization Schedule on such Payment Date, then such Classes will be
(i) allocated funds from the Series 1999-A Subaccount to make up such shortfalls
prior to any Classes receiving funds in respect of principal scheduled to be
paid on the current Payment Date and (ii) allocated funds from the Series 1999-A
Subaccount in respect of prior shortfalls on a pro rata basis based on the
amount of such shortfalls.
Other than in the event of a redemption, 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.
"CLASS PRINCIPAL BALANCE" means the initial principal balance of such
Class, reduced by principal distributed to such Class in accordance with the
terms of the Indenture.
The entire unpaid principal amount for any Class of the Series 1999-A Bonds
will be due and payable on the applicable Class Termination Date.
S-16
<PAGE>
The following Expected Amortization Schedule sets forth the scheduled
outstanding Class Principal Balance for each Class of the Series 1999-A 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.
TABLE 2
EXPECTED AMORTIZATION SCHEDULE
<TABLE>
<CAPTION>
Series
PAYMENT DATE CLASS A-1 CLASS A-2 CLASS A-3 CLASS A-4 CLASS A-5 CLASS A-6 1999-1
- ------------ ----------- ------------- ------------- ------------- ------------- ------------- ------
<S> <C> <C> <C> <C> <C> <C>
</TABLE>
For various reasons, the actual Class Principal Balance of any Class of the
Series 1999-A Bonds may not be reduced by the amounts indicated in the foregoing
table on any Payment Date. The actual reductions in such Class Principal
Balances may be delayed from those indicated in the table. See "Risk Factors" in
the accompanying prospectus for various factors which may, individually or in
the aggregate, affect the rates of reduction of the Class Principal Balances of
any Class of the Series 1999-A Bonds.
S-17
<PAGE>
The "MONTHLY ALLOCATED PRINCIPAL BALANCE" as of the Series Issuance Date
for the Series 1999-A Bonds and each Monthly Allocation Date is shown below.
These balances are used for the allocation of funds in the Collection Account
between different Series of Transition Bonds on each Monthly Allocation Date.
There are no consequences if the full amount of these allocations is not made on
any Monthly Allocation Date. In addition, these balances will change from time
to time with the issuance of each new Series, the redemption or refunding of a
Class or Series and each adjustment to the Intangible Transition Charges.
TABLE 3
MONTHLY ALLOCATED PRINCIPAL BALANCE
<TABLE>
<CAPTION>
MONTHLY ALLOCATED
MONTHLY ALLOCATION DATE PRINCIPAL BALANCE
- ----------------------- -----------------
<S> <C>
April __, 1999.......................
May __, 1999.........................
June __, 1999........................
July __, 1999........................
August __, 1999......................
September __, 1999...................
October __, 1999.....................
November __, 1999....................
December __, 1999....................
January __, 2000.....................
February __, 2000....................
March __, 2000.......................
April __, 2000.......................
May __, 2000.........................
June __, 2000........................
July __, 2000........................
August __, 2000......................
September __, 2000...................
October __, 2000.....................
November __, 2000....................
December __, 2000....................
January __, 2001.....................
February __, 2001....................
March __, 2001.......................
April __, 2001.......................
May __, 2001.........................
June __, 2001........................
July __, 2001........................
August __, 2001......................
September __, 2001...................
October __, 2001.....................
November __, 2001....................
December __, 2001....................
January __, 2002.....................
February __, 2002....................
March __, 2002.......................
April __, 2002.......................
May __, 2002.........................
June __, 2002........................
July __, 2002........................
August __, 2002......................
September __, 2002...................
October __, 2002.....................
November __, 2002....................
December __, 2002....................
</TABLE>
<TABLE>
<CAPTION>
January __, 2003.....................
February __, 2003....................
MONTHLY ALLOCATED
MONTHLY ALLOCATION DATE PRINCIPAL BALANCE
- ----------------------- -----------------
<S> <C>
March __, 2003.......................
April __, 2003.......................
May __, 2003.........................
June __, 2003........................
July __, 2003........................
August __, 2003......................
September __, 2003...................
October __, 2003.....................
November __, 2003....................
December __, 2003....................
January __, 2004.....................
February __, 2004....................
March __, 2004.......................
April __, 2004.......................
May __, 2004.........................
June __, 2004........................
July __, 2004........................
August __, 2004......................
September __, 2004...................
October __, 2004.....................
November __, 2004....................
December __, 2004....................
January __, 2005.....................
February __, 2005....................
March __, 2005.......................
April __, 2005.......................
May __, 2005.........................
June __, 2005........................
July __, 2005........................
August __, 2005......................
September __, 2005...................
October __, 2005.....................
November __, 2005....................
December __, 2005....................
January __, 2006.....................
February __, 2006....................
March __, 2006.......................
April __, 2006.......................
May __, 2006.........................
June __, 2006........................
July __, 2006........................
August __, 2006......................
September __, 2006...................
</TABLE>
S-18
<PAGE>
<TABLE>
<CAPTION>
MONTHLY ALLOCATED
MONTHLY ALLOCATION DATE PRINCIPAL BALANCE
- ----------------------- -----------------
<S> <C>
October __, 2006.....................
November __, 2006....................
December __, 2006....................
January __, 2007.....................
February __, 2007....................
March __, 2007.......................
April __, 2007.......................
May __, 2007.........................
June __, 2007........................
July __, 2007........................
August __, 2007......................
September __, 2007...................
</TABLE>
<TABLE>
<CAPTION>
MONTHLY ALLOCATED
MONTHLY ALLOCATION DATE PRINCIPAL BALANCE
- ----------------------- -----------------
<S> <C>
October __, 2007.....................
November __, 2007....................
December __, 2007....................
January __, 2008.....................
February __, 2008....................
March __, 2008.......................
April __, 2008.......................
May __, 2008.........................
June __, 2008........................
July __, 2008........................
August __, 2008......................
</TABLE>
S-19
<PAGE>
THE INTEREST RATE SWAP AGREEMENTS
On the Series Issuance Date, the Issuer will enter into two Interest Rate
Swap Agreements, each with one of the Swap Counterparties identified and
described above. Pursuant to each of the Interest Rate Swap Agreements, on the
Business Day prior to each Payment Date, a payment will be made (i) by the
Issuer to the applicable Swap Counterparty (if the following is a positive
number) or (ii) by the applicable Swap Counterparty to the Issuer (if the
following is a negative number), of an amount equal to:
(1/2 x (applicable Notional Amount x applicable Swap Rate))
minus
((the actual number of days in the related Interest Accrual Period divided by
360) x applicable Notional Amount) x (six-month LIBOR for the related Payment
Date + __% for Class A-3 Bonds or __% for Class A-5 Bond, as applicable)
If such amount is positive, it will be referred to in this prospectus
supplement as the Net Swap Payment, and if such amount is negative, it will be
referred to as the Net Swap Receipt.
Any Net Swap Receipt under an Interest Rate Swap Agreement will be
deposited in the Class A-3 or Class A-5 Subaccount, as applicable, and will be
available, together with allocations to such Class Subaccounts from the Series
1999-A Subaccount described above, to make distributions of interest due on the
Class A-3 Bonds and the Class A-5 Bonds, as applicable, on the next Payment
Date. Any Net Swap Payment will be paid only out of funds on deposit in the
Class A-3 or Class A-5 Subaccounts, as applicable.
SWAP COUNTERPARTY RATINGS. The required ratings of a Swap Counterparty
under each Interest Rate Swap Agreement will be "Aa3" by Moody's and either
"A-1+" (short term) by S&P or "AA" (long term) by S&P.
SWAP COUNTERPARTY DOWNGRADE EVENT. A "SWAP COUNTERPARTY DOWNGRADE EVENT"
will occur in the event that a Swap Counterparty's rating is withdrawn or
reduced below the ratings required by the applicable Interest Rate Swap
Agreement. Within 30 days after the occurrence of a Swap Counterparty Downgrade
Event, the applicable Swap Counterparty will use its best efforts to (i) post
collateral or establish any other arrangement satisfactory to the Rating
Agencies, in each case such that the ratings of the affected Class by the Rating
Agencies prior to such Swap Counterparty Downgrade Event will not be withdrawn
or reduced (such collateral posting or other arrangements are referred to herein
as "SATISFACTORY ARRANGEMENTS") or (ii) assign its rights and obligations under
the applicable Interest Rate Swap Agreement to a replacement Swap Counterparty
with the required ratings under the applicable Interest Rate Swap Agreement or
that has made Satisfactory Arrangements.
At the end of such 30-day period, if such Swap Counterparty has failed to
comply with (i) or (ii) above, or in the event of a Swap Counterparty payment
default under the applicable Interest Rate Swap Agreement, regardless of whether
such payment default was preceded by a Swap Counterparty Downgrade Event, the
Issuer will appoint a recognized swap dealer which is a member of the
International Swaps and Derivatives Association, Inc. with capital and surplus
of at least $50 million (the "SWAP AGENT") to, within 30 days, either (i) find a
replacement Swap Counterparty meeting the required ratings under the applicable
Interest Rate Swap Agreement or who has made Satisfactory Arrangements or (ii)
if such a replacement Swap Counterparty cannot be found, find the replacement
Swap Counterparty who would be most satisfactory to the Rating Agencies but in
no event less satisfactory than the existing Swap Counterparty.
At the end of such second 30-day period, if a replacement Swap Counterparty
has been found meeting the ratings required in the applicable Interest Rate Swap
Agreement or who has made Satisfactory Arrangements, the Swap Counterparty will
be required to assign its rights and obligations under the applicable Interest
Rate Swap Agreement to such replacement Swap Counterparty. If such a replacement
has not been found, 66 2/3% of the holders of the affected Class may vote to
either
S-20
<PAGE>
(i) continue the Interest Rate Swap Agreement with any replacement Swap
Counterparty under (ii) of the preceding paragraph or, in the event no such Swap
Counterparty was found, to continue the Interest Rate Swap Agreement with the
existing Swap Counterparty or (ii) terminate the applicable Interest Rate Swap
Agreement.
If the Interest Rate Swap Agreement is not terminated as described above,
the Issuer Trustee and the Swap Agent will be obligated every six months to
renew their search for a replacement Swap Counterparty (i) meeting the required
ratings under the applicable Interest Rate Swap Agreement or a Swap Counterparty
who has made Satisfactory Arrangements or (ii) if such a replacement Swap
Counterparty cannot be found, who would be most satisfactory to the Rating
Agencies but in no event less satisfactory than the existing Swap Counterparty.
At the end of each such six-month period, 66 2/3% of the holders of the affected
Class can terminate the applicable Interest Rate Swap Agreement if a Swap
Counterparty meeting the required ratings under the applicable Interest Rate
Swap Agreement or that has made Satisfactory Arrangements has not been found.
All searches for replacement Swap Counterparties will be at the reasonable
cost of the original Swap Counterparty being replaced until a replacement Swap
Counterparty is in place meeting the required ratings under the applicable
Interest Rate Swap Agreement or who has made Satisfactory Arrangements. After
such time, the replacement Swap Counterparty will be responsible for the costs
of searching for any subsequent replacement.
INTEREST RATE SWAP AGREEMENT EVENTS OF DEFAULT AND TERMINATION EVENTS. The
"SWAP EVENTS OF DEFAULT" under both Interest Rate Swap Agreements are (i) the
failure of the Issuer or the Swap Counterparty to pay any amount when due if
such failure is not remedied on or before the fifth Business Day after such
failure, (ii) a breach of the Interest Rate Swap Agreement by the Swap
Counterparty other than a failure to pay, (iii) a default by the Swap
Counterparty's credit support provider, if any, (iv) certain events of
insolvency or bankruptcy of the Issuer or the Swap Counterparty or (v) a merger
of the Issuer or the Swap Counterparty without an assumption of its obligations
under the Interest Rate Swap Agreement. The "TERMINATION EVENTS" under both
Interest Rate Swap Agreements are (i) illegality (as described below), (ii) a
redemption of the Class A-3 or A-5 Bonds, as applicable or an acceleration of
the Series 1999-A Bonds and (iii) a Swap Counterparty Downgrade Event (as
described above) that is not cured. Either a Swap Event of Default or a
Termination Event can lead to a termination of an Interest Rate Swap Agreement.
Upon the occurrence of a Termination Event or a Swap Event of Default, the
applicable Interest Rate Swap Agreement may be terminated after notice has been
given. The party not responsible for such event shall decide whether to
terminate, except that illegality will cause an automatic termination and either
party may terminate upon a redemption of the related Class or an acceleration of
the Series 1999-A Bonds. The Issuer may only terminate the applicable Interest
Rate Swap Agreement upon the direction of 66 2/3% of the holders of the affected
Class. Upon the termination of any Interest Rate Swap, the interest rate for the
Class of Series 1999-A Bonds subject to the Termination Event will permanently
convert to a fixed rate equal to the Swap Rate. See "Risk Factors" in this
prospectus supplement.
Upon a termination of an Interest Rate Swap Agreement, the applicable Swap
Counterparty may be liable to pay a termination payment to the Issuer or the
Issuer may be liable to pay a termination payment to such Swap Counterparty,
based on the market value of the related Interest Rate Swap Agreement determined
in accordance with specified procedures set forth therein. Any termination
payment paid by a Swap Counterparty (including interest thereon, determined in
accordance with the applicable Interest Rate Swap Agreement, to the extent that
the full amount of such termination payment is not paid when due), will be
distributed to the Issuer and deposited into the applicable Class Subaccount and
distributed to the holders of the Class A-3 or Class A-5 Bonds as described
under "--Distributions from the Series 1999-A Subaccount" in this section of
this prospectus supplement. Any termination payment that may be owed by the
Issuer in the case of a Swap Event of Default or Termination Event is
subordinated to the Transition Bondholders and will be paid to the applicable
Swap Couterparty only after the Transition Bondholders have been fully paid,
except that any termination payment due to a Swap Counterparty as a result of an
optional redemption will be subordinated only to the rights of the holders of
the Class to be redeemed.
S-21
<PAGE>
Swap Counterparty, regardless of the reason for the termination of the Interest
Rate Swap Agreement, will be senior to the rights of the Transition Bondholders.
If the Seller becomes obligated to pay Liquidated Damages or
indemnification amounts under the Sale Agreement, any termination payment owed
to a Swap Counterparty would be added to the amount of Liquidated Damages or
indemnification payments otherwise due and if received would be payable to such
Swap Counterparty. See "The Sale Agreement" in the accompanying prospectus.
There will be no termination payment owed by either the Issuer or the Swap
Counterparty in the event of a termination as a result of illegality.
"Illegality" means that due to the adoption of, or any change in, any applicable
United States federal or state law after the date on which a swap transaction is
entered into, or due to the promulgation of, or any change in, the
interpretation by any court, tribunal or regulatory authority with competent
jurisdiction of any applicable law after such date, it becomes unlawful for the
Issuer or the Swap Counterparty:
(i) to perform any absolute or contingent obligation to make a payment
or delivery or to receive a payment or delivery in respect of such swap
transaction or to comply with any other material provision of the Interest
Rate Swap Agreement relating to such swap transaction; or
(ii) to perform, or for any credit support provider of such party to
perform any contingent or other obligation which the party (or such credit
support provider) has under any credit support document relating to such
swap transaction.
ASSIGNMENT OF THE INTEREST RATE SWAP AGREEMENTS. A Swap Counterparty may
assign its obligations under an Interest Rate Swap Agreement with the prior
written consent of the Issuer or, without such consent, either (i) in a
consolidation or amalgamation with or merger with or into, or transfer of all or
substantially all of its assets to another entity or (ii) to a replacement Swap
Counterparty as described above.
OPTIONAL REDEMPTION
The Class A-3 Bonds and the Class A-5 Bonds are subject to optional
redemption in whole or in part on any Payment Date after February 28, 2001 at
the sole option of the Issuer so long as provision is made for payment of any
termination payment due to a Swap Counterparty in connection with such optional
redemption. The redemption price will equal the principal amount thereof plus
interest at the applicable Bond Rate accrued to the redemption date. The
remaining Classes of the Series 1999-A Bonds are not subject to optional
redemption except as described below.
The Series 1999-A Bonds may be redeemed in whole on any Payment Date
commencing with the Payment Date on which the outstanding principal balance of
the Series 1999-A Bonds (after giving effect to payments that would otherwise be
made on such date) has been reduced to less than 5% of the initial principal
balance of the Series 1999-A Bonds. Notice of such redemption will be given by
the Issuer to the Bond Trustee and the Rating Agencies.
MANDATORY REDEMPTION
If the Seller, PECO Energy, is obligated to pay Liquidated Damages under
the Sale Agreement, the Series 1999-A Bonds will be subject to mandatory
redemption in whole. The redemption price will equal the principal balance
thereof plus interest at the applicable Bond Rate, accrued to the redemption
date. PECO Energy, as Seller, will be obligated to pay Liquidated Damages as
described in "The Sale Agreement--Seller Representations and Warranties" in the
accompanying prospectus.
OVERCOLLATERALIZATION
The Overcollateralization Amount for the Series 1999-A Bonds will be funded
over the life of the Series 1999-A Bonds and is expected to be $80 million. The
Intangible Transition Charges related to the Series 1999-A Bonds will be
calculated at, and periodically adjusted to, a level that is designed to collect
the Overcollateralization Amount ratably over the life of the Series 1999-A
Bonds. The Calculated Overcollateralization Level for each Payment Date for the
Series 1999-A Bonds and the
S-22
<PAGE>
Monthly Allocated Overcollateralization Balance for each Monthly Allocation
Date, in each case as of the date of this prospectus supplement, are set forth
below. The balances in Table 4A below are for the allocation of funds in the
Collection Account on each Monthly Allocation Date. There are no consequences if
the full amount of these allocations is not made on any Monthly Allocation Date.
In addition, these balances will change from time to time with the issuance of
each new Series, the redemption or refunding of a Class or Series and each
periodic adjustment to the Intangible Transition Charges.
For a more detailed description of overcollaterization, see the material
under the captions "The Transition Bonds--Credit Enhancement" and "The
Indenture--Allocations and Payments" in the accompanying prospectus.
S-23
<PAGE>
TABLE 4
CALCULATED OVERCOLLATERALIZATION LEVEL
<TABLE>
<CAPTION>
REQUIRED
OVERCOLLATERALIZATION
PAYMENT DATE LEVEL
- ------------ ---------------------
<S> <C>
</TABLE>
TABLE 4A
MONTHLY ALLOCATED OVERCOLLATERALIZATION BALANCE
<TABLE>
<CAPTION>
MONTHLY ALLOCATED
OVERCOLLATERALIZATION
MONTHLY ALLOCATION DATE BALANCE
- ----------------------- ---------------------
<S> <C>
April __, 1999................
May __, 1999..................
June __, 1999.................
July __, 1999.................
August __, 1999...............
September __, 1999............
October __, 1999..............
November __, 1999.............
December __, 1999.............
January __, 2000..............
February __, 2000.............
March __, 2000................
April __, 2000................
May __, 2000..................
June __, 2000.................
July __, 2000.................
August __, 2000...............
September __, 2000............
October __, 2000..............
November __, 2000.............
December __, 2000.............
January __, 2001..............
February __, 2001.............
March __, 2001................
April __, 2001................
</TABLE>
<TABLE>
<CAPTION>
MONTHLY ALLOCATED
OVERCOLLATERALIZATION
MONTHLY ALLOCATION DATE BALANCE
- ----------------------- ---------------------
<S> <C>
May __, 2001..................
June __, 2001.................
July __, 2001.................
August __, 2001...............
September __, 2001............
October __, 2001..............
November __, 2001.............
December __, 2001.............
January __, 2002..............
February __, 2002.............
March __, 2002................
April __, 2002................
May __, 2002..................
June __, 2002.................
July __, 2002.................
August __, 2002...............
September __, 2002............
October __, 2002..............
November __, 2002.............
December __, 2002.............
January __, 2003..............
February __, 2003.............
March __, 2003................
April __, 2003................
May __, 2003..................
</TABLE>
S-24
<PAGE>
<TABLE>
<CAPTION>
MONTHLY ALLOCATED
OVERCOLLATERALIZATION
MONTHLY ALLOCATION DATE BALANCE
- ----------------------- ---------------------
<S> <C>
June __, 2003.................
July __, 2003.................
August __, 2003...............
September __, 2003............
October __, 2003..............
November __, 2003.............
December __, 2003.............
January __, 2004..............
February __, 2004.............
March __, 2004................
April __, 2004................
May __, 2004..................
June __, 2004.................
July __, 2004.................
August __, 2004...............
September __, 2004............
October __, 2004..............
November __, 2004.............
December __, 2004.............
January __, 2005..............
February __, 2005.............
March __, 2005................
April __, 2005................
May __, 2005..................
June __, 2005.................
July __, 2005.................
August __, 2005...............
September __, 2005............
October __, 2005..............
November __, 2005.............
December __, 2005.............
January __, 2006..............
</TABLE>
<TABLE>
<CAPTION>
MONTHLY ALLOCATED
OVERCOLLATERALIZATION
MONTHLY ALLOCATION DATE BALANCE
- ----------------------- ---------------------
<S> <C>
February __, 2006.............
March __, 2006................
April __, 2006................
May __, 2006..................
June __, 2006.................
July __, 2006.................
August __, 2006...............
September __, 2006............
October __, 2006..............
November __, 2006.............
December __, 2006.............
January __, 2007..............
February __, 2007.............
March __, 2007................
April __, 2007................
May __, 2007..................
June __, 2007.................
July __, 2007.................
August __, 2007...............
September __, 2007............
October __, 2007..............
November __, 2007.............
December __, 2007.............
January __, 2008..............
February __, 2008.............
March __, 2008................
April __, 2008................
May __, 2008..................
June __, 2008.................
July __, 2008.................
August __, 2008...............
</TABLE>
S-25
<PAGE>
OTHER CREDIT ENHANCEMENT
Reserve Subaccount. ITC Collections allocated to the Issuer pursuant to
the Master Servicing Agreement available on any Monthly Allocation Date above
that amount necessary to pay the (i) amounts payable in respect of expenses of
the Issuer Trustee, the Bond Trustee and the Servicer and certain other fees and
expenses, (ii) amounts distributable to Series Subaccounts and Class
Subaccounts, if any, in respect of principal of and interest 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), including prepayments, if any, will be allocated to the Reserve
Subaccount. On each Monthly Allocation Date, the Bond Trustee will draw on
amounts in the Reserve Subaccount, if any, to the extent amounts available in
the General Subaccount, the Interest Deposit Subaccount (with respect to
payments of Interest) and the Loss Subaccount are insufficient to make scheduled
payments to the Series Subaccounts and pay expenses of the Issuer, the Bond
Trustee, the Servicer and certain other fees and expenses. Subject to the
conditions described in "The Indenture--Allocations and Payments" in the
accompanying prospectus, the Bond Trustee may also use funds in the Reserve
Subaccount to cover any shortfall from the failure by a Swap Counterparty to
fully pay amounts due to the Issuer under the applicable Interest Rate Swap
Agreement.
Capital Subaccount. Upon the issuance of the Series 1999-A Bonds, PECO
Energy will deposit the Required Capital Amount of $20 million in the Capital
Subaccount. On each Monthly Allocation Date, the Bond Trustee will draw on
amounts in the Capital Subaccount, if any, to the extent amounts available in
the General Subaccount, the Interest Deposit Subaccount (with respect to
payments of interest), the Loss Subaccount, the Reserve Subaccount and the
Overcollateralization Subaccount are insufficient to make scheduled payments to
the Series Subaccounts and to pay expenses of the Issuer, the Bond Trustee and
the Servicer and certain other fees and expenses.
REPORTS TO HOLDERS OF SERIES 1999-A BONDS
On or prior to each Payment Date, the Bond Trustee will prepare and provide
statements to the holders of record of the Series 1999-A Bonds. Such statements
will be available to the beneficial owners of the Series 1999-A Bonds upon
request to the Bond Trustee or the Servicer. The financial information provided
will not be examined or reported upon by any independent public accountant and
no independent public accountant will give an opinion on such financial
information.
For a more detailed description of the statements provided to the holders
of record of the Series 1999-A Bonds, you should review the material under the
caption "The Indenture--Reports to Transition Bondholders" in the accompanying
prospectus.
S-26
<PAGE>
DESCRIPTION OF INTANGIBLE TRANSITION PROPERTY
THE INTANGIBLE TRANSITION CHARGES
The Qualified Transition Expenses authorized in the QRO issued by the PUC
to PECO Energy are to be recovered from Customers in each of PECO Energy's
separate Rate Classes that have been assigned stranded cost responsibility based
on the allocation of generation-related charges borne by such Rate Classes
through current electric rates approved by the PUC. All Series and Classes of
Transition Bonds will be secured by the Collateral. The Intangible Transition
Charges will be calculated by determining the total amount of Intangible
Transition Charges required to be billed to each such Rate Class in order to
generate ITC Collections sufficient to ensure timely recovery of Qualified
Transition Expenses in accordance with the Expected Amortization Schedule among
affected Rate Classes. This amount is then expressed as a percentage of total
projected revenue per Rate Class. The Intangible Transition Charges will be
allocated from Competitive Transition Charges (as periodically adjusted) and
variable distribution charges (both of which are usage-based charges) and will
appear as a footnote to one of or both such items on each Customer's bill.
Intangible Transition Charges (as periodically adjusted) will be allocated first
from Competitive Transition Charges, then to the extent Intangible Transition
Charges exceed such amounts, from variable distribution charges. In no event
will Intangible Transition Charges (as periodically adjusted) exceed the sum of
Competitive Transition Charges (as periodically adjusted) and variable
distribution charges. ITC Collections will vary with changes in usage, the
number of Customers, the rate of delinquencies and write-offs and other factors.
Variations in ITC Collections will be addressed by recalculating the allocation
from Competitive Transition Charges and variable distribution charges to
Intangible Transition Charges on each Calculation Date. See "The QRO and the
Intangible Transition Charges--The Intangible Transition Charges--The ITC
Adjustment Process" in the accompanying prospectus.
The unbundled Customer bills that were sent out beginning January 1, 1999
separately identified charges for generation, transmission and distribution and
other services. When Intangible Transition Charges are billed to Customers, such
charges will be applied to total projected revenue per Rate Class, exclusive of
transmission, energy, capacity and fixed distribution charges. This will be
reflected in the calculation of the Intangible Transition Charges. The cash flow
from Intangible Transition Charges (i.e., ITC Collections) will be allocated
among the Transferred Intangible Transition Property held by the Issuer and
Intangible Transition Property held by other issuers of transition bonds to
which Intangible Transition Property is sold, based on their respective
Percentages as described in "The Sale Agreement" in the accompanying prospectus.
Initially, the Intangible Transition Charges billed will average
approximately $________ per month for Residential Customers, 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 1998 was $_____, $_____ and $_____, respectively. The following projected
average Intangible Transition Charges (expressed as a percentage of variable
distribution charges and Competitive Transition Charges applicable to each Rate
Class) will be imposed on Customers in the following Customer Categories
beginning with the bill rendered approximately ten days after the Series
Issuance Date for the Series 1999-A Bonds:
S-27
<PAGE>
TABLE 5
PROJECTED AVERAGE INTANGIBLE TRANSITION CHARGES
FOR THE PERIOD THROUGH AUGUST 14, 1999
RESIDENTIAL CUSTOMERS
<TABLE>
<CAPTION>
ITC
RATE CLASS PERCENTAGE
- ---------- ----------
<S> <C>
Rate R............................................ %
Rate R-H.......................................... %
Rate OP........................................... %
</TABLE>
SMALL COMMERCIAL AND INDUSTRIAL CUSTOMERS
<TABLE>
<CAPTION>
ITC
RATE CLASS PERCENTAGE
- ---------- ----------
<S> <C>
Rate GS........................................... %
Rate POL.......................................... %
Rate SL-P......................................... %
Rate SL-S......................................... %
Rate SL-E......................................... %
Rate TL........................................... %
</TABLE>
LARGE COMMERCIAL AND INDUSTRIAL CUSTOMERS
<TABLE>
<CAPTION>
ITC
RATE CLASS PERCENTAGE
- ---------- ----------
<S> <C>
Rate PD........................................... %
Rate HT........................................... %
Rate EP........................................... %
</TABLE>
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 (indicated above) have remained unchanged for eight
years. These Rate Classes are:
Residential Rate Classes:
Rate R--Residential Service: Residential Service is available in the
entire service territory of PECO Energy to single private family dwellings
for the domestic requirements of family members, which service is supplied
through one meter. This Rate Class also includes Rate RS Customers
receiving service under a solar rate and payment-troubled low income
Customers receiving discounted rates under the CAP Program, Rate CAP.
Rate R-H--Residential Heating Service: Residential Heating Service is
available to single private family dwellings (or to a multiple dwelling
unit building consisting of two to five dwelling units, whether occupied or
not) for domestic requirements when such service is supplied through one
meter and where the dwelling is heated by specified types of electric space
heating systems.
Rate OP--Off-Peak Service: Available in conjunction with other
residential service rates, Rates R, R-H and GS, for any Customer receiving
delivery at certain voltage levels; during in-peak periods, PECO Energy can
interrupt service.
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
S-28
<PAGE>
service is established hereunder, for the safety and convenience of the
public within the City of Philadelphia.
Rate SL-S--Street Lighting - Suburban Divisions: Available for the
outdoor lighting of streets, highways, bridges, parks and similar places
for the safety and convenience of the public in Suburban Divisions.
Rate SL-E--Street Lighting Customer-Owned Facilities: Available to any
governmental agency outside of the City of Philadelphia for outdoor
lighting of streets, highways, bridges, parks or similar places, including
directional highway signs at locations where outdoor lighting service is
established hereunder for the safety and convenience of the public where
all of the utilization facilities are installed, owned and maintained by a
governmental agency.
Rate TL--Traffic Lighting: Available to any municipality using PECO
Energy's standard delivery service for electric traffic signal lights
installed, owned and maintained by the municipality.
Rate BLI--Borderline Interchange: Available under reciprocal
agreements to neighboring electric utilities for resale in their adjacent
territory. No Intangible Transition Charges will be imposed on Rate BLI
Customers.
Large Commercial and Industrial Rate Classes:
Rate PD--Primary-Distribution Power: Untransformed electric delivery
service available from the primary supply lines of PECO Energy's
distribution system where the Customer installs, owns and maintains any
transforming, switching and other receiving equipment required.
Rate HT--High-Tension Power: Untransformed electric delivery service
from PECO Energy's standard high-tension lines, where the Customer
installs, owns and maintains, any transforming, switching and other
receiving equipment required. Excludes certain special contracts.
Rate EP--Electric Propulsion: This rate is available only to the
National Rail Passenger Corporation and to the Southeastern Pennsylvania
Transportation Authority for untransformed electric delivery service from
PECO Energy's standard high-tension lines, where the Customer installs,
owns and maintains any transforming, switching and other receiving
equipment required and where the service is supplied for the operation of
electrified transit and railroad systems and appurtenances.
ADJUSTMENTS TO THE INTANGIBLE TRANSITION CHARGES
The Servicer is required to seek adjustments to the Intangible Transition
Charges on each May 14, commencing May 14, 1999 and continuing through May 14,
2008 and, starting January 14, 2008, on the 14th day of each month (or if such
day is not a business day, the immediately preceding business day) until the
Series Termination Date. For the annual adjustments through May 14, 2008, the
adjustments are expected to be implemented on or prior to August 12 of the same
year; in the case of the monthly adjustments, the adjustments are expected to be
implemented 30 days after filing an Adjustment Request with the PUC. Each
Adjustment Request will be designed to result in the outstanding principal
balance of the Series 1999-A Bonds equaling the amount provided for in the
Expected Amortization Schedule and the amount on deposit in the
Overcollateralization Subaccount equaling the Calculated Overcollateralization
Level by the Payment Date immediately succeeding the next Adjustment Date.
The QRO only requires that the PUC approve annual adjustments within 90
days and does not set forth any procedure for approval in a shorter time period
and there can be no assurance that the PUC will approve adjustments any more
frequently.
S-29
<PAGE>
DESCRIPTION OF THE SELLER'S BUSINESS
For a discussion of the Seller and the Servicer, you should review the
material under the captions "PECO Energy Company" and "The Seller and Servicer"
in the accompanying prospectus.
SERVICING
MONTHLY SERVICING FEE
On each Monthly Allocation Date, the Servicer will be entitled to receive
the Monthly Servicing Fee in an amount equal to (i) one-twelfth of 0.25 percent
of the outstanding principal balance of the Series 1999-A Bonds for so long as
Intangible Transition Charges are included in electric bills otherwise sent to
Customers and (ii) one-twelfth of 1.50 percent of the outstanding principal
balance of the Series 1999-A Bonds if Intangible Transition Charges are not
included in electric bills otherwise sent to Customers but instead, are billed
separately to Customers. 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 the accompanying
prospectus. The Monthly Servicing Fee will be paid prior to the distribution of
any amounts in respect of interest on and principal of the Series 1999-A Bonds.
The Servicer will be entitled to retain as additional compensation net
investment income on Intangible Transition Charges received by the Servicer
prior to remittance thereof to the Collection Account and the portion of late
fees, if any, paid by Customers relating to the Intangible Transition Charges.
SERVICER ADVANCES
The Servicer will not make any advances of interest or principal on the
Series 1999-A Bonds.
MATERIAL TAX MATTERS
[In the event a Class of the Series 1999-A Bonds is issued at a price which
is lower than its stated principal amount by more than a de minimis amount, the
excess of such Series 1999-A Bond's stated principal amount at expected maturity
over its issue price will give rise to OID, which will be treated as additional
interest income to the Series 1999-A Bondholder. Accordingly, a Series 1999-A
Bondholder will be subject to the following tax consequences in addition to the
tax consequences described in the accompanying prospectus.
In general, the issue price of a Class of the Series 1999-A Bonds is the
first price at which a substantial amount of the Series 1999-A Bonds of such
Class is sold to the public. In general, if the principal amount of a security
exceeds its issue price by an amount that is less than 0.25% of the security's
principal amount payable at expected maturity multiplied by the number of
complete years to maturity then the excess is treated as de minimis OID and the
security is not treated as having been issued with OID. Unless a security holder
makes an election to accrue all interest on a constant-yield basis, the security
holder must include de minimis OID in income proportionately as stated principal
payments on the security are made.
A security holder that is a United States Person will be required to
include in taxable income any OID income as it accrues on a constant-yield
method based on the compounding of interest before the receipt of cash payments
attributable to such income. A security holder must take such OID income into
account currently, regardless of such security holder's general method of
accounting for other items. In general, a security holder will be required to
include in gross income the sum of the daily portions of OID with respect to the
holder for each day during the taxable year in which the security holder holds
the security. 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 security may be of any length selected by the
security holder and may vary in length over the term of the security, so long as
(i) no accrual period is longer than one year and (ii) each scheduled payment of
interest or principal on the security occurs on either the final day or the
first day of the accrual period. The amount of OID on a security that is
allocable to the accrual period is equal to the excess of (x) the product of the
adjusted issue price of the security at the beginning of the accrual period and
the yield to maturity of the security (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 security
that are allocable to the accrual period. The adjusted issue price of a security
at the
S-30
<PAGE>
beginning of any accrual period is the issue price of the security, 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 security. A security
holder that is a United States Person will have a tax basis in a security equal
to the security holder'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 security holder 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 security holder that is a Foreign Person generally will be taxable in
the same manner as a United States corporation or resident with respect to OID
income if such income is effectively connected with the conduct of a trade or
business in the United States.]
ERISA CONSIDERATIONS
ERISA and/or Section 4975 of the Code impose certain requirements on
employee benefit plans and certain other plans and arrangements, including
individual retirement accounts and annuities, Keogh plans and certain collective
investment funds or insurance company general or separate accounts in which such
plans, accounts or arrangements are invested, that are subject to the fiduciary
responsibility and prohibited transaction provisions of ERISA and/or Section
4975 of the Code (collectively, "PLANS"), and on persons who are fiduciaries
with respect to Plans, in connection with the investment of assets that are
treated as "plan assets" of any Plan for purposes of applying Title I of ERISA
and Section 4975 of the Code ("PLAN ASSETS"). ERISA imposes on Plan fiduciaries
certain general fiduciary requirements, including those of investment prudence
and diversification and the requirement that a Plan's investments be made in
accordance with the documents governing the Plan. Generally, any person who has
discretionary authority or control respecting the management or disposition of
Plan Assets, and any person who provides investment advice with respect to Plan
Assets for a fee or other consideration, is a fiduciary with respect to such
Plan Assets.
ERISA and Section 4975 of the Code prohibit a broad range of transactions
involving Plan Assets and persons who have certain specified relationships to a
Plan or its Plan Assets ("PARTIES IN INTEREST" under ERISA and "DISQUALIFIED
PERSONS" under the Code (collectively, "PARTIES IN INTEREST")), unless a
statutory or administrative exemption is available, Parties in Interest and Plan
fiduciaries that participate in a prohibited transaction may be subject to
penalties imposed under ERISA and/or excise taxes imposed pursuant to Section
4975 of the Code, unless a statutory or administrative exemption is available.
These prohibited transactions generally are set forth in Section 406 of ERISA
and Section 4975 of the Code.
THE ISSUER RECOMMENDS THAT ANY FIDUCIARY OR OTHER PLAN INVESTOR CONSIDERING
WHETHER TO PURCHASE THE SERIES 1999-A BONDS ON BEHALF OF OR WITH PLAN ASSETS OF
ANY PLAN CONSULT WITH ITS LEGAL ADVISORS FOR GUIDANCE REGARDING THE ERISA
CONSIDERATIONS APPLICABLE TO THE SERIES 1999-A BONDS OFFERED HEREBY.
[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 1999-A
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-31
<PAGE>
UNDERWRITING
Subject to the terms and conditions set forth in the underwriting agreement
(the "UNDERWRITING AGREEMENT"), the Issuer has agreed to sell to each of the
Underwriters named below (the "UNDERWRITERS"), and each of the Underwriters, for
whom Salomon Smith Barney is acting as representative, has severally agreed to
purchase, the respective principal amounts of the Series 1999-A Bonds set forth
opposite its name below.
<TABLE>
<CAPTION>
NAME CLASS A-1 CLASS A-2 CLASS A-3 CLASS A-4 CLASS A-5 CLASS A-6 CLASS A-7
- ---- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Salomon Smith Barney..........
Goldman, Sachs & Co...........
Lehman Brothers...............
First Chicago Capital Markets,
Inc.........................
First Union Capital Markets
Corp........................
Commerce Capital Markets,
Inc.........................
Janney Montgomery Scott
Inc.........................
Pryor, McClendon, Counts &
Co., Inc....................
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 1999-A Bonds
offered hereby, if any are taken.
The price to the public, Underwriters' discounts and commissions, the
concessions that the Underwriters may allow to certain dealers and the discounts
that such dealers may reallow to certain other dealers, each expressed as a
percentage of the principal amount of each Class of Series 1999-A Bonds, shall
be as follows:
<TABLE>
<CAPTION>
UNDERWRITING SELLING
PRICE TO DISCOUNT AND CONCESSIONS REALLOWANCE,
PUBLIC COMMISSIONS NOT TO EXCEED NOT TO EXCEED
-------- ------------ ------------- -------------
<S> <C> <C> <C> <C>
Class A-1.................................
Class A-2.................................
Class A-3.................................
Class A-4.................................
Class A-5.................................
Class A-6.................................
Class A-7.................................
</TABLE>
The Series 1999-A Bonds are a new issue of securities with no established
trading market. The Series 1999-A 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 1999-A Bonds but are not obligated to do so and may
discontinue market making at any time without notice. No assurance can be given
as to the liquidity of the trading market for the Series 1999-A Bonds.
In connection with the offering, the Underwriters may purchase and sell the
Series 1999-A Bonds in the open market. These transactions may include
over-allotment and stabilizing transactions and purchases to cover syndicate
short positions created in connection with the offering. Stabilizing
transactions consist of certain bids or purchases for the purpose of preventing
or retarding a decline in the market price of the Series 1999-A Bonds, and
syndicate short positions involve the sale by the Underwriters of a greater
number of Series 1999-A Bonds than they are required to purchase from the Issuer
in the offering. The Underwriters also may impose a penalty bid, whereby selling
concessions allowed to syndicate members or other broker-dealers in respect of
the Series 1999-A Bonds sold in the offering for their account may be reclaimed
by the syndicate if such Series 1999-A Bonds are repurchased by the syndicate in
stabilizing or covering transactions. These activities may stabilize, maintain
or otherwise affect the market price of the Series 1999-A Bonds, which may be
higher than the price that might otherwise prevail in the open market, and these
activities, if commenced, may be discontinued at any time.
In the ordinary course of business, each Underwriter and its affiliates
have engaged and may engage in investment banking and/or commercial banking
transactions with the Issuer and its affiliates,
S-32
<PAGE>
including PECO Energy. In addition, each Underwriter may from time to time take
positions in the Transition Bonds.
Under the terms of the Underwriting Agreement, PECO Energy 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 any Underwriter's obligation to purchase the Series
1999-A Bonds be rated "AAA" by S&P, "AAA" by Fitch IBCA, "AAA" by Duff & Phelps
and "Aaa" by Moody's (each of S&P, Fitch IBCA, Duff & Phelps and Moody's, a
"RATING AGENCY") which, in each case, is in one of the four highest rating
categories of such Rating Agency.
A security rating is not a recommendation to buy, sell or hold securities
and may be subject to revision or withdrawal at any time by the assigning Rating
Agency. No person is obligated to maintain the rating on any of the Series
1999-A Bonds, and, accordingly, there can be no assurance that the ratings
assigned to any Class of the Series 1999-A Bonds upon initial issuance will not
be revised or withdrawn by a Rating Agency at any time thereafter. If a rating
of any Class of the Series 1999-A Bonds is revised or withdrawn, the liquidity
of such Class of the Series 1999-A Bonds may be adversely affected. In general,
ratings address credit risk and do not represent any assessment of any
particular rate of principal payments on the Series 1999-A Bonds other than
payment in full of each Class of the Series 1999-A Bonds by the applicable Class
Termination Date.
S-33
<PAGE>
INDEX OF PRINCIPAL DEFINITIONS
Set forth below is a list of the defined terms used in this prospectus
supplement and defined herein and the pages on which the definition may be
found. Certain defined terms used in this prospectus supplement are defined in
the prospectus. See "Index of Principal Definitions" on page 109 of the
accompanying prospectus.
<TABLE>
<CAPTION>
TERM PAGE
- ---- ----
<S> <C>
Agent Bank.................................................. S-11
Bond Trustee................................................ S-10
Calculation Date............................................ S-7
Call Reports................................................ S-16
Citibank.................................................... S-15
Class Principal Balance..................................... S-16
Collateral.................................................. S-5
Competition Act............................................. S-4
competitive transition charges.............................. S-4
Comptroller................................................. S-15
FDIC........................................................ S-15
Group....................................................... S-15
GSMMDP...................................................... S-15
Indenture................................................... S-10
intangible transition charges............................... S-4
intangible transition property.............................. S-4
Interest Accrual Period..................................... S-12
Interest Determination Date................................. S-5
Interest Rate Swap Agreement................................ S-6
LIBOR....................................................... S-5
London Banking Day.......................................... S-11
Master Servicing Agreement.................................. S-5
Mitsui...................................................... S-15
Monthly Allocated Interest Balance.......................... S-13
Monthly Allocated Principal Balance......................... S-18
Net Swap Payment............................................ S-6
Net Swap Receipt............................................ S-6
Notional Amount............................................. S-6
OID......................................................... S-7
Parties in Interest......................................... S-31
PECO Energy................................................. S-3
Plan Assets................................................. S-31
Plans....................................................... S-31
QRO......................................................... S-4
Rate BLI.................................................... S-29
Rate EP..................................................... S-29
Rate GS..................................................... S-28
Rate HT..................................................... S-29
Rate OP..................................................... S-28
</TABLE>
S-34
<PAGE>
<TABLE>
<CAPTION>
TERM PAGE
- ---- ----
<S> <C>
Rate PD..................................................... S-29
Rate POL.................................................... S-28
Rate R...................................................... S-28
Rate R-H.................................................... S-28
Rate SL-E................................................... S-29
Rate SL-P................................................... S-28
Rate SL-S................................................... S-29
Rate TL..................................................... S-29
Rating Agency............................................... S-33
Record Date................................................. S-12
Sale Agreement.............................................. S-5
Satisfactory Arrangements................................... S-20
Seller...................................................... S-3
September 1998 10-Q......................................... S-15
Servicer.................................................... S-3
stranded costs.............................................. S-4
Swap Agent.................................................. S-20
Swap Counterparty........................................... S-6
Swap Counterparty Downgrade Event........................... S-20
Swap Events of Default...................................... S-21
Swap Rate................................................... S-6
Telerate Page............................................... S-11
Termination Events.......................................... S-21
Travelers................................................... S-16
Underwriters................................................ S-32
Underwriting Agreement...................................... S-32
</TABLE>
S-35
<PAGE>
SUBJECT TO COMPLETION, DATED MARCH 10, 1999
P R O S P E C T U S
PECO ENERGY TRANSITION TRUST, ISSUER
UP TO $4,000,000,000 OF TRANSITION BONDS ISSUABLE IN SERIES
PECO ENERGY COMPANY, SELLER AND SERVICER
------------------
PECO Energy Transition Trust (the "Issuer") proposes to offer up to
$4,000,000,000 of transition bonds in one or more series (each, a "Series"),
each of which may be comprised of one or more classes (each, a "Class"), in
amounts, at prices and on terms to be determined at the time of sale and to be
set forth in a supplement to this Prospectus (each, a "Prospectus Supplement").
The transition bonds will be issued under an indenture and supplemental
indentures thereto (collectively, the "Indenture") between the Issuer and The
Bank of New York, as bond trustee (together with any successor, the "Bond
Trustee"). All transition bonds issued under the Indenture are referred to in
this Prospectus and the Prospectus Supplement as "Transition Bonds." The
Transition Bonds of each Series will be secured by Intangible Transition
Property sold to the Issuer (the "Transferred Intangible Transition Property")
and the proceeds thereof, which will be pledged by the Issuer to the Bond
Trustee. The Issuer will also pledge to the Bond Trustee ITC Collections
allocated to the Issuer pursuant to the Master Servicing Agreement, the Issuer's
rights under the Sale Agreement (except for certain provisions for
indemnification of the Issuer) and the Master Servicing Agreement (except for
certain provisions for indemnification of the Issuer), the Collection Account,
and all amounts or investment property on deposit therein or credited thereto
from time to time (other than cash or other property distributed to the Issuer
from the Collection Account in accordance with the provisions of the Indenture
as described in this Prospectus), all present and future claims, demands, causes
and choses in action in respect of any of the foregoing and all payments on or
under and all proceeds in respect of any or all of the foregoing (the
Transferred Intangible Transition Property and such other property pledged to
the Bond Trustee, the "Collateral"). Each Series of Transition Bonds will rank
on a parity with all other Series of Transition Bonds, provided that the Issuer
may enter into credit enhancement arrangements with respect to a specific Class
or Series of Transition Bonds and hedge or swap transactions with respect to any
floating rate Class or Series of Transition Bonds. See "The Indenture--Security"
and "--Issuance in Series or Classes" in this Prospectus. "Intangible Transition
Property" represents the irrevocable right of PECO Energy Company ("PECO
Energy") or its successor or assignee to collect nonbypassable charges (the
"Intangible Transition Charges") from Customers to recover (i) the portion of
PECO Energy's Stranded Costs, which are the anticipated loss in value of
generation-related assets as a result of the transition from a regulated
environment to competition for electric generation services, financed through
the issuance of transition bonds and (ii) the interest, fees, expenses, credit
enhancement and premiums, if any, associated with the transition bonds. These
Intangible Transition Charges are nonbypassable in that applicable customers
cannot avoid paying them even if they purchase electricity from a supplier other
than PECO Energy. See "The Competition Act--Nonbypassability" in this
Prospectus. Intangible Transition Property was created pursuant to the Qualified
Rate Order issued on May 14, 1998 (the "QRO") by the Pennsylvania Public Utility
Commission (the "PUC"), in accordance with the Pennsylvania Electricity
Generation Customer Choice and Competition Act (the "Competition Act"). See "The
Competition Act" and "PECO Energy's Restructuring Plan" in this Prospectus.
The Issuer, a Delaware statutory business trust established by PECO Energy,
was formed for the purpose of purchasing and owning the Transferred Intangible
Transition Property, issuing Transition Bonds from time to time and pledging its
interest in the Collateral to the Bond Trustee under the Indenture in order to
secure the Transition Bonds. On the issuance date for each Series (each, a
"Series Issuance Date"), except in the event of a refunding of outstanding
Transition Bonds, PECO Energy will sell Intangible Transition Property to the
Issuer pursuant to an Intangible Transition Property Sale Agreement (the "Sale
Agreement") between PECO Energy (in such capacity, the "Seller") and the Issuer.
The Transferred Intangible Transition Property and Intangible Transition
Property, if any, sold by PECO Energy to other issuers (collectively, the
"Serviced Intangible Transition Property") will be serviced by PECO Energy (in
such capacity and along with any successors, the "Servicer") pursuant to a
Master Servicing Agreement (the "Master Servicing Agreement") among the Issuer,
the Servicer and any other such issuers of transition bonds secured by
Intangible Transition Property.
THE TRANSITION BONDS ARE OBLIGATIONS OF THE ISSUER ONLY AND WILL BE SECURED
ONLY BY THE COLLATERAL. THE ISSUER IS A SPECIAL PURPOSE ENTITY THAT HAS NO
PROPERTY OTHER THAN THE COLLATERAL, AND THE COLLATERAL IS THE SOLE SOURCE OF
PAYMENT FOR THE TRANSITION BONDS. THE TRANSITION BONDS DO NOT REPRESENT
OBLIGATIONS OF PECO ENERGY OR ANY ENTITY OTHER THAN THE ISSUER. THE TRANSITION
BONDS ARE NOT OBLIGATIONS OF THE PUC OR ANY OTHER GOVERNMENTAL AGENCY OR
INSTRUMENTALITY.
------------------
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 26 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.
_______________, 1999
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. This 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 any such State.
<PAGE>
PARTIES TO THE TRANSACTION
[GRAPHIC]
In the printed version of the document a graphic appears showing interaction of
all parties to the transaction.
- ----------------
* Intangible Transition Property, created by the PUC implementing the
Completion Act through approving PECO Energy's Restructuring Plan and
issuing the Qualified Rate Order. The PUC will also approve periodic
adjustments of Intangible Transition Charges as described in this
Prospectus.
** The PUC also supervises the implementation of the Competition Act and is
authorized to issue regulations thereunder.
2
<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.
REPORTS TO TRANSITION BONDHOLDERS
Pursuant to the Indenture, the Bond Trustee will prepare and provide to the
holders of record of the Transition Bonds regular reports containing information
concerning, among other things, the Issuer and the Collateral. Unless and until
Transition Bonds are issued in definitive form, such reports will be provided to
Cede & Co. ("Cede"), as the nominee for The Depository Trust Company ("DTC").
Such reports will be available to beneficial owners of the Transition Bonds
(each, a "Transition Bondholder") upon request to the Bond Trustee or the
Servicer. The financial information provided to Transition Bondholders will not
be examined and reported upon, nor will an opinion thereon be provided, by an
independent public accountant. See "The Indenture--Reports to Transition
Bondholders" in this Prospectus.
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INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All reports and other documents filed by the Issuer pursuant to Section
13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date of this
Prospectus and prior to the termination of the offering of the Transition Bonds
will be deemed to be incorporated by reference into this Prospectus and to be a
part hereof. Any statement contained in this Prospectus, in a Prospectus
Supplement or in a document incorporated or deemed to be incorporated by
reference in this Prospectus will be deemed to be modified or superseded for
purposes of this Prospectus and any Prospectus Supplement to the extent that a
statement contained in this Prospectus, in a Prospectus Supplement or in any
separately filed document which also is or is deemed to be incorporated by
reference herein modifies or supersedes such statement. Any such statement so
modified or superseded will not be deemed, except as so modified or superseded,
to constitute part of this Prospectus or any Prospectus Supplement.
The Issuer will provide without charge to each person to whom a copy of
this Prospectus is delivered, on the written or oral request of any such person,
a copy of any or all of the documents incorporated herein by reference, except
the exhibits to such documents (unless such exhibits are specifically
incorporated by reference in such documents). Written requests for such copies
should be directed to the Issuer, c/o First Union Trust Company, National
Association, One Rodney Square, 920 King Street, 1st Floor, Wilmington, Delaware
19801. Telephone requests for such copies should be directed to the Issuer at
302-888-7532.
PROSPECTUS SUPPLEMENT
The Prospectus Supplement for a Series of Transition Bonds will describe
the following terms of such Series and, if applicable, the Classes thereof: (i)
the designation of the Series and, if applicable, the Classes thereof, (ii) the
aggregate principal amount of the Transition Bonds of the Series and, if
applicable, each Class thereof, (iii) the Bond Rate of the Series or, if
applicable, each Class thereof, or the formula, if any, used to calculate the
applicable Bond Rate or Bond Rates, (iv) the Monthly Allocated Interest Balances
for the Series, (v) the Monthly Allocated Principal Balances for the Series,
(vi) the date or dates on which interest and principal will be payable (each, a
"Payment Date"), (vii) the Expected Final Payment Date of the Series and, if
applicable, each Class thereof, (viii) the termination date for the Series (the
"Series Termination Date") and, if applicable, each Class thereof (each, a
"Class Termination Date"), (ix) the Series Issuance Date for the Series, (x) the
place or places for payments with respect to the Series, (xi) the authorized
initial denominations for the Series, (xii) the redemption provisions, if any,
of the Series, (xiii) the Expected Amortization Schedule for the Series, (xiv)
the Overcollateralization Amount with respect to the Series, the pro forma
Calculated Overcollateralization Level for each Payment Date and the Monthly
Allocated Overcollateralization Balance for each Monthly Allocation Date, (xv)
the Calculation Dates and Adjustment Dates for the Series, (xvi) the terms of
any credit enhancement applicable to the Series or Class, (xvii) the terms of
any hedge or swap transaction applicable to the Series or Class and (xviii) any
other terms of the Series or Class that are not inconsistent with the provisions
of the Indenture. The Indenture requires, as a condition to the issuance of each
Series of Transition Bonds, that such issuance will not result in any rating
agency which has rated the Transition Bonds of any Class or Series at the time
of issuance thereof at the request of the Issuer (each, a "Rating Agency")
reducing or withdrawing its then-current rating of any such outstanding Series
or Class of Transition Bonds (the notification in writing by each Rating Agency
to the Seller, the Servicer, the Bond Trustee and the Issuer that any action
will not result in such a reduction or withdrawal is referred to in this
Prospectus as the "Rating Agency Condition"). If no such Rating Agency is in
existence any longer, "Rating Agency" shall be a nationally recognized
statistical rating organization or other comparable person designated by the
Issuer.
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TABLE OF CONTENTS
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PARTIES TO THE TRANSACTION.................................. 2
AVAILABLE INFORMATION....................................... 3
REPORTS TO TRANSITION BONDHOLDERS........................... 3
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE............. 4
PROSPECTUS SUPPLEMENT....................................... 4
PROSPECTUS SUMMARY.......................................... 7
RISK FACTORS................................................ 26
Unusual Nature of Intangible Transition Property.......... 26
Servicing................................................. 31
The Electric Industry Generally........................... 34
Bankruptcy; Creditors' Rights............................. 35
The Transition Bonds...................................... 38
PECO ENERGY COMPANY......................................... 40
THE COMPETITION ACT......................................... 40
General................................................... 40
Recovery of Stranded Costs................................ 40
Securitization of Stranded Costs.......................... 41
Jurisdiction Over Disputes; Standing...................... 42
PECO ENERGY'S RESTRUCTURING PLAN............................ 43
General................................................... 43
The Settlement............................................ 43
Provider of Last Resort................................... 46
Prior Litigation.......................................... 47
THE QRO AND THE INTANGIBLE TRANSITION CHARGES............... 48
The QRO................................................... 48
The Intangible Transition Charges......................... 50
Competitive Billing....................................... 52
THE SELLER AND SERVICER..................................... 54
Retail Electric Service Territory......................... 54
Customers and Operating Revenues.......................... 54
Forecasting Customers and Usage........................... 60
Billing Process........................................... 62
Limited Information on Customers' Creditworthiness........ 62
Electric Generation Suppliers and Other Third-Party
Billers................................................ 65
Year 2000 Compliance...................................... 66
THE ISSUER.................................................. 66
USE OF PROCEEDS............................................. 68
THE TRANSITION BONDS........................................ 68
General................................................... 68
Interest and Principal.................................... 69
Floating Rate Transition Bonds............................ 69
Redemption................................................ 70
Credit Enhancement........................................ 70
Book-Entry Registration................................... 71
Definitive Transition Bonds............................... 74
CERTAIN WEIGHTED AVERAGE LIFE AND YIELD CONSIDERATIONS...... 75
THE SALE AGREEMENT.......................................... 76
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Sale and Assignment of Intangible Transition Property..... 76
Seller Representations and Warranties..................... 77
Certain Matters Regarding the Seller...................... 82
Governing Law............................................. 82
THE MASTER SERVICING AGREEMENT.............................. 83
Servicing Procedures...................................... 83
Servicer Advances......................................... 84
Servicing Compensation; Releases.......................... 84
Servicer Duties........................................... 84
Servicer Representations and Warranties................... 85
Servicer Indemnification.................................. 85
Statements to Issuer and Bond Trustee..................... 86
Evidence as to Compliance................................. 86
Certain Matters Regarding the Servicer.................... 87
Servicer Defaults......................................... 87
Rights Upon Servicer Default.............................. 88
Successor Servicer........................................ 88
Addition of Other Issuers................................. 88
Governing Law............................................. 88
THE INDENTURE............................................... 89
Security.................................................. 89
Issuance in Series or Classes............................. 89
Collection Account........................................ 90
Allocations and Payments.................................. 92
Liquidated Damages........................................ 94
Reports to Transition Bondholders......................... 95
Modification of Indenture................................. 95
Enforcement of the Sale Agreement and Master Servicing
Agreement.............................................. 97
Modifications to the Sale Agreement and the Master
Servicing Agreement.................................... 98
Events of Default; Rights Upon Event of Default........... 98
Certain Covenants......................................... 100
List of Transition Bondholders............................ 101
Annual Compliance Statement............................... 101
Bond Trustee's Annual Report.............................. 101
Satisfaction and Discharge of Indenture................... 101
Legal Defeasance and Covenant Defeasance.................. 102
The Bond Trustee.......................................... 103
Governing Law............................................. 103
MATERIAL TAX MATTERS........................................ 104
U.S. Federal Income Tax Consequences...................... 104
Tax Status of the Trust and of the Transition Bonds....... 104
Taxation of United States Transition Bondholders.......... 104
Information Reporting and Backup Withholding.............. 105
Taxation of Foreign Transition Bondholders................ 105
Material State Tax Matters................................ 107
ERISA CONSIDERATIONS........................................ 107
PLAN OF DISTRIBUTION........................................ 108
RATINGS..................................................... 108
LEGAL MATTERS............................................... 108
INDEX OF PRINCIPAL DEFINITIONS.............................. 109
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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 26 in this Prospectus.
The following summary is qualified by the more detailed information
appearing elsewhere in this Prospectus and the related Prospectus Supplement.
Capitalized terms used in this Prospectus are defined in this Prospectus, and
prospective investors should refer to the Index of Principal Definitions which
begins on page 109 for the location of the definitions of such terms.
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Transaction Overview: The Competition Act, enacted in 1996, provides for the
restructuring of the electric industry in
Pennsylvania, including retail competition for
generation beginning in 1999. Deregulation of the
Pennsylvania electric industry under the Competition
Act requires the unbundling of generation,
transmission and distribution services. While
transmission and distribution services will continue
to be provided by electric utilities ("electric
distribution companies"), the Competition Act
authorizes electric generation suppliers licensed by
the PUC ("electric generation suppliers") to provide
generation and related services, including billing and
metering. The Competition Act provides for the
recovery by electric utilities of the anticipated loss
in value of generation-related assets as a result of
the transition from a regulated environment to
competition for electric generation services
("stranded costs"), as authorized by the PUC. Examples
of generation-related assets include electric
generation facilities (such as nuclear power plants),
power purchase contracts with third-party generators
of electricity and certain amounts recoverable in
electric rates (such as certain deferred expenses
declared by the PUC to be regulatory assets). The
investments in these assets were recoverable in rates
established by the PUC but may not be recoverable in
rates established by market forces in a competitive
environment. Under the Competition Act, the PUC may
authorize an electric utility or its designee to issue
transition bonds to securitize all or a portion of the
allowed recovery of stranded costs.
Pursuant to the Competition Act, the PUC has
authorized PECO Energy to recover $5.26 billion of
stranded costs (referred to in this Prospectus as PECO
Energy's "Stranded Costs"). The PUC has also issued
the QRO authorizing PECO Energy to securitize up to $4
billion of such Stranded Cost recovery through the
issuance of transition bonds. See "PECO Energy's
Restructuring Plan--The Settlement" in this
Prospectus. In order to securitize a portion of its
Stranded Cost recovery, PECO Energy will sell to the
Issuer the Transferred Intangible Transition Property,
comprised of the irrevocable right to receive
Intangible Transition Charges with respect to the
Transferred Intangible Transition Property in an
amount sufficient to recover the aggregate principal
amount of Transition Bonds plus an amount sufficient
to provide for any credit enhancement, to fund any
reserves and to pay interest, redemption premiums, if
any, servicing fees and other expenses
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relating to the Transition Bonds (collectively, the
"Qualified Transition Expenses").
To fund each of its purchases of Intangible Transition
Property, the Issuer will sell Transition Bonds
offered hereby. The Issuer may also issue Transition
Bonds to refund outstanding Transition Bonds. See "The
Indenture--Issuance in Series or Classes." Under the
Competition Act, as implemented by the QRO, the right
to collect Intangible Transition Charges is
irrevocable, and these charges are subject to periodic
adjustments designed to increase or decrease future
estimated collections to pay certain fees and expenses
of servicing the Transition Bonds, premiums, if any,
and interest on the Transition Bonds when due and
principal of each Series of Transition Bonds in
accordance with the Expected Amortization Schedule
therefor. See "The Competition Act--Securitization of
Stranded Costs" in this Prospectus.
The Issuer will issue the Transition Bonds from time
to time in one or more Series, each of which may be
comprised of one or more Classes. The Transition Bonds
will be secured by the Collateral. See "The
Indenture--Security" in this Prospectus.
Issuer: The Issuer is PECO Energy Transition Trust, a Delaware
statutory business trust formed by PECO Energy on June
23, 1998, for the purpose of purchasing and owning the
Transferred Intangible Transition Property, issuing
Transition Bonds from time to time and pledging its
interest in the Collateral to the Bond Trustee under
the Indenture to secure the Transition Bonds. The
Issuer is a special purpose entity whose only assets
are expected to be the Collateral and whose only
revenues are expected to be ITC Collections allocated
to the Issuer pursuant to the Master Servicing
Agreement. The Collateral is the sole source of
payment for the Transition Bonds. See "The Issuer" in
this Prospectus.
Issuer Trustee: First Union Trust Company, National Association will
serve as a trustee of the Issuer (together with any
successor, the "Issuer Trustee"). The corporate trust
office of the Issuer Trustee is located at One Rodney
Square, 920 King Street, 1st Floor, Wilmington,
Delaware 19801 and its telephone number is
302-888-7532. Two additional trustees have been
appointed by PECO Energy. See "The Issuer" in this
Prospectus.
Bond Trustee: The Bank of New York will serve as the Bond Trustee.
The corporate trust office of the Bond Trustee is
located at 101 Barclay Street, Floor 12 East, New
York, New York 10286 and its telephone number is
800-524-4458.
PECO Energy, Seller and
Servicer: PECO Energy, as Seller, will sell Intangible
Transition Property from time to time to the Issuer
under the terms of the Sale Agreement. See also "Risk
Factors--Bankruptcy; Creditors' Rights--Bankruptcy of
Seller--True Sale or Financing" in this Prospectus.
Pursuant to the Master Servicing Agreement, PECO
Energy, as Servicer, will service the Serviced
Intangible Transition Property.
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Incorporated in Pennsylvania in 1929, PECO Energy
provides retail electric and gas service in
Southeastern Pennsylvania, including the City of
Philadelphia. See "PECO Energy Company" and "The
Seller and Servicer" in this Prospectus.
Risk Factors: Prospective investors should consider, among other
things, the following risks associated with an
investment in the Transition Bonds. Such risks may
cause Transition Bondholders to suffer a loss of their
investment in Transition Bonds or may adversely affect
the timing of payments to Transition Bondholders.
The existence of Intangible Transition Property and
the adequacy of the Transferred Intangible Transition
Property as a source of payment for the Transition
Bonds are dependent on relevant provisions of the
Competition Act and the QRO. The ability of the Issuer
to receive collections of the Intangible Transition
Charges ("ITC Collections") and make payments on the
Transition Bonds could be affected adversely by:
limitations on the availability of Liquidated Damages
for breaches of representations and warranties; the
limited rights and remedies available to Transition
Bondholders in the event of a change in law; federal
preemption of the Competition Act adversely affecting
Intangible Transition Property; any attempted
limitation or alteration of the Competition Act, the
QRO, Intangible Transition Property or related matters
by legal challenge or amendment or repeal of the
Competition Act by the Pennsylvania General Assembly;
adverse effects arising from litigation or political
or legislative events in other jurisdictions;
regulatory changes ordered by the PUC; the failure of
adjustments to the Intangible Transition Charges to
result in the appropriate level of ITC Collections or
the failure of the PUC to implement timely adjustments
to the Intangible Transition Charges; limitations on
the Intangible Transition Charges; the resignation or
removal of the Servicer; inaccurate forecasts of the
aggregate billed revenues from which Intangible
Transition Charges are allocated or delinquencies and
write-offs relating to ITC Collections; problems in
billing and metering by, and collections by and from,
electric generation suppliers or other third parties
providing metering and billing services; economic and
technological factors and weather patterns affecting
electricity consumption; the bankruptcy or insolvency
of the Seller or the Servicer; any alteration by the
Servicer or any successor thereto of its billing and
collection practices; changes in the electricity
industry, in electricity usage impacting billed
revenue from which Intangible Transition Charges are
allocated or in the Customer base; the impact of the
Year 2000 issue; risks associated with any credit
enhancement; or any of the factors described below
potentially affecting the price and liquidity of the
Transition Bonds.
The price and liquidity of the Transition Bonds and
the amortization thereof and, accordingly, the
weighted average lives thereof may be affected by any
delay in adjustments to the Intangible Transition
Charges, the limitation of adjustments to the
Intangible Transition Charges, a delay or failure by
the Servicer or an electric generation supplier or
other third parties providing
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metering and billing services to remit ITC
Collections, or an incorrect evaluation by the
Servicer of the creditworthiness of a significant
number of Customers or the issuance of additional
Series or other financings.
There are no historical performance data for
Intangible Transition Property, and the Servicer does
not have any experience administering this specific
type of asset. Additionally, because of the unique
nature of Intangible Transition Property, foreclosure
may not be a realistic or practical remedy for the
Bond Trustee.
The Transition Bonds will not be obligations of any
entity other than the Issuer, will be issuable in
Series, will have ratings which are limited in nature,
will have uncertain payments of interest and principal
and weighted average lives, will be subject to
mandatory redemption and may be subject to optional
redemption, as specified in the related Prospectus
Supplement.
For a more detailed discussion of certain material
risks associated with an investment in Transition
Bonds, prospective investors should review the
discussion under "Risk Factors" which begins on page
26.
Source of Payment;
Intangible
Transition Charge: The Transition Bonds will be payable solely from the
Collateral, including ITC Collections allocated to the
Issuer pursuant to the Master Servicing Agreement,
whether paid by Customers directly to the Servicer or
indirectly through electric generation suppliers or
other third parties which may or may not supply
generation services to such Customers. The Intangible
Transition Charges will be nonbypassable charges and
will be payable by designated existing and future
Customers. As described in "Risk Factors" in this
Prospectus, the Servicer's receipt of ITC Collections
is dependent on the remittance of such amounts by
third-party electric generation suppliers and other
third parties to the extent applicable Customers are
supplied or billed by such third parties. See "The QRO
and the Intangible Transition Charges--The Intangible
Transition Charges--Calculation of the Intangible
Transition Charges" in this Prospectus and
"Description of Intangible Transition Property--The
Intangible Transition Charges" in the related
Prospectus Supplement.
ITC Adjustment Process: The Master Servicing Agreement requires the Servicer
to seek, and the Competition Act and the QRO require
the PUC to approve, adjustments to the Intangible
Transition Charges charged to each Rate Class within
any Customer Category based on actual ITC Collections
attributable to such Customer Category and updated
assumptions by the Servicer as to projected billed
revenue from which Intangible Transition Charges are
allocated within each Rate Class, expected
delinquencies and write-offs within each Rate Class
and future payments and expenses relating to the
Intangible Transition Property and the Transition
Bonds. Additionally, the QRO provides that adjustments
during the final calendar year during which any series
of transition bonds secured by Intangible Transition
Property is outstanding may be implemented quarterly
or monthly. With respect to the Transition
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Bonds, such adjustments are designed to result in the
outstanding principal balance of each Series equaling
the amount provided for in the Expected Amortization
Schedule therefor, and the amount on deposit in the
Overcollateralization Subaccount equaling the
Calculated Overcollateralization Level, by (i) the
next Adjustment Date or the Payment Date immediately
succeeding such Adjustment Date, as specified in the
related Prospectus Supplement, or (ii) the Expected
Final Payment Date, as applicable, for each Series,
taking into account any amounts on deposit in the
Reserve Subaccount other than certain Customer
prepayments of Intangible Transition Charges, if any,
not allocable to the period covered by the applicable
Adjustment Request. For a discussion of Customer
prepayments, see "The Seller and Servicer--Limited
Information on Customers' Creditworthiness--
Application of Customer Payments" in this Prospectus.
The Servicer is required to file requests with the PUC
for such adjustments (each, an "Adjustment Request")
on May 14 of each year and on such additional 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 annual
adjustments. The adjustments to the Intangible
Transition Charges are expected to be implemented on
or prior to August 12 of each year and, with respect
to each series of Transition Bonds, on the date or
dates in the final calendar year of ITC Collections
for a Series of Transition Bonds specified in the
related Prospectus Supplement (each, an "Adjustment
Date"). Such adjustments will cease with respect to a
Series on the final Adjustment Date specified in the
related Prospectus Supplement for that Series. See
"The QRO and the Intangible Transition Charges--The
Intangible Transition Charges" in this Prospectus.
Irrevocability of
Intangible
Transition Charges: Intangible Transition Property has been created by the
PUC's issuance of the QRO and the declaration by the
PUC that the relevant paragraphs of the QRO are
irrevocable. See "The Competition Act--Securitization
of Stranded Costs--Irrevocability of Intangible
Transition Property" in this Prospectus. The
Competition Act provides that, to the extent that the
PUC declares all or a portion of a qualified rate
order irrevocable, the PUC may not, by any subsequent
action, reduce, postpone, impair or terminate either
the qualified rate order or the intangible transition
charges authorized therein. The Intangible Transition
Charges are nonbypassable in that Customers on whom
such charges are imposed cannot avoid paying them,
even if they purchase electricity from a supplier
other than PECO Energy.
Under Section 2812(c)(2) of the Competition Act, the
Commonwealth of Pennsylvania (the "Commonwealth")
"pledges to and agrees with holders of any transition
bonds and with any assignee or financing party who may
enter into contracts with an electric utility . . .
that the Commonwealth of Pennsylvania will not limit
or alter or in any way impair or reduce the value of
the intangible transition property or intangible
transition charges approved by a qualified rate order
until the transition bonds and interest on the
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transition bonds are fully paid and discharged or the
contracts are fully performed on the part of the
electric utility . . . or adequate compensation is
made by law for the full protection of the intangible
transition charges collected pursuant to a
qualified rate order and of the holder of [a]
transition bond and any assignee or financing party
entering into [a] contract with the electric utility."
See "Risk Factors--Unusual Nature of Intangible
Transition Property," "The Competition Act" and "The
QRO and the Intangible Transition Charges" in this
Prospectus.
Customers: The Intangible Transition Charges will be assessed on
the bills of each person (each, a "Customer") that (i)
was a customer of PECO Energy located within PECO
Energy's retail electric service territory on January
1, 1997 or that became a customer of electric services
within such territory after January 1, 1997, (ii) is
still located within such territory and (iii) is in a
rate class (each, a "Rate Class") that has been
assigned Stranded Cost responsibility. For a
description of the Rate Classes, see "The Seller and
Servicer--Customers and Operating Revenues" in this
Prospectus. The Rate Classes are grouped into three
broad categories: Residential; Small Commercial and
Industrial; and Large Commercial and Industrial (each,
a "Customer Category"). In 1998, approximately 41.6%
of PECO Energy's regulated retail electric revenues
were collected from Residential Customers,
approximately 24.7% from Small Commercial and
Industrial Customers and approximately 33.6% from
Large Commercial and Industrial Customers.
As of January 1, 1999, Customers who purchase
generation from an electric generation supplier may
elect to continue to receive a single bill from their
electric distribution company, to receive separate
bills for services provided by their electric
generation supplier and their electric distribution
company or to have an electric generation supplier or
another third party render a consolidated bill
including generation charges and the charges of the
electric distribution company (including Intangible
Transition Charges). To the extent Customers choose to
take service from an electric generation supplier that
provides consolidated billing and elect to receive
consolidated billing, or elect to receive consolidated
billing from a third party, whether or not such third
party also provides electric service, the payments in
respect of the Intangible Transition Charges owing by
such Customers will be owed by the electric generation
supplier or third party rather than by the Customer.
See "The QRO and the Intangible Transition
Charges--Competitive Billing" and "Risk
Factors--Servicing--Credit Concerns Arising Out of
Third-Party Billing" in this Prospectus.
The Transition Bonds;
Issuance
of New Series: The Issuer may issue Transition Bonds in one or more
Series, each comprised of one or more Classes. Each
Series of Transition Bonds will be issued under the
Indenture. See "The Indenture" in this Prospectus. Any
Series of Transition Bonds may include one or more
Classes which differ, among other things, as to the
Bond Rate and amortization of principal. The terms of
all Transition
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Bonds of the same Series will be identical, unless
such Series is comprised of more than one Class, in
which case the terms of all Transition Bonds of the
same Class will be identical. The particular terms of
the Transition Bonds of any Series and, if applicable,
Classes thereof, will be described in the related
Prospectus Supplement. The terms of such Series and
any Classes thereof will not be subject to prior
review by, or consent of, the Transition Bondholders
of any previously issued Series. A new Series may be
issued pursuant to the Indenture only upon
satisfaction of the conditions described in this
Prospectus under "The Indenture--Issuance in Series or
Classes." See "Risk Factors--The Transition
Bonds--Effect of Additional Series and Other
Financings on Outstanding Transition Bonds" and "The
Transition Bonds" in this Prospectus.
Payment Date: The Payment Dates with respect to any Series of
Transition Bonds will be the days specified in the
related Prospectus Supplement.
Record Dates: With respect to any Payment Date, the record date
shall be the day designated in the Prospectus
Supplement (each, a "Record Date").
Interest and Principal: Interest will accrue on the principal balance of
Transition Bonds of a Series or Class at the
applicable rate of interest (the "Bond Rate")
specified in or determined in the manner specified in
the applicable Prospectus Supplement.
On any Payment Date with respect to any Series, the
Issuer will make principal payments on such Series
only until the outstanding principal balance thereof
has been reduced to the amount specified for such
Payment Date in the amortization schedule (the
"Expected Amortization Schedule") set forth in the
Prospectus Supplement for such Series, but only to the
extent funds are available therefor as described in
this Prospectus. Accordingly, principal of such Series
or Class of Transition Bonds may be paid later than
reflected in the Expected Amortization Schedule
therefor. Failure to make a principal payment in
accordance with the Expected Amortization Schedule
(except on the Class or Series Termination Date) will
not be an Event of Default under the Indenture. See
"Risk Factors--The Transition Bonds--Uncertain
Weighted Average Life" and "Certain Weighted Average
Life and Yield Considerations" in this Prospectus.
The entire unpaid principal amount of the Transition
Bonds will be due and payable if an Event of Default
under the Indenture occurs and is continuing and the
Bond Trustee or the holders of a majority in principal
amount of the Transition Bonds of all Series then
outstanding have declared the Transition Bonds to be
immediately due and payable. See "The
Indenture--Events of Default; Rights Upon Event of
Default" in this Prospectus.
Overcollateralization: The QRO permits the Servicer to set the Intangible
Transition Charges at levels that are expected to
produce ITC Collections allocated to the Issuer
pursuant to the Master Servicing Agreement above that
necessary to pay interest and principal as described
under the Expected Amortization Schedule for each
Series and to pay any other fees and expenses of
servicing the Transition Bonds.
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Each Prospectus Supplement will set forth the
"Overcollateralization Amount" for the Series of
Transition Bonds offered thereby which amount will be
deposited in the Overcollateralization Subaccount as
described under "--Allocations and Payments" below
after all such payments having a higher priority have
been made. The Intangible Transition Charges will be
calculated at, and periodically adjusted to, a level
that is designed to collect the Overcollateralization
Amount ratably over the life of the related Transition
Bonds. The amount anticipated to be on deposit in the
Overcollateralization Subaccount for all Series of
Transition Bonds as of each Payment Date is referred
to in this Prospectus as the "Calculated
Overcollateralization Level." The amount on deposit at
any time in the Overcollateralization Subaccount will
be available to pay any shortfalls in amounts
available to pay or make provision for interest on
each Series of Transition Bonds when due, to make
payments under any hedge or swap transactions or
credit enhancement arrangements 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 6th day of each calendar month or, if
such day is not a Business Day, the next succeeding
Business Day. A "Business Day" shall mean any day
other than a Saturday, Sunday, or a day on which
banking institutions in the City of Philadelphia, the
City of New York or the State of Delaware are required
by law or executive order to remain closed.
Collection Account and
Subaccounts: Under the Indenture, the Issuer will establish the
Collection Account, which will be held by the Bond
Trustee under the Indenture. The Collection Account
will consist of: a general subaccount (the "General
Subaccount"); one or more subaccounts for each Series
(each, a "Series Subaccount"); a Class subaccount for
each Class of Transition Bonds, if any, that bears a
floating rate of interest (each, a "Class
Subaccount"); a reserve subaccount (the "Reserve
Subaccount"); an overcollateralization subaccount (the
"Overcollateralization Subaccount"); a capital
subaccount (the "Capital Subaccount"); a defeasance
subaccount for each Series of Transition Bonds, if
any, that are to be defeased (each, a "Defeasance
Subaccount"), if applicable; an interest subaccount
(the "Interest Deposit Subaccount"), if applicable;
and a loss subaccount (the "Loss Subaccount"), if
applicable. Unless the context indicates otherwise,
references in this Prospectus to the Collection
Account include each of the subaccounts contained
therein. Deposits to and withdrawals from these
subaccounts will be made as described under "The
Indenture--Collection Account" and "Allocations and
Payments" in this Prospectus.
General Subaccount: ITC Collections remitted by the Servicer to the Bond
Trustee, as well as Liquidated Damages and Indemnity
Amounts remitted by the Seller or the Servicer or
otherwise received by the Bond Trustee or the Issuer,
shall be deposited in the General Subaccount.
"Indemnity Amounts" means any amounts paid by the
Seller or the Servicer to the Bond Trustee, for itself
or on
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behalf of the Transition Bondholders, in respect of
certain indemnification obligations pursuant to the
Sale Agreement and the Master Servicing Agreement.
Indemnity Amounts exclude certain Liquidated Damages
paid pursuant to the Sale Agreement. See "The
Indenture--Allocations and Payments" and "The Sale
Agreement" in this Prospectus.
Series Subaccount: Upon issuance of each Series of Transition Bonds, a
Series Subaccount will be established with respect to
such Series. On each Monthly Allocation Date, deposits
will be made to each Series Subaccount as described
under "The Indenture--Allocations and Payments" in
this Prospectus. Amounts on deposit in the Series
Subaccount for any Series will be applied to make
payments with respect to such Series as described
under "The Transition Bonds--Interest and Principal"
in this Prospectus and in the applicable Prospectus
Supplement.
Class Subaccount: Upon issuance of a Class of Transition Bonds that
bears a floating rate of interest, a Class Subaccount
will be established with respect to such Class.
Payments to and from any counterparty to a hedge or
swap transaction will be made from or deposited to, as
applicable, the applicable Class Subaccount as
described in the related Prospectus Supplement. On
each Payment Date, amounts on deposit in the Class
Subaccount will be applied to make payments with
respect to the related Class as described under "The
Indenture--Allocations and Payments" in this
Prospectus.
Reserve Subaccount: ITC Collections, including certain Customer
prepayments of Intangible Transition Charges, if any,
allocated to the Issuer pursuant to the Master
Servicing Agreement available on any Monthly Allocation
Date in excess of (i) amounts payable in respect
of fees and expenses of the Bond Trustee and the
Servicer and certain other fees and expenses, (ii)
amounts distributable to Series Subaccounts and Class
Subaccounts, if any, in respect of principal of and
interest scheduled to be paid 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. Deposits to and withdrawals from the
Reserve Subaccount will be made as described under
"The Indenture--Allocations and Payments" in this
Prospectus.
Overcollateralization
Subaccount: Collections with respect to the Overcollateralization
Amount, up to the Calculated Overcollateralization
Level, will be held in the Overcollateralization
Subaccount. Deposits to and withdrawals from the
Overcollateralization Subaccount will be made as
described under "The Indenture--Allocations and
Payments" in this Prospectus.
Capital Subaccount: Upon the issuance of each Series of Transition Bonds,
the Issuer will deposit an amount equal to at least
0.5% of the initial principal amount of such Series of
Transition Bonds, representing a capital contribution
from PECO Energy, into the Capital Subaccount (with
respect to each Series, the "Required Capital
Amount"). Except for amounts necessary to pay certain
expenses,
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such amounts will be available to make payments of
principal and interest on the Transition Bonds.
Deposits to and withdrawals from the Capital
Subaccount will be made as described under "The
Indenture--Allocations and Payments" in this
Prospectus.
Defeasance Subaccount: If funds are remitted to the Bond Trustee in
connection with the exercise of the Legal Defeasance
Option or the Covenant Defeasance Option under the
Indenture, the Issuer shall establish a Defeasance
Subaccount for each Series to be defeased. The funds
required to fund such defeasance will be deposited
into such account. Deposits to and withdrawals from
the applicable Defeasance Subaccount will be made as
described under "The Indenture--Allocations and
Payments" in this Prospectus.
Interest Deposit If amounts are remitted by the Seller to the Bond
Subaccount: Trustee pursuant to the Sale Agreement in respect of
interest payable in connection with the Seller's
breach of certain of its representations therein, the
Issuer shall establish the Interest Deposit
Subaccount. Deposits to and withdrawals from the
Interest Deposit Subaccount will be made as described
under "The Indenture--Allocations and Payments" in
this Prospectus. See also "The Sale Agreement" in this
Prospectus.
Loss Subaccount: The Issuer shall establish the Loss Subaccount if the
Seller is required to pay any Loss Amounts pursuant to
the Sale Agreement. Deposits to and withdrawals from
the Loss Subaccount will be made as described under
"The Indenture--Allocations and Payments" in this
Prospectus. See also "The Sale Agreement" in this
Prospectus for a discussion of Loss Amounts and the
Seller's indemnification obligations under the Sale
Agreement.
Allocations and Payments:On each Monthly Allocation Date, the Bond Trustee
shall apply all amounts on deposit in the General
Subaccount of the Collection Account and any
investment earnings thereon in the following priority:
(i) all amounts owed to the Bond Trustee (including
legal fees and expenses, Indemnity Amounts and Loss
Amounts) will be paid to the Bond Trustee; (ii) all
amounts owed to the Issuer Trustee (including legal
fees and expenses, Indemnity Amounts and Loss Amounts)
will be paid to the Issuer Trustee; (iii) the Monthly
Servicing Fee and all unpaid Monthly Servicing Fees
from prior Monthly Allocation Dates will be paid to
the Servicer; (iv) so long as no Event of Default has
occurred and is continuing or would be caused by such
payment, all operating expenses other than those
referred to in clauses (i), (ii) and (iii) above will
be paid to the Persons entitled thereto, provided that
the amount paid on any Monthly Allocation Date
pursuant to this clause (iv) may not exceed $12,500 in
the aggregate for all Series; (v) an amount equal to
Interest with respect to each Series of Transition
Bonds for such Monthly Allocation Date will be
transferred on a Pro Rata basis to the Series
Subaccount for such Series; (vi) an amount equal to
any Principal of any Series or Class of Transition
Bonds payable as a result of acceleration triggered by
an Event of Default, any Principal of any Series or
Class of Transition Bonds payable on a Series
Termination Date or Class Termination Date, as
applicable, that will occur prior to the next Monthly
Allocation Date and any
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Principal of and premium on a Series or Class of
Transition Bonds payable on a Redemption Date that
will occur prior to the next Monthly Allocation Date
will be transferred on a Pro Rata basis to the Series
Subaccount for such Series, taking into account
amounts on deposit therein in respect of Principal as
of such Monthly Allocation Date; (vii) an amount equal
to Principal with respect to each Series of Transition
Bonds for such Monthly Allocation Date not provided
for pursuant to clause (vi) above will be transferred
on a Pro Rata basis to the Series Subaccounts for such
Series; (viii) all unpaid operating expenses,
Indemnity Amounts and Loss Amounts will be paid to the
Persons entitled thereto; (ix) Overcollateralization
with respect to all Series of Transition Bonds for
such Monthly Allocation Date will be transferred to
the Overcollateralization Subaccount; (x) any amounts
owed to any counterparty to a hedge or swap
transaction; (xi) provided that no Event of Default
has occurred and is continuing, an amount up to the
amount of net investment earnings on amounts in the
General Subaccount of the Collection Account since the
previous Monthly Allocation Date will be released to
the Issuer, free from the lien of the Indenture; (xii)
the balance, if any, will be allocated to the Reserve
Subaccount; and (xiii) following repayment of all
outstanding Series of Transition Bonds, the balance,
if any, will be released to the Issuer, free from the
lien of the Indenture. See "The Indenture--Allocations
and Payments" in this Prospectus.
The following diagram generally depicts the basic flow
of ITC Collections from Customers or Electric
Generation Suppliers or other third parties to the
Servicer and, subsequently, to the various accounts
listed above.
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BASIC MONTHLY ALLOCATIONS AND DISTRIBUTIONS
[GRAPHIC]
In the printed version of the document a graphic appears showing sources and
uses of funds.
* electric generation suppliers or other third parties providing billing and
metering services
** collections of Intangible Transition Charges
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"Interest" means, with respect to any Monthly
Allocation Date and any Series of Transition Bonds,
the sum of without duplication, (i) an amount that
would cause the amount on deposit in each Series
Subaccount, without regard to expected investment
income, in respect of interest to equal the Monthly
Allocated Interest Balance for such Series and such
Monthly Allocation Date, (ii) if the Transition Bonds
have been declared due and payable, all accrued and
unpaid interest thereon, (iii) with respect to a
Series to be redeemed prior to the next Monthly
Allocation Date, the amount of interest that will be
payable as interest on such Series on the Redemption
Date therefor and (iv) any interest due on such Series
on a Payment Date therefor or other date for the
payment of interest and not paid and, to the extent
permitted by law, interest thereon.
"Principal" means, with respect to any Monthly
Allocation Date and any Series of Transition Bonds,
the sum of, without duplication, (i) an amount that
would cause the amount on deposit in the Series
Subaccount, without regard to expected investment
income, for such Series in respect of principal to
equal the Monthly Allocated Principal Balance for such
Series and such Monthly Allocation Date, (ii) the
amount that would be payable as principal as a result
of the occurrence and continuance of an Event of
Default, (iii) with respect to a Series that is
subject to redemption, the amount that would be
payable as principal as a result of a redemption
thereof pursuant to the Indenture or (iv) any
principal due on a Series on a Payment Date or other
date for the payment of principal thereof and not
paid.
"Pro Rata" means, with respect to any Series of
Transition Bonds, a ratio, (i) in the case of clause
(v) in the first paragraph in this subsection, the
numerator of which is the Monthly Allocated Interest
Balance with respect to such Series for such Monthly
Allocation Date and the denominator of which is the
sum of Monthly Interest Balances with respect to all
Series for such Monthly Allocation Date, (ii) in the
case of clause (vi) in the first paragraph of this
subsection, the numerator of which is the amount
allocable under such clause with respect to such
Series and the denominator of which is the amount
allocable to all Series under such clause and (iii) in
the case of clause (vii) in the first paragraph of
this subsection, the numerator of which is the Monthly
Allocated Principal Balance with respect to such
Series for such Monthly Allocation Date and the
denominator of which is the sum of Monthly Allocated
Principal Balances with respect to all Series for such
Monthly Allocation Date.
"Overcollateralization" means, with respect to any
Monthly Allocation Date, an amount that would cause
the balance in the Overcollateralization Subaccount to
equal the Monthly Allocated Overcollateralization
Balance for such Monthly Allocation Date, without
regard to expected investment earnings.
The "Monthly Allocated Interest Balance" and the
"Monthly Allocated Principal Balance," if applicable,
for each Monthly Allocation Date and each Series will
each be set forth in the related Prospectus Supplement
for such Series and will be calculated such that
amounts scheduled to be paid on each
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Payment Date in respect of interest (in the case of
Classes with swap or hedge transactions, at the rate
payable to the counterparty to such transactions) and
principal, respectively, for such Series will be
expected to be on deposit in the applicable Series
Subaccount as of the Monthly Allocation Date prior to
such Payment Date.
The "Monthly Allocated Overcollateralization Balance"
for each Monthly Allocation Date will be set forth in
the first Prospectus Supplement and adjusted to
reflect redemptions or defeasances of Transition Bonds
and issuances of additional Series of Transition Bonds
and will be calculated such that the Calculated
Overcollateralization Level for each Payment Date will
be expected to be on deposit in the
Overcollateralization Subaccount as of the Monthly
Allocation Date prior to such Payment Date.
If on any Monthly Allocation Date funds on deposit in
the General Subaccount are insufficient to make the
allocations contemplated by clauses (i) through (viii)
above, the Bond Trustee will draw from amounts on
deposit in the following subaccounts up to the amount
of such shortfall, in order to make such payments and
transfers: (i) from the Interest Deposit Subaccount,
with respect to the payments or transfers contemplated
by clause (v) above only, (ii) then from the Loss
Subaccount, with respect to the payments or transfers
contemplated by clauses (i) through (vii) above only,
and (iii) thereafter, from the Reserve Subaccount,
then from the Overcollateralization Subaccount and
finally from the Capital Subaccount. See "The
Indenture--Allocations and Payments" in this
Prospectus.
On each Payment Date for any Series, the amounts on
deposit in the applicable Series Subaccount for that
Series remaining after the allocations, if any,
described in the next paragraph (other than net income
or other gain, which, so long as no Event of Default
has occurred and is continuing, shall be released to
the Issuer free of the lien of the Indenture) will be
applied to pay the following (in the priority
indicated): (i) interest due and payable on the
Transition Bonds of such Series, together with any
overdue interest and, to the extent permitted by law,
interest thereon, will be paid to the Transition
Bondholders of such Series (in the case of Classes
with swap or hedge transactions, such interest will be
the amounts payable to the applicable counterparty to
such transactions), (ii) the balance, if any, up to
the principal amount of the Transition Bonds of such
Series that is scheduled to be paid by such Payment
Date in accordance with the Expected Amortization
Schedule for such Series or, with respect to any
Series of Transition Bonds payable as a result of
acceleration pursuant to the Indenture or to be
redeemed pursuant to the Indenture, the outstanding
principal amount of such Series and premium, if any,
will be paid to the Transition Bondholders of such
Series in respect of principal and premium, if any, on
the Transition Bonds of such Series, and (iii) the
balance, if any, will be transferred to the General
Subaccount for allocation on the next Monthly
Allocation Date. See "The Indenture--Allocations and
Payments" in this Prospectus. Amounts applied to a
Series as described in this paragraph will be
allocated among the Classes of such Series, if any
(including to the Class Subaccounts, if any, as
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described in the following paragraph), as described in
the Prospectus Supplement.
On the Business Day preceding each Payment Date, the
amounts on deposit in any Series Subaccount with
respect to Classes of such Series for which one or
more Class Subaccounts have been established (other
than net income or other gain, which, so long as no
Event of Default has occurred and is continuing, shall
be released to the Issuer free of the lien of the
Indenture) will be allocated to the applicable Class
Subaccount as described in the related Prospectus
Supplement, up to the gross amount, if any, owed to
the applicable counterparty to any hedge or swap
transaction entered into by the Issuer pursuant to the
related hedge or swap agreement. On such day, net
amounts owed to such counterparty will be paid from,
or net amounts paid by such counterparty will be
deposited into, such Class Subaccount. On the related
Payment Date, remaining amounts in each Class
Subaccount will be paid as interest to the holders of
the applicable Class. See "The Indenture--Allocations
and Payments" in this Prospectus.
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 or Class. For each Series of Transition Bonds,
the related Prospectus Supplement will also specify a
Series Termination Date and, if applicable, Class
Termination Dates. The Series Termination Date or
Class Termination Date shall be on or after the
related Expected Final Payment Date. Failure to make a
principal payment in accordance with the Expected
Amortization Schedule (except on the Class or Series
Termination Date) will not be an Event of Default
under the Indenture. Failure to pay unpaid principal
of the applicable Series or Class of Transition Bonds
in full by the applicable Series or Class Termination
Date shall constitute an Event of Default. Upon the
occurrence of an Event of Default, the Bond Trustee or
the holders of a majority in principal amount of all
Transition Bonds of all Series then outstanding may
declare the principal amount of all Series then
outstanding to be immediately due and payable. See
"The Indenture--Events of Default; Rights Upon Event
of Default" and "Ratings" in this Prospectus.
Redemption: Each Series of Transition Bonds will be subject to
mandatory redemption in whole at a redemption price
equal to the principal amount thereof, plus interest
accrued to the redemption date, if the Seller is
obligated to pay Liquidated Damages under the Sale
Agreement. PECO Energy, as Seller, will be required to
pay an amount sufficient to pay the principal of the
outstanding Transition Bonds, plus accrued interest
thereon to the date of redemption and breakage costs
or termination fees, if any, due to any counterparty
to any hedge or swap transaction entered into by the
Issuer ("Liquidated Damages") and certain amounts due
to the Bond Trustee, the Issuer Trustee and the Issuer
as a result of a breach by
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PECO Energy of certain of its representations relating
to Intangible Transition Property under the Sale
Agreement if such breach has a material adverse effect
on the Transition Bondholders and assuming the Seller
meets certain rating criteria or makes certain escrow
deposits, such breach continues beyond a 90-day grace
period (if such rating criteria are not met or the
requisite escrow deposit is not made, the Seller must
pay Liquidated Damages within two days of such
breach). The Bond Trustee, which may consult with the
Servicer and other third parties, will have sole
responsibility to determine whether a breach by PECO
Energy of any such representation has a material
adverse effect on the Transition Bondholders.
If the full amount of indemnification payments
resulting from PECO Energy's breach of certain of its
representations relating to the Commonwealth's and the
PUC's ability to adversely affect Intangible
Transition Property or Transition Bondholders,
governmental approvals, pending or threatened
litigation, PECO Energy's due incorporation and
corporate authority to fulfill its obligations under
the Sale Agreement, the enforceability of the Sale
Agreement against PECO Energy and the absence of any
breach of its charter documents, creation of a lien or
violation of applicable law in connection with the
Sale Agreement is reasonably expected to be incurred
beyond a 90-day period immediately following the
breach of the representation giving rise thereto, the
Seller shall, except as provided below, pay Liquidated
Damages to the Bond Trustee, as assignee of the
Issuer, for deposit into the General Subaccount of the
Collection Account on the first Monthly Allocation
Date following the expiration of such 90-day period.
With respect to any losses incurred as a result of
such a breach the full amount of which is reasonably
expected not to exceed 1/12th of 1% of the annual
outstanding balance of the Transition Bonds per
Monthly Allocation Date (the "De Minimis Loss
Amount"), the Seller on the Monthly Allocation Date
immediately following the day which is 90 days after
receipt of written notice from the Issuer or the Bond
Trustee of an event requiring indemnification by the
Seller (the "Initial Loss Calculation Date") shall pay
to the Bond Trustee, as assignee of the Issuer, for
deposit in the Loss Subaccount of the Collection
Account, the aggregate expected amount of such losses
for all Monthly Allocation Dates on which losses are
expected to be incurred, following which the Seller's
obligation to pay indemnification or Liquidated
Damages, as applicable, as a result of such losses
shall be waived so long as actual losses incurred on
any Monthly Allocation Date do not exceed the De
Minimis Loss Amount. If the amount of such losses on
any Monthly Allocation Date exceeds the amounts paid
by the Seller to the Bond Trustee, as assignee of the
Issuer, with respect thereto, the Seller shall pay to
the Bond Trustee, as assignee of the Issuer, on the
next Monthly Allocation Date the amount of such excess
for such Monthly Allocation Date and the expected
amount of excess for all subsequent Monthly Allocation
Dates. If, however, the amount of such losses on any
Monthly Allocation Date exceeds the De Minimis Loss
Amount, then Liquidated Damages are payable on the
next Monthly Allocation Date.
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Additional redemption provisions, if any, for each
Series of Transition Bonds will be specified in the
related Prospectus Supplement. See "The Transition
Bonds--Redemption" and "The Sale Agreement--Seller
Representations and Warranties" in this Prospectus.
Other Credit Enhancement: The Issuer, at its option, may provide additional
credit enhancement with respect to a Series in the
form of other reserve accounts, a financial guaranty
insurance policy, a letter of credit, a credit or
liquidity facility, a repurchase obligation,
third-party payment or other support, a cash deposit
or such other arrangement as is described in the
applicable Prospectus Supplement. See "The Transition
Bonds--Credit Enhancement" in this Prospectus.
Floating Rate
Transition Bonds: If in connection with the issuance of floating rate
Transition Bonds, the Issuer arranges for one or more
hedge or swap transactions, the material terms of such
transactions will be described in the applicable
Prospectus Supplement. Under the Indenture, the Issuer
may not terminate or amend any hedge or swap agreement
to which it is a party while any floating rate
Transition Bonds of the Class related thereto remain
outstanding, except pursuant to the terms of such
hedge or swap agreement and then only with the consent
of a super majority of the holders of such Class. See "The
Indenture--Certain Covenants."
Denominations: Each Class of Transition Bonds will initially be
issued in the minimum denominations set forth in the
related Prospectus Supplement.
Form of the Transition
Bonds: Each Series and Class of Transition Bonds will
initially be issued either only in book-entry form
through DTC or in another form as specified in the
applicable Prospectus Supplement. See "The Transition
Bonds--Book-Entry Registration" in this Prospectus.
Servicing: The Servicer (initially PECO Energy) is responsible
for servicing, managing and making collections of the
Intangible Transition Charges in accordance with its
customary and usual billing and collection practices
and for filing Adjustment Requests. The Servicer will
remit to the Bond Trustee for deposit into the
Collection Account all ITC Collections allocated to
the Issuer pursuant to the Master Servicing Agreement
and all proceeds of other Collateral under the
Indenture (from whatever source) received by the
Servicer on or before each Remittance Date. As long as
PECO Energy or any successor to PECO Energy's electric
distribution business is the Servicer, the Remittance
Date is the 3rd day of each month (or if the 3rd is
not a Business Day, the immediately succeeding
Business Day), provided that, among other things, (i)
PECO Energy or its successor maintains a short-term
rating of at least "A-1" by Standard & Poor's Rating
Group ("S&P"), "P-1" by Moody's Investor Service
("Moody's") and, if rated by Fitch IBCA, Inc. ("Fitch
IBCA"), "F-2" by Fitch IBCA (and for five Business
Days following a reduction in, any such rating) or
(ii) the Rating Agency Condition will have been
satisfied with respect to each of the Rating Agencies
other than Moody's (to which notice will be sent) (and
any conditions or limitations imposed by such Rating
Agencies in connection
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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 1st day
of the month to and including the last day of the same
month is referred to in this Prospectus as the
"Collection Period." Pending deposit into the
Collection Account, ITC Collections allocated to the
Issuer pursuant to the Master Servicing Agreement may
be invested by the Servicer at its own risk and for
its own benefit and will not be segregated from the
general funds of the Servicer. See "Risk
Factors--Bankruptcy; Creditors' Rights" in this
Prospectus.
Servicing Compensation: To the extent amounts are available therefor in
accordance with the Indenture, the Servicer will be
entitled to receive a servicing fee on each Monthly
Allocation Date with respect to each Series of
Transition Bonds in an amount equal to 1/12 of the
percent specified in the related Prospectus Supplement
of the outstanding principal amount of the Transition
Bonds of such Series as of such Monthly Allocation
Date (the "Monthly Servicing Fee"). The Monthly
Servicing Fee will be paid prior to the payment of any
amounts in respect of interest on and premium and
principal of the Transition Bonds. See "The Master
Servicing Agreement--Servicing Compensation; Releases"
in this Prospectus.
Servicer Advances: If so specified in the related Prospectus Supplement,
the Servicer will make advances of interest or
principal on the related Series of Transition Bonds.
If no advances are specified in a particular
Prospectus Supplement, the Servicer will make no
advances for the related Series.
ERISA Considerations: A fiduciary of any employee benefit plan or other plan
or arrangement that is subject to the Employee
Retirement Income Security Act of 1974, as amended
("ERISA"), or Section 4975 of the Internal Revenue
Code of 1986, as amended (the "Code"), should
carefully review with its legal advisers whether the
purchase or holding of the Transition Bonds of any
Class or Series could give rise to a transaction
prohibited or not otherwise permissible under ERISA or
the Code. See "ERISA Considerations" in this
Prospectus and in the related Prospectus Supplement.
Tax Status: In the opinion of Ballard Spahr Andrews & Ingersoll,
LLP, (i) the Issuer will be treated as a division of
PECO Energy for United States federal income tax
purposes and therefore will not be treated as a
separate taxable entity for such purposes and (ii)
consequently, interest paid on the Transition Bonds
will be treated as interest expense incurred by PECO
Energy. Transition Bondholders who are United States
taxpayers will be required to include the interest
received on the Transition Bonds in gross income.
Investors should consult their income tax advisers
with respect to their own individual tax situations to
determine the federal, state, local and other tax
consequences of the purchase of Transition Bonds.
Transition Bondholders who are not United States
taxpayers generally will not be subject to United
States federal income or withholding taxes on interest
received on the Transition Bonds. See "Material Tax
Matters" in this Prospectus.
</TABLE>
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<TABLE>
<S> <C>
Ratings: It is a condition of any underwriter's obligation to
purchase each Series or Class of Transition Bonds
that, at the time of issuance, such Series or Class
receive the rating indicated in the related Prospectus
Supplement, which will be in one of the four highest
categories, from one or more Rating Agencies specified
therein.
A security rating is not a recommendation to buy, sell
or hold securities and may be subject to revision or
withdrawal at any time. No person is obligated to
maintain any rating on any Transition Bond and,
accordingly, there can be no assurance that the
ratings assigned to any Series or Class of Transition
Bonds upon initial issuance thereof will not be
revised or withdrawn by a Rating Agency at any time
thereafter. If a rating of any Series or Class of
Transition Bonds is revised downward or withdrawn, the
liquidity and the price of such Series or Class of
Transition Bonds may be adversely affected. In
general, the ratings address credit risk and do not
represent any assessment of any particular rate of
principal payments on the Transition Bonds other than
the payment in full of each Series or Class of
Transition Bonds by the applicable Series Termination
Date or Class Termination Date. See "Risk Factors--The
Transition Bonds--Uncertain Weighted Average Life" and
"Ratings" in this Prospectus.
</TABLE>
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RISK FACTORS
Prospective investors in any Series of Transition Bonds should consider,
among other things, the following factors in connection with the purchase of
Transition Bonds:
UNUSUAL NATURE OF INTANGIBLE TRANSITION PROPERTY
DEPENDENCE ON THE COMPETITION ACT AND THE QRO. The existence of Intangible
Transition Property and the adequacy of the Transferred Intangible Transition
Property as a source of payment of principal of and interest on the Transition
Bonds are dependent on the relevant provisions of the Competition Act and the
QRO. If the provisions of the Competition Act or the QRO relating to recovery or
securitization of Stranded Costs were overturned as a result of existing or
future legal challenges, the Issuer's sole remedy would be to seek Liquidated
Damages from the Seller under the Sale Agreement. If the Competition Act were
amended or repealed by the Commonwealth or preempted by federal legislation, the
Seller would not be obligated to pay Liquidated Damages, and Transition
Bondholders would be limited to rights under law. There is no assurance that the
exercise of such rights would result in principal and interest on the Transition
Bonds being paid in full, and as a result Transition Bondholders could suffer a
loss of their investment. Further, the time and expense of pursuing such rights
could result in a loss to Transition Bondholders or delay the expected payments
on the Transition Bonds.
DEPENDENCE ON CONTINUED OPERATION OF EXISTING GENERATION FACILITIES IN
CERTAIN CIRCUMSTANCES. The Competition Act also provides that the recovery of
stranded costs associated with existing generating facilities is contingent on
continued operation at reasonable availability levels of the generation
facilities for which recovery has been approved, except when the generating
facility is uneconomic on a production cost basis because of the transition to a
competitive market. (See "The Competition Act--Recovery of Stranded Costs" in
this Prospectus.) While the Competition Act and the QRO state that the relevant
portions of the QRO are irrevocable, notwithstanding any other provisions of the
Competition Act, it is possible that a challenge could be made to the collection
of Intangible Transition Charges in the event that certain generating facilities
of the Seller ceased to operate at reasonable levels. A determination by a court
that all or a portion of the Intangible Transition Charges were not chargeable
to Customers as a result of generating facilities of the Seller not operating at
reasonable levels could adversely affect the ability of the Issuer to make
payments on the Transition Bonds, and Transition Bondholders could suffer a loss
of their investment. Further, in this instance, Transition Bondholders would not
be entitled to Liquidated Damages.
LIMITED AVAILABILITY OF LIQUIDATED DAMAGES. Under the terms of the Sale
Agreement, PECO Energy, as the Seller, will be required to pay the Bond Trustee,
as assignee of the Issuer, Liquidated Damages if there has been a breach by PECO
Energy of certain of its representations relating to the Intangible Transition
Property, but only (i) if such breach (x) has a material adverse effect on the
Transition Bondholders and (y) continues beyond a 90-day grace period (if,
however, certain rating criteria are not met or the requisite escrow deposit is
not made, the Seller must pay Liquidated Damages within two days of such breach)
or (ii) (x) the payment of certain indemnification amounts by the Seller related
to a breach of certain other representations is reasonably expected to continue
beyond a 90-day period immediately following such breach and (y) such amounts
are reasonably expected to exceed the De Minimis Loss Amount. See "The Sale
Agreement--Seller Representations and Warranties" in this Prospectus. A
determination by a court in an existing or future action (as described below in
"--Legal Challenges Which Could Adversely Affect Transition Bondholders") that,
based on laws in effect on the date any Intangible Transition Property is sold
to the Issuer, the Transferred Intangible Transition Property or the QRO
violated any such laws, or is otherwise invalid or unenforceable, would be
considered to be a breach of the Seller's representation. There is no assurance
that the Seller would be able to pay such Liquidated Damages. See also
"--Dependence on the Competition Act and the QRO" above and "--Bankruptcy;
Creditors' Rights--Estimation of Claims; Challenge to Liquidated Damage Claims"
below.
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<PAGE>
NO LIQUIDATED DAMAGES FOR CHANGE IN LAW. The Seller will not be in breach
of any representations and warranties (or be required to pay Liquidated Damages)
for a change in law by legislative enactment or constitutional amendment,
including an enactment or amendment that breaches the pledge and agreement of
the Commonwealth in the Competition Act not to limit, alter or impair Intangible
Transition Property or Intangible Transition Charges. A repeal of the
Competition Act, an amendment to it voiding the existence of Intangible
Transition Property or the adoption of a federal statute prohibiting the
recovery of stranded costs are examples of changes in law.
The Seller will not be in breach of any representations and warranties
under the Sale Agreement or be required to pay Liquidated Damages as a result of
a breach of the pledge and agreement of the Commonwealth. A breach by the
Commonwealth of its pledge under the Competition Act could result in a
substantial impairment of the Transition Bondholders' rights. Furthermore, under
current law, a substantial impairment would be permitted if the impairment can
be shown to be a reasonable and appropriate exercise of the Commonwealth's
sovereign power. A reasonable and appropriate exercise of the Commonwealth's
sovereign power is generally considered valid under both the United States and
Commonwealth Constitutions if the action is deemed to serve a significant public
purpose. An example of a significant public purpose would be certain actions to
protect the public's health and safety or the exercise of the state's power of
eminent domain. If, for example, competition in electricity generation reduced
the safety and reliability of electric service and the legislature decided
competition was injurious to the public health and safety and repealed the
Competition Act to protect consumers, the protection of consumers could be
considered to be an important public purpose and, therefore, the repeal of the
statute a reasonable and appropriate exercise of the Commonwealth's sovereign
power. An exercise of the Commonwealth's sovereign power could, at the least,
delay payments on Transition Bonds and, if upheld, even if the Commonwealth
afforded Transition Bondholders "adequate compensation . . . by law" or "just
compensation" for a taking, as described below in "--Possible Commonwealth
Amendment or Repeal of the Competition Act," cause Transition Bondholders to
suffer a loss of their investment.
LEGAL CHALLENGES WHICH COULD ADVERSELY AFFECT TRANSITION BONDHOLDERS. If
the relevant provisions of the Competition Act and the QRO were challenged in a
lawsuit and determined to be invalid or unenforceable in whole or in part, such
determination could adversely affect the ability of the Issuer to make payments
on the Transition Bonds, and Transition Bondholders could suffer a loss of their
investment. As of the date of this Prospectus, the Competition Act and the QRO
are in full force and effect. The PUC issued its Final Order dated May 14, 1998
(the "Final Order"), of which the QRO is a part, approving the settlement (the
"Settlement") concerning PECO Energy's restructuring plan as modified by
subsequent PUC orders (the "Restructuring Plan"). The period for appealing the
QRO has expired. All appeals of the final order that were being pursued have
been resolved and all other appeals that were being held in abeyance are in the
process of being withdrawn in accordance with the Settlement. See "PECO Energy's
Restructuring Plan--Prior Litigation" in this Prospectus.
Future court actions, including, but not limited to, any resulting from
other restructuring cases in Pennsylvania, could challenge the constitutionality
of the Competition Act under the U.S. Constitution or the Pennsylvania
Constitution. To the extent that a future court action successfully challenged
the validity of the Competition Act, such an action would cause a breach of the
Seller's representations concerning the Competition Act and Intangible
Transition Property and, if such breach had a material adverse effect on the
Transition Bondholders and continues beyond a 90-day grace period, the Seller
would have to pay Liquidated Damages pursuant to the Sale Agreement, resulting
in the redemption of the Transition Bonds (if, however, certain rating criteria
are not met or the requisite escrow deposit is not made, the Seller must pay
Liquidated Damages within two days of such breach). See "The Sale Agreement" and
"The Indenture" in this Prospectus.
To the extent, however, that a court action, in Pennsylvania or elsewhere,
leads the legislature to amend or repeal the Competition Act, Transition
Bondholders would not be entitled to Liquidated Damages and would be entitled
only to rights under law. See "--No Liquidated Damages for Change in Law" above.
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<PAGE>
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 Stranded Costs described herein, 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 but died at the end of that Congressional session after having been
referred to the House Commerce Committee and the Subcommittee on Energy and
Power. No prediction can be made as to whether any future bills that prohibit
the recovery of stranded costs will become law or, if they become law, what
their final form or effect will be. There is no assurance that the courts would
consider such a preemption a "taking." Moreover, even if such a preemption of
the Competition Act or the QRO by the federal government were considered a
"taking," for which the government had to pay the estimated market value of the
Transferred Intangible Transition Property at the time of the taking, there is
no assurance that such compensation would be sufficient to pay the full amount
of principal of and interest on the Transition Bonds, and Transition Bondholders
could suffer a loss of their investment. See "--Possible Commonwealth Amendment
or Repeal of the Competition Act" below.
POSSIBLE COMMONWEALTH AMENDMENT OR REPEAL OF THE COMPETITION ACT. Under
the Competition Act, the Commonwealth has pledged to and agreed with transition
bondholders that it will not limit or alter or in any way impair or reduce the
value of intangible transition property or intangible transition charges
approved by a qualified rate order, until the transition bonds and interest
thereon are fully paid and discharged. The Competition Act also provides,
however, that subject to the requirements of law, nothing contained in the
Competition Act precludes such limitation or alteration by the Commonwealth if
"adequate compensation is made by law" for the full protection of the intangible
transition charges collected pursuant to a qualified rate order and of
transition bondholders. It is unclear what "adequate compensation . . . by law"
would be afforded to Transition Bondholders by the Commonwealth if it attempts
to limit or alter Intangible Transition Property or Intangible Transition
Charges. Accordingly, no assurance can be given that any such provision would
fully compensate Transition Bondholders for their investment and would not
adversely affect the price of the Transition Bonds or the timing of payments
with respect to the Transition Bonds. See also "--The Electric Industry
Generally--Uncertainties Created by the Changing Regulatory Environment" below.
In the opinion of Ballard Spahr Andrews & Ingersoll, LLP ("Ballard Spahr"),
counsel to PECO Energy, under the Contract Clauses of the United States and
Pennsylvania Constitutions, the Commonwealth could not repeal or amend the
Competition Act (by way of legislative process) or take any other action that
substantially impairs the rights of the Transition Bondholders, unless such
action is a reasonable exercise of the Commonwealth's sovereign powers and of a
character appropriate to the public purpose justifying such action. To date, no
cases addressing these issues in the context of transition bonds have been
decided. There have been cases in which courts have applied the Contract Clause
of the United States Constitution and parallel state constitutional provisions
to strike down legislation, reducing or eliminating taxes or public charges
which supported bonds issued by public instrumentalities, or otherwise reducing
or eliminating the security for such bonds. Based upon such case law, in the
opinion of Ballard Spahr, it would appear unlikely that the Commonwealth could
reduce, modify, alter or take any other action with respect to intangible
transition property which would substantially impair the rights of transition
bondholders, unless the action is reasonable and appropriate to further a
legitimate public purpose. Moreover, under the Taking Clauses of the United
States and Pennsylvania Constitutions, the Commonwealth could not repeal or
amend the Competition Act (by way of legislative process) or take any action in
contravention of its pledge and agreement (described above) without paying just
compensation to the transition bondholders if doing so would constitute a
permanent appropriation of the property interest of transition bondholders in
the intangible transition property and deprive the transition bondholders of
their reasonable expectations arising from their investments in the transition
bonds. There is no assurance, however, that, even if a court were to award such
just compensation, it would be sufficient to pay the full amount of principal of
and interest on the transition bonds. In addition, there can be no assurance
that a repeal of or amendment to the Competition Act will not be sought or
adopted or that any action by the Commonwealth may not occur, any of which might
constitute a violation of the Commonwealth's pledge and agreement with the
transition bondholders. In any such event, costly and time-consuming litigation
might ensue. Any such
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<PAGE>
litigation might adversely affect the price and liquidity of the Transition
Bonds and the dates of payments of principal thereof and, accordingly, the
weighted average lives thereof. Moreover, given the lack of judicial precedent
directly on point, and the novelty of the security for the Transition
Bondholders, the outcome of any such litigation cannot be predicted with
certainty, and accordingly, Transition Bondholders could incur a loss of their
investment. See "--Limited Availability of Liquidated Damages" and "No
Liquidated Damages for Change in Law" above.
LITIGATION AND OTHER EVENTS IN OTHER JURISDICTIONS WHICH COULD ADVERSELY
AFFECT TRANSITION BONDHOLDERS. A legal action successfully challenging under
the U.S. Constitution or other federal law a state deregulation statute similar
to the Competition Act adopted by a jurisdiction other than Pennsylvania could
establish legal principles that would serve as a basis to challenge the
Competition Act. Whether or not a subsequent court challenge to the Competition
Act would be successful would depend on the similarity of the other statute and
the applicability of the legal precedent to the Competition Act. While the
Competition Act would not become invalid automatically as a result of a court
decision invalidating another state's statute, such a decision could establish a
legal precedent for a successful challenge to the Competition Act that could
adversely affect Transition Bondholders. Accordingly, the market value of the
Transition Bonds could be reduced. In addition, legal challenges, legislative,
administrative, political or other actions in other states challenging stranded
cost recovery or securitization of stranded cost recovery could adversely affect
the market for Transition Bonds. Legal challenges brought in jurisdictions other
than Pennsylvania that assert claims based on state laws other than the laws of
Pennsylvania would not, however, directly affect the Competition Act or the
interests of the Transition Bondholders. Similarly, legislative, administrative,
political or other actions in other states (such as California which has already
implemented a competitive market structure for its electric generation industry)
would not directly impact the Competition Act or the interests of Transition
Bondholders but could heighten awareness of the political and other risks
associated with these types of securities as perceived by the capital markets,
and in that way, limit the liquidity of the Transition Bonds and impair their
value. There can be no assurance that future challenges to stranded cost
recovery or stranded cost securitizations in other states will not significantly
impair the liquidity and value of the Transition Bonds.
UNEXPECTED REGULATION BY THE PUC. Even with the enactment of the
Competition Act, the PUC will continue to regulate certain aspects of the
electric industry in Pennsylvania, including full regulation of electric
distribution companies, the establishment of financial and other qualifications
of electric generation suppliers and other third parties, guidelines governing
customer billing and collection, metering and disclosure requirements applicable
to electric generation suppliers or other entities participating in the new
market in Pennsylvania. See "--The Electric Industry Generally" below. In
addition, the PUC could revise or rescind any of its regulations. Furthermore,
the parties to the Settlement of PECO Energy's Restructuring Plan agreed to
"review and, as appropriate, to recommend changes to regulations and procedures
in order to facilitate the efficient and full recovery of revenues from
customers, while at the same time protecting customers." The Seller cannot
predict whether the PUC will make such regulations or the timing or content of
any such PUC regulations. In the Sale Agreement, the Seller agrees to take legal
or administrative actions, including instituting and provoking legal actions as
may be reasonably necessary to block or overturn any attempts to cause a repeal,
modification or supplement to the Competition Act or the QRO or the Intangible
Transition Property by legislative enactment or constitutional amendment
materially adverse to the holders of Transition Bonds, or proceedings of third
parties, which, if successful, would result in a breach of representations
concerning the Intangible Transition Property, the QRO or the Competition Act.
See "The Sale Agreement" in this Prospectus. There is no assurance that the
Seller would be able to take such action or that any action the Seller is able
to take would be successful. Future PUC regulations may affect the rating of the
Transition Bonds, their price or the rate of ITC Collections and, accordingly,
the amortization of Transition Bonds and their weighted average lives. As a
result, Transition Bondholders could suffer a loss of their investment.
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PAYMENTS ON TRANSITION BONDS RELY ON ADJUSTMENTS OF THE INTANGIBLE
TRANSITION CHARGES. The actual rate of ITC Collections may vary from
projections upon which the Intangible Transition Charges were based, primarily
as a result of variations in electricity usage by Customers from projected
electricity usage and delinquencies and write-offs. Under the Master Servicing
Agreement, the Servicer is obligated to seek an adjustment to the Intangible
Transition Charges by submitting Adjustment Requests to the PUC on each
Calculation Date to reflect shortfalls in or excesses of ITC Collections for the
period since the last adjustment, including amounts of shortfalls or excesses
resulting from inaccurate forecasts by the Servicer. For example, if actual
electricity consumption is less than the Servicer forecasted because of an
unusually mild summer, and this resulted in a shortfall in ITC Collections, the
Servicer would be required to seek an adjustment from the PUC to the Intangible
Transition Charges imposed thereafter to compensate for such shortfall. In
addition, the adjustments will take into account any projected trends in
Customers or usage impacting billed revenue from which Intangible Transition
Charges are allocated in order to prevent shortfalls or excesses of ITC
Collections from arising in future periods so that if, for example, usage is
declining at an accelerating pace, such trend will be taken in account in the
calculation of the current adjustment. See "The Master Servicing
Agreement--Servicing Procedures--ITC Adjustment Process" in this Prospectus. The
adjustments to the related Intangible Transition Charges are designed to result
in the outstanding principal balance of each Series equaling the amount provided
for in the Expected Amortization Schedule therefor, and the amount on deposit in
the Overcollateralization Subaccount equaling the Calculated
Overcollateralization Level, by (i) the next Adjustment Date or the Payment Date
immediately succeeding such Adjustment Date, as specified in the related
Prospectus Supplement, or (ii) the Expected Final Payment Date, as applicable,
for each Series, taking into account any amounts on deposit in the Reserve
Subaccount other than certain Customer prepayments of Intangible Transition
Charges, if any, not allocable to the period covered by the applicable
Adjustment Request. For a discussion of Customer prepayments, see "The Seller
and Servicer--Limited Information on Customers'--Creditworthiness--Customer
Payments" in this Prospectus. Since the adjustments will be based on forecasted
usage impacting billed revenue from which Intangible Transition Charges are
allocated, delinquencies and write-offs, there can be no assurance that any such
adjustments to the Intangible Transition Charges will result in ITC Collections
allocated to the Issuer pursuant to the Master Servicing Agreement sufficient to
pay the expenses of servicing the Transition Bonds, including interest on the
Transition Bonds when due and principal of the Transition Bonds in accordance
with the Expected Amortization Schedule therefor. Intangible Transition Charges,
as adjusted from time to time, are allocable only from Competitive Transition
Charges, as such charges may be adjusted as described herein under "PECO
Energy's Restructuring Plan--The Settlement," and variable distribution charges,
and in no circumstance may exceed the aggregate of such charges. The Competition
Act and the QRO require the PUC to approve annual Adjustment Requests within 90
days of the applicable Calculation Date. There can be no assurance that the PUC
will approve any Adjustment Request in accordance with the QRO. Any failure to
approve such adjustments in accordance with the QRO, or any litigation
challenging the approval thereof or methodology therein, could adversely affect
the price and liquidity of the Transition Bonds and the dates of the payment of
the principal thereof and, accordingly, the weighted average lives thereof.
LIMITATIONS ON THE INTANGIBLE TRANSITION CHARGES. After the billing of
meter-reading cycles ending after December 31, 2010, PECO Energy must cease
billing Customers the Intangible Transition Charges, and, after the final
Adjustment Date specified for each Series in the related Prospectus Supplement,
there will be no further adjustments of the Intangible Transition Charges with
respect to such Series. Thereafter, any shortfalls in ITC Collections available
to make payments with respect to such Series are expected to be covered through
amounts, if any, on deposit in the Reserve Subaccount (amounts in such
subaccount will also be used to cover any shortfall arising from the failure of
the counterparty to any hedge or swap transaction entered into by the Issuer to
fully pay amounts due to the Issuer under the related hedge or swap agreement),
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.
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UNCERTAINTIES ASSOCIATED WITH NEW ASSET TYPE. The Servicer has no
historical performance data for Intangible Transition Property, although
customer and energy usage records are available. Such customer and energy usage
records, however, do not reflect customers' payment patterns or energy usage in
a competitive market and do not reflect consolidated billing by electric
generation suppliers or other third parties, so these records may have limited
predictive value with respect to the Intangible Transition Charges. See
"--Servicing--Credit Concerns Arising Out of Third-Party Billing" below.
Furthermore, the Servicer does not have any experience administering this type
of asset. In addition, in the event of a foreclosure, there is likely to be a
limited market, if any, for the Transferred Intangible Transition Property, and,
therefore, foreclosure may not be a realistic or practical remedy. See
"--Bankruptcy; Creditors' Rights" below.
RISKS ASSOCIATED WITH THE USE OF CREDIT ENHANCEMENTS, HEDGE OR SWAP
TRANSACTIONS. Certain forms of credit enhancement, interest rate swaps or hedge
arrangements that may be entered into by the Issuer with respect to a Series or
Class of floating rate Transition Bonds entail certain kinds of risks, such as
credit risks (the risk associated with the credit of any party providing the
credit enhancement, interest rate swap or hedge). The applicable Prospectus
Supplement will contain the risk factors, if any, associated with any applicable
credit enhancement, interest rate swap or hedge arrangement.
SERVICING
ISSUER'S RELIANCE ON SERVICER. The Issuer will rely on the Servicer for
the calculation of any adjustments to the Intangible Transition Charges, for
submission of Adjustment Requests to the PUC and for billing and collection of
the Intangible Transition Charges. If, as a result of its insolvency or
liquidation or otherwise, PECO Energy were to cease servicing Intangible
Transition Property, it may be difficult to obtain a Successor Servicer to
fulfill the obligations of PECO Energy as Servicer. In addition, a transfer of
servicing functions will require regulatory cooperation. A Successor Servicer
may also experience difficulties in collecting Intangible Transition Charges and
determining appropriate adjustments to Intangible Transition Charges. Further,
under current law, it is possible that the remedy of shutting off service to a
Customer for nonpayment of the Intangible Transition Charges would not be
available to a Successor Servicer. If PECO Energy were to be replaced as
Servicer, any of these factors and others could delay the timing of payments on
the Intangible Transition Property, and Transition Bondholders could incur a
loss of their investment. See "The Master Servicing Agreement" in this
Prospectus.
INACCURATE PROJECTIONS. The failure of the Servicer to forecast accurately
the billed revenue from which Intangible Transition Charges are allocated and
the delinquency and write-off experience relating to Intangible Transition
Charges could adversely affect the timely receipt of ITC Collections.
Projections are inherently subject to a variety of risks and uncertainties that
could cause actual results to differ materially from those projected. Such risks
and uncertainties include, among others, changes in political, social and
economic conditions, weather, unexpected demographic trends, catastrophes,
regulatory initiatives, compliance with governmental regulations, litigation and
various other events, conditions and circumstances, all of which are beyond the
control of the Servicer. While adjustments to the Intangible Transition Charges
are required under the Competition Act to be made as described in this
Prospectus, to the extent actual results differ from projections, payments on
the Transition Bonds could be delayed, and the market value of the Transition
Bonds could be reduced. Such adjustments will be made in response to shortfalls
or excesses in ITC Collections for the prior period, including amounts of
shortfalls or excesses resulting from inaccurate forecasts by the Servicer.
For calendar year 1998, actual usage exceeded forecasted usage by 1.32%
because of higher than average usage by Customers in the Large Commercial and
Industrial Customer Category. See "The Seller and Servicer--Forecasting
Customers and Usage" in this Prospectus. The accuracy of PECO Energy's
historical forecasts is not necessarily indicative of the accuracy of the
Servicer's future forecasts, particularly in light of the impact of weather
patterns on usage and changes that are expected to occur as a result of the
introduction of competition for electric generation services. Competition could
affect usage in ways that cannot now be predicted and that would make past
projections useless in making future projections. Similarly, the introduction of
electric generation suppliers and other third
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parties providing consolidated bills to customers and being responsible for
paying amounts owed in respect of transmission and distribution charges and the
intangible transition charges to electric distribution companies, including PECO
Energy, could make past projections meaningless as a tool in predicting
delinquencies and write-offs. Such changes in the electricity market could also
substantially affect the methodology by which the Servicer produces forecasts
and the types of information used by the Servicer to produce them. There can be
no assurance that the accuracy of past projections will be replicated in any
future predictions made by the Servicer.
While under the Master Servicing Agreement the Servicer is obligated to
make all reasonable efforts to make accurate forecasts of billed revenue from
which Intangible Transition Charges are allocated, write-offs and delinquencies
and incorporate assumptions relating thereto into its calculation of the
Intangible Transition Charges and adjustments thereto, there can be no assurance
that actual billed revenue from which Intangible Transition Charges are
allocated, delinquencies and write-offs will not be significantly different from
future forecasts thereof or that the calculation of Intangible Transition
Charges will not result in a shortfall in ITC Collections. In addition, there
can be no assurance that any Successor Servicer will be successful in making
such forecasts. Shortfalls may be recovered through adjustments to the
Intangible Transition Charges, but the frequency of such adjustments is limited,
and, accordingly, delays in payments to Transition Bondholders or losses might
result. See "--Unusual Nature of Intangible Transition Property--Payments on
Transition Bonds Rely on Adjustments of the Intangible Transition Charges"
above. In addition, although the Competition Act requires the PUC to approve
annual Adjustment Requests within 90 days, there can be no assurance that the
PUC will approve any Adjustment Request in accordance with the QRO. Any failure
by the PUC to approve any Adjustment Request in accordance with the QRO or any
litigation challenging the approval thereof or methodology therein could
adversely affect the price and liquidity of the Transition Bonds and the dates
of the payment of the principal thereof and, accordingly, the weighted average
lives thereof.
DELAYS IN PAYMENTS CAUSED BY CHANGES IN PAYMENT TERMS. The Servicer is
permitted to alter the terms of billing and collection arrangements and modify
amounts due from Customers. Although the Servicer does not have the right to
change the amount of a Customer's individual Intangible Transition Charges, it
does have the right to take actions that in its judgment will maximize actual
collections from Customers with respect to any utility bill. In addition, the
Servicer has the right to write-off outstanding bills that it deems
uncollectible in accordance with its customary and usual billing and collection
practices. Such actions might include, for example, agreeing to an extended
payment schedule or agreeing to write-off the remaining portion of an
outstanding bill in order to recover a portion thereof. While PECO Energy has no
current intention of taking actions that would change the billing and collection
arrangements in a manner that would adversely affect the collection of payments
of the Intangible Transition Charges, there can be no assurance that PECO Energy
will not change its customary and usual billing and collection practices,
including its requirements regarding Customer deposits, in such a manner or that
a Successor Servicer may not make such a change or that such a change may not be
required by the PUC or new legislation. Such changes could delay or reduce ITC
Collections and, accordingly, could adversely affect the payment of interest on
the Transition Bonds on a timely basis or the payment of principal of the
Transition Bonds in accordance with the Expected Amortization Schedule or in
full by the applicable Expected Final Payment Date or Series Termination Date
or, if applicable, Class Termination Date. See "Certain Weighted Average Life
and Yield Considerations" in this Prospectus; see also "The Seller and
Servicer--Customers and Operating Revenues," "--Billing Process" and "--Limited
Information on Customers' Creditworthiness" in this Prospectus.
LIMITED INFORMATION ON CUSTOMERS' CREDITWORTHINESS. The Servicer's ability
to collect amounts billed to Customers for the Intangible Transition Charges
will depend in part on the creditworthiness of the Customers. Under Pennsylvania
law, PECO Energy generally is obligated to provide service to new Customers in
its retail electric service territory. Credit investigations of new Customers by
PECO Energy have been limited. PECO Energy's information regarding the
creditworthiness of new Customers is limited to information regarding prior
service, if any, by PECO
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Energy provided by its customer information system audits. If the Servicer
incorrectly evaluates the creditworthiness of a significant number of its
Customers, significant increases in delinquencies and write-offs may result, and
delays in payments to Transition Bondholders may occur. See "--Credit Concerns
Arising out of Third-Party Billing" below.
CREDIT CONCERNS ARISING OUT OF THIRD-PARTY BILLING. The Restructuring Plan
and future orders of the PUC will set forth guidelines governing customer
billing and collection by electric generation suppliers and other third parties
providing billing and metering services. Any electric generation supplier or
other third party that provides consolidated billing is required to pay the
Servicer periodic amounts billed by the Servicer to the electric generation
supplier or other third party, including the Intangible Transition Charges,
regardless of the ability of the electric generation supplier or other third
party to collect such amounts from Customers. In such event, the electric
generation supplier or other third party will replace Customers as the obligor
with respect to such Intangible Transition Charges, and the Servicer, on behalf
of the Issuer, will have the right to collect such charges from electric
generation suppliers and other third parties instead of from Customers. See also
"--The Electric Industry Generally--Adverse Effects of Shrinking Base of
Customers on ITC Collections" below. There can be no assurance that any electric
generation supplier or other third party will use the same customer credit
standards as the Servicer or that the Servicer will be able to mitigate credit
risks relating to electric generation suppliers or other third parties in the
same manner in, or to the same extent to, which it mitigates such risks relating
to its Customers. The Servicer, on behalf of the Issuer, will pursue any
electric generation supplier or other third party that fails to remit applicable
Intangible Transition Charges in a manner similar to that by which the Servicer
will pursue any failure by a Customer to remit Intangible Transition Charges.
See "The Master Servicing Agreement" in this Prospectus. The Servicer will not
generally have the right to pursue Customers of an electric generation supplier
or other third party who defaults in the payment of Intangible Transition
Charges. The Servicer will have the right to bill and collect Intangible
Transition Charges and other amounts payable to the Issuer or the Servicer
directly from all Customers receiving consolidated bills from electric
generation suppliers or other third parties following certain payment defaults
by an electric generation supplier or other third party and applicable grace
periods. See "The QRO and the Intangible Transition Charges--Competitive
Billing" in this Prospectus.
Changes in Customer billing and payment arrangements may result in Customer
confusion and the misdirection or delay of payments, which could have the effect
of causing shortfalls in ITC Collections. Any problems arising from new and
untested systems or any lack of experience on the part of the electric
generation suppliers or other third parties with Customer billing and
collections could cause delays in billing and collecting the Intangible
Transition Charges resulting in shortfalls in ITC Collections. Such ITC
Collections shortfalls could adversely affect the timely payment of interest on
the Transition Bonds or the payment of principal of the Transition Bonds in
accordance with the Expected Amortization Schedule therefor or in full by the
applicable Expected Final Payment Date or Series Termination Date or, if
applicable, Class Termination Date. For a discussion of the future market share
of electric generation suppliers, see "PECO Energy's Restructuring Plan--The
Settlement--Customer Choice" in this Prospectus. Neither the Seller nor the
Servicer will pay any shortfalls resulting from the failure of any electric
generation supplier or other third party to forward ITC Collections to the
Servicer. The adjustment mechanism for the Intangible Transition Charges, as
well as the Overcollateralization Amount and the amounts on deposit in the
Capital Subaccount and the Reserve Subaccount, are designed to mitigate this
risk relating to the timing of collections and payments. However, delays in
payments to Transition Bondholders might occur as a result of delays in
implementation of the adjustment mechanism or any lack of funds in the Reserve
Subaccount, the Overcollateralization Subaccount, and the Capital Subaccount
after the final Adjustment Date. See also "The Electric Industry
Generally--Adverse Effects of Shrinking Base of Customers on ITC Collections"
below.
In addition, to the extent that Customers choose consolidated billing by
electric generation suppliers or other third parties, the Issuer may be relying
on a small number of electric generation suppliers and other third parties
rather than a large number of individual Customers, to remit ITC
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Collections. In this circumstance, a default in the payment of Intangible
Transition Charges by a single electric generation supplier or other third party
that provides billing service to a large number of Customers may adversely
affect the timing of payments on the Transition Bonds or could result in a loss
of their investment.
POSSIBLE PAYMENT DELAYS CREATED BY THE COMMINGLING OF ITC COLLECTIONS WITH
SERVICER'S OTHER FUNDS. Until ITC Collections are remitted to the Collection
Account on a Remittance Date, the Servicer will not segregate them from its
general funds. A failure or inability of the Servicer to remit the full amount
of the ITC Collections, whether voluntary or involuntary, might result in delays
or reductions in payments to Transition Bondholders. The adjustments to the
Intangible Transition Charges described in this Prospectus as well as the
amounts, if any, on deposit in the Reserve Subaccount, the Overcollateralization
Subaccount and the Capital Subaccount are designed to mitigate this risk.
However, delays in payments to Transition Bondholders may occur as a result of
delays in implementation of the adjustment mechanism or any lack of funds in the
Reserve Subaccount, the Overcollateralization Subaccount and the Capital
Subaccount after the final Adjustment Date.
POTENTIAL IMPACT OF THE YEAR 2000 ISSUE ON TRANSITION BONDHOLDERS. PECO
Energy is faced with the task of addressing the Year 2000 issue. See "The Seller
and Servicer--Year 2000 Compliance" in this Prospectus. The Year 2000 issue
could affect, among other things, the ability of PECO Energy as Servicer or any
Successor Servicer and electric generation suppliers or other third parties to
bill and collect the Intangible Transition Charges, 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,
payments to Transition Bondholders could be delayed.
THE ELECTRIC INDUSTRY GENERALLY
UNCERTAINTIES CREATED BY THE CHANGING REGULATORY ENVIRONMENT. The
Restructuring Plan and subsequent orders of the PUC provide certain standards
for metering, billing and other activities by electric generation suppliers and
other third parties participating in the new market in Pennsylvania. While the
Restructuring Plan provides that an electric generation supplier that bills
customers must comply with all billing, financial and disclosure requirements
applicable to electric generation suppliers, the PUC may waive any of those
requirements at any time in the future. Further, the parties to the Settlement
agreed to review and, as appropriate, to recommend changes to PUC regulations
and procedures "in order to facilitate the efficient and full recovery of
revenues from customers, while at the same time protecting customers." In an
order adopted on July 1, 1998, the PUC ordered that third parties that are
neither electric distribution companies nor electric generation suppliers and
have no relationship with end users could provide billing and collection
services for electric distribution charges, including Intangible Transition
Charges and electric generation charges. Such third parties will be subject to
the same requirements as electric generation suppliers, and, except in limited
circumstances, the Servicer, on behalf of the Issuer, will have no rights to
collect Intangible Transition Charges from Customers electing consolidated
billing from such a third party. As with electric generation suppliers providing
consolidated billing, there can be no assurance that such third parties will use
the same customer credit standards as the Servicer or that the Servicer will be
able to mitigate credit risks relating to such third parties in the same manner
in, or to the same extent to, which it mitigates such risks relating to its
Customers. The Servicer, on behalf of the Issuer, will pursue any such third
party that fails to remit applicable Intangible Transition Charges in a manner
similar to that by which the Servicer will pursue any Customer that fails to
remit Intangible Transition Charges. By affecting billing terms and the terms of
remittances by electric generation suppliers and other third parties to the
Servicer or by making it more difficult for the Servicer to collect Intangible
Transition Charges, any changes in billing and collection regulation might
adversely affect the price and liquidity of the Transition Bonds and their
amortization and, accordingly, their weighted average lives.
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Transition Bondholders may suffer a loss of their investment as a result of any
such changes. See "--Unusual Nature of Intangible Transition Property" above.
UNCERTAINTIES CREATED BY CHANGES IN GENERAL ECONOMIC CONDITIONS AND
ELECTRICITY USAGE. General economic conditions and technological changes that
significantly alter power consumption or reduce the Customer base in the
Servicer's historical service area may affect payments on the Transition Bonds.
Additionally, changes in business cycles, departures of Customers from the
Servicer's historical service area, weather, occurrence of natural disasters,
dramatic changes in energy prices, implementation of energy conservation efforts
and increased efficiency of equipment, among other things, affect energy usage.
If a sufficient number of Customers self-generate, significantly reduce their
electricity consumption or cease consuming electricity altogether, the
Intangible Transition Charges, as adjusted from time to time, required to be
paid by remaining Customers may become burdensome and result in greater
delinquencies and write-offs or petitions to the PUC to reduce Intangible
Transition Charges, which could have an adverse effect on Transition
Bondholders. See "--Unusual Nature of Intangible Transition Property--Payments
on Transition Bonds Rely on Adjustments of the Intangible Transition Charges"
above and "--Adverse Effects of Shrinking Base of Customers on ITC Collections"
below.
ADVERSE EFFECTS OF SHRINKING BASE OF CUSTOMERS ON ITC COLLECTIONS. If one
or more of the risks described under the subsection "--The Electric Industry
Generally" or an unforeseen catastrophe were to occur, the number of Customers
on whom the Intangible Transition Charges would be levied might be reduced
significantly. Although the Issuer believes that the likelihood of this
occurring is remote, its occurrence might cause Transition Bondholders to fail
to receive the full amount to which they are entitled. The Servicer's current
forecasts of future electricity demand do not include any shift by Customers to
self-generation, because self-generation of electricity by Customers is not
expected to be economically viable during the period in which the Transition
Bonds will be outstanding. While the Issuer expects that the applicable
Intangible Transition Charges will be imposed on Customers who only partially
self-generate, the ability of the Servicer to collect such Intangible Transition
Charges may be reduced because the Servicer may not have ready access to data
about which consumers are self-generating and will not be able to exercise full
shut-off rights as an enforcement tool against a self-generator. But see
"--Servicing--Credit Concerns Arising Out of Third-Party Billing" above.
BANKRUPTCY; CREDITORS' RIGHTS
BANKRUPTCY OF SELLER. General. The bankruptcy of the Seller could have
several adverse consequences, the most important of which are briefly described
in this subsection.
True Sale or Financing. The Seller will represent and warrant in the Sale
Agreement that the transfer of the Transferred Intangible Transition Property in
accordance with that agreement constitutes a valid sale and assignment by the
Seller to the Issuer of the Transferred Intangible Transition Property. The
Seller will also represent and warrant in the Sale Agreement, and it is a
condition of closing for the sale of Intangible Transition Property, that it
will take the appropriate actions under the Competition Act, including filing an
intangible transition property notice, to perfect this sale. The Competition Act
provides that a transfer of intangible transition property by an electric
utility to an assignee which the parties have in the governing documentation
expressly stated to be a sale or other absolute transfer, in a transaction
approved in a qualified rate order, shall be treated as an absolute transfer of
all the transferor's right, title and interest, as in a true sale, and not as a
pledge or other financing, of such intangible transition property. The Seller
and the Issuer will treat the transactions as a sale under applicable law,
although for federal and Commonwealth income and franchise tax purposes the
Transition Bonds will be treated as a financing and not a sale and for financial
reporting purposes, the Seller and the Issuer will not treat the transaction as
a sale of Intangible Transition Property. See "The Competition
Act--Securitization of Stranded Costs--Characterization of Transfer of the
Transferred Intangible Transition Property as True Sale" in this Prospectus. If
the Seller were to become a debtor in a bankruptcy case, a bankruptcy trustee of
the Seller, the Seller itself as debtor in possession or another party in
interest could take the position that the sale of the Transferred Intangible
Transition Property to the Issuer was a financing transaction and not a "true
sale." There can be no
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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
Competition Act further provides that any such filing in respect of transition
bonds takes precedence over any other filings. In addition, the Sale Agreement
requires that financing statements under the Uniform Commercial Code executed by
the Issuer be filed in the appropriate offices in Delaware. As a result of such
filings, the Issuer would be a secured creditor of the Seller and entitled to
recover against the security, which is the Collateral. None of this, however,
mitigates the risk of payment delays and other adverse effects caused by a
Seller bankruptcy. Further, in the event an intangible transition property
notice is not filed pursuant to the Competition Act for any reason, the Issuer
fails to otherwise perfect its interest in the Transferred Intangible Transition
Property and the transfer is thereafter deemed not to constitute a true sale,
the Issuer would be an unsecured creditor of the Seller.
Consolidation of the Issuer and the Seller. If the Seller were to become a
debtor in a bankruptcy case, a bankruptcy trustee of the Seller, the Seller
itself as a debtor in possession or another party in interest may attempt to
substantively consolidate the assets of the Issuer and the Seller. Although the
Seller and the Issuer have taken steps to attempt to minimize this risk (see
"The Issuer" in this Prospectus), no assurance can be given that if the Seller
or an affiliate of the Seller (other than the Issuer) were to become a debtor in
a bankruptcy case, a court would not order that the assets and liabilities of
the Issuer be consolidated with those of the Seller or such affiliate, thus
resulting in delays or reductions in payments on the Transition Bonds.
Estimation of Claims; Challenge to Liquidated Damage Claims. If the Seller
were to become a debtor in a bankruptcy case, claims (including indemnity
claims) by the Issuer against the Seller under the Sale Agreement and the other
documents executed in connection therewith would be unsecured claims and would
be subject to being discharged in such proceeding. In addition, a bankruptcy
trustee of the Seller, the Seller as debtor in possession or another party in
interest may request that the Bankruptcy Court estimate any contingent claims
(including any contingent claim for Liquidated Damages) of the Issuer against
the Seller and take the position that such claims should be estimated at zero or
at a low amount because the contingency giving rise to such claims is unlikely
to occur. If the Seller were to become a debtor in a bankruptcy case and the
Liquidated Damages provisions of the Sale Agreement were triggered, a bankruptcy
trustee of the Seller, the Seller as debtor in possession or another party in
interest might challenge the enforceability of the Liquidated Damage provisions.
If a court were to hold that the Liquidated Damage provisions were
unenforceable, the Issuer should be left with a claim for actual damages against
the Seller based on breach of contract principles. The amount of such actual
damages would be subject to estimation and/or calculation by the court.
No assurances can be given as to the result of any of the above-described
actions or claims. Furthermore, no assurance can be given as to what percentage,
if any, unsecured creditors would receive in any bankruptcy proceeding involving
the Seller. Accordingly, Transition Bondholders could suffer a loss of their
investment.
Status of Intangible Transition Property as Current Property. The Seller
has represented in the Sale Agreement, and the Competition Act provides, that
the Transferred Intangible Transition Property constitutes a current property
right on the date that the QRO became effective and that it thereafter exists
continuously for all purposes. Nonetheless, no assurance can be given that if
the Seller were to become a debtor in a bankruptcy case, a bankruptcy trustee of
the Seller, the Seller itself as debtor in
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possession or another party in interest would not attempt to take the position
that, because the payments based on the Transferred Intangible Transition
Property are indirectly usage-based charges, the Transferred Intangible
Transition Property comes into existence only as Customers use electricity. If a
court were to adopt this position, no assurance can be given that a security
interest in favor of the Transition Bondholders would attach to Intangible
Transition Charges in respect of electricity consumed after the commencement of
a bankruptcy case for the Seller. If it were determined that the Transferred
Intangible Transition Property has not been sold to the Issuer, and the security
interest in favor of the Transition Bondholders did not attach to Intangible
Transition Charges in respect of electricity consumed after the commencement of
a bankruptcy case of the Seller, then the Issuer would be an unsecured creditor
of the Seller, and delays or reductions in payments on the Transition Bonds
could result. Whether or not a court determined that the Transferred Intangible
Transition Property had been sold to the Issuer, no assurances can be given that
a court would not rule that any Intangible Transition Charges relating to
electricity consumed after the commencement of the Seller's bankruptcy cannot be
transferred to the Issuer or the Bond Trustee, thus resulting in delays or
reductions of payments of the Transition Bonds.
In addition, because the payments based on the Intangible Transition
Charges are indirectly usage-based charges, if the Seller were to become the
debtor in a bankruptcy case, a bankruptcy trustee of the Seller, the Seller
itself as debtor in possession or another party in interest could take the
position that the Issuer should pay a portion of the costs of the Seller
associated with the generation, transmission or distribution by the Seller of
the electricity, consumption of which gave rise to the ITC Collections used to
make payments on the Transition Bonds. If a court were to adopt this position,
the result could be delays or reductions in payments to the Transition
Bondholders.
Regardless of whether the Seller is the debtor in a bankruptcy case, if a
court were to accept the argument that the Transferred Intangible Transition
Property comes into existence only as customers use electricity, a tax or
government lien or other nonconsensual lien on property of the Seller arising
before the Transferred Intangible Transition Property came into existence could
have priority over the Issuer's interest in the Transferred Intangible
Transition Property, thereby possibly resulting in a reduction of amounts paid
to the Transition Bondholders. Adjustments to the Intangible Transition Charges
may be available to mitigate this risk, although delays in implementation
thereof or challenges thereto may cause a delay in receipt of payments.
Enforcement of Rights by Bond Trustee. Upon an Event of Default under the
Indenture, the Competition Act permits the Bond Trustee to enforce in accordance
with the terms of the Indenture the security interest in the Transferred
Intangible Transition Property and direct the PUC to order the sequestration and
payment to Transition Bondholders of all revenues arising with respect to the
Transferred Intangible Transition Property. The Competition Act provides that
such an order will remain in full force and effect notwithstanding bankruptcy,
reorganization, or other insolvency proceedings with respect to the utility or
its assignee. There can be no assurance, however, that the PUC would issue such
an order in light of the automatic stay provisions of Section 362 of the
Bankruptcy Code or, alternatively, that a bankruptcy court would lift the
automatic stay to permit such action by the PUC. In that event, the Bond Trustee
may under the Indenture seek an order from the bankruptcy court lifting the
automatic stay with respect to such action by the PUC and an order requiring an
accounting and segregation of the revenues arising from the Transferred
Intangible Transition Property. There can be no assurance that a court would
grant either order.
BANKRUPTCY OF SERVICER. The Servicer is entitled to commingle ITC
Collections with its own funds until each Remittance Date. The Competition Act
provides that the relative priority of a lien created under the Competition Act
is not defeated or adversely affected by the commingling of funds arising with
respect to Intangible Transition Property with funds of the electric utility.
However, no assurances can be given that in the event of a bankruptcy of the
Servicer, a bankruptcy trustee of the Servicer, the Servicer itself as a debtor
in possession or another party in interest might not assert (or that a court
might not hold) that any ITC Collections held by the Servicer were property of
the Servicer and so included in the bankruptcy estate. This may result in delays
in payments due on the Transition Bonds. In addition, in the event of a Servicer
bankruptcy, the automatic stay may prevent the Issuer
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from effecting a transfer of servicing, notwithstanding the contractual
provisions in the Master Servicing Agreement that provide that the Bond Trustee,
as assignee of the Issuer, together with certain other persons, may vote to
appoint, or petition the PUC or a court of competent jurisdiction for the
appointment of, a Successor Servicer which satisfies the Rating Agency
Condition. Even if a Successor Servicer may be appointed, such a successor may
be difficult to obtain and may not be capable of performing all the duties that
PECO Energy as Servicer was capable of performing. See "--Servicing--Issuer's
Reliance on Servicer" above.
THE TRANSITION BONDS
LIMITED LIQUIDITY OF TRANSITION BONDS. There is no assurance that a
secondary market for any of the Transition Bonds will develop or, if one does
develop, that it will provide the Transition Bondholders with liquidity of
investment or that it will continue for the life of such Transition Bonds. It is
not anticipated that any Transition Bonds will be listed on any securities
exchange.
LIMITED SOURCES OF PAYMENTS FOR THE TRANSITION BONDS. The Transition Bonds
are obligations of the Issuer, a special purpose entity, only and will not
represent an interest in or obligation of the Seller, the Issuer Trustee or the
Bond Trustee or any entity other than the Issuer. The Issuer has no property
other than the Collateral. The Collateral is the sole source of payment on the
Transition Bonds. The Issuer's organizational documents will restrict its right
to acquire other assets unrelated to the transactions described in this
Prospectus. None of the Transition Bonds will be guaranteed or insured by the
Seller, the Issuer Trustee or the Bond Trustee or any affiliates thereof (other
than the Issuer) or any other entity.
EFFECT OF ADDITIONAL SERIES AND OTHER FINANCINGS ON OUTSTANDING TRANSITION
BONDS. Subject to certain conditions, the Issuer may from time to time issue
new Series of Transition Bonds. The principal terms of any Series will be
specified in a Prospectus Supplement for such Series, but the terms of any
additional Series will not be subject to the prior review by or consent of the
Transition Bondholders of any previously issued Series. Such principal terms may
include methods for allocating collections, provisions creating different or
additional security or other credit enhancement, and any other amendment or
supplement to the Indenture or otherwise which is made applicable only to such
Series of Transition Bonds. While the issuance of other Series must meet the
Rating Agency Condition, there can be no assurance that the issuance of any
other Series of Transition Bonds might not have an impact on the timing or
amount of payments received by Transition Bondholders. See "The Transition
Bonds" and "The Indenture--Issuance in Series or Classes" in this Prospectus. In
addition, various matters relating to the Transition Bonds are subject to a vote
of all Transition Bondholders for all Series of Transition Bonds, even though
there may be differences in the interests or positions among such Series or
Classes of such Series which could result in voting outcomes adverse to the
interests of one or more Series or Classes of Transition Bonds.
The Seller may sell Intangible Transition Property to one or more entities
other than the Issuer to finance Stranded Costs. Neither such sales nor the
terms of any transition bonds issued by such entity or entities will be subject
to the prior review by or consent of the Transition Bondholders of any Series.
ITC Collections will be pro rated among the Issuer and such other entities based
on their respective Percentages at the time such Intangible Transition Charges
are billed. The sale of Intangible Transition Property to an entity other than
the Issuer will be subject, among other things, to the Rating Agency Condition.
There can be no assurance that the issuance of other transition bonds secured by
Intangible Transition Property might not have an impact on the timing or amount
of payments received by Transition Bondholders. In addition, in the event such
other transition bonds are issued, pursuant to the Master Servicing Agreement,
various matters relating to the transition bonds (including Transition Bonds
issued by the Issuer) are subject to a vote of the Bond Trustee and any bond
trustees of Other Issuers, based on the directions of the holders, even though
there may be differences in the interests or positions among the transition
bonds issued by such Other Issuers and the Transition Bonds issued by the Issuer
which could result in voting outcomes adverse to the interest of the Transition
Bonds.
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LIMITED NATURE OF RATINGS. It is a condition of the Underwriters'
obligation to purchase each Series and Class of Transition Bonds that at the
time of issuance such Transition Bonds receive from the Rating Agencies the
respective ratings set forth in the applicable Prospectus Supplement, which, in
each case, will be in one of the four highest categories. The ratings of the
Transition Bonds address the likelihood of the ultimate payment of principal and
the timely payment of interest on the Transition Bonds. The ratings do not
represent any assessment of any particular rate of principal payments on the
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, resulting in a longer weighted
average life. Because principal will only be paid at a rate not to exceed that
reflected in the Expected Amortization Schedule, the Transition Bonds are not
expected to be retired earlier than scheduled other than in the event of a
redemption or acceleration.
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 is primarily a vertically
integrated public utility that provides retail electric and gas service in
Southeastern Pennsylvania and retail electric generation service throughout
Pennsylvania in conjunction with Pennsylvania's Customer Choice Program. PECO
Energy also engages in the wholesale marketing of electricity on a national
basis. The Company 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 in Pennsylvania 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. Generation services may be provided by electric generation
suppliers licensed by the PUC. Under the Competition Act, electric generation
suppliers are subject to certain limited financial and disclosure requirements
but are otherwise unregulated by the PUC. Electric distribution and transmission
services will remain regulated.
The Competition Act requires utilities to submit restructuring plans,
including their stranded costs which will result from retail competition for
generation services. Stranded costs include regulatory assets, nuclear
decommissioning costs and long-term purchase power commitments for which full
recovery is allowed and other costs, including investment in generating plants,
spent fuel disposal, retirement costs and reorganization costs, for which an
opportunity for recovery is allowed in an amount determined by the PUC as just
and reasonable. Under the Competition Act, utilities are subject to a rate cap
through December 31, 2005 which provides that total charges to customers cannot
exceed rates in place at December 31, 1996, subject to certain exceptions. The
Competition Act also caps transmission and distribution rates from December 31,
1996 through June 30, 2001, subject to certain exceptions. Under the Competition
Act, each regulated electric utility was required to implement a retail access
pilot program for customers representing 5% of the peak load of each customer
class for the period from November 1, 1997 through December 31, 1998.
RECOVERY OF STRANDED COSTS
As a mechanism for utilities (including PECO Energy) to recover their
allowed stranded costs, the Competition Act provides for the imposition and
collection of nonbypassable charges on customer's bills called "competitive
transition charges." Competitive transition charges are assessed to and
collected from all retail customers who have been assigned stranded cost
responsibility and access the utilities' transmission and distribution systems
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
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assessed regardless of whether such customer purchases electricity from the
utility or an independent electric generation supplier. The Competition Act
provides, however, that the utility's right to collect competitive transition
charges is contingent on the continued operation at reasonable availability
levels of the assets for which the stranded costs were awarded, except where
continued operation is no longer cost efficient because of the transition to a
competitive market. See "Risk Factors--Unusual Nature of Intangible Transition
Property--Dependence on the Competition Act and the QRO" and
"--Dependence on Continued Operation of Existing Generation Facilities in
Certain Circumstances." in this Prospectus.
SECURITIZATION OF STRANDED COSTS
The Competition Act authorizes the PUC to issue qualified rate orders
approving the issuance of transition bonds to facilitate the recovery or
financing of qualified transition expenses of an electric utility or its
assignee. Transition bonds may be issued by a utility, a finance subsidiary of a
utility or a third-party assignee of a utility. Under the Competition Act,
proceeds of transition bonds are required to be used principally to reduce
qualified transition expenses, including stranded costs, and the related
capitalization costs of the utility. The transition bonds are secured by
intangible transition property and payable from the intangible transition
charges and may have a maximum maturity of ten years. Intangible transition
charges can be imposed only when and to the extent that transition bonds are
issued.
The Competition Act contains a number of provisions designed to facilitate
the securitization of stranded costs.
IRREVOCABILITY OF INTANGIBLE TRANSITION PROPERTY. Under the Competition
Act, intangible transition property is created by the issuance by the PUC of a
qualified rate order and the declaration by the PUC that the relevant paragraphs
of a qualified rate order are irrevocable. The PUC is granted the power under
the Competition Act to specify that all or a portion of such qualified rate
order will be irrevocable. The Competition Act provides that to the extent that
the PUC declares all or a portion of a qualified rate order irrevocable, the PUC
may not, by any subsequent action, reduce, postpone, impair or terminate either
the order or the intangible transition charge authorized therein. In addition,
under the Competition Act, the Commonwealth pledges and agrees with the holders
of the transition bonds, and with any assignee or finance party, not to limit or
alter or in any way impair or reduce the value of intangible transition property
or the intangible transition charges until the related transition bonds are
fully discharged. The Competition Act provides, however, that nothing precludes
the Commonwealth from limiting or altering intangible transition property or the
qualified rate order, provided that adequate compensation is made by law for the
full protection of the intangible transition charges collected pursuant to the
qualified rate order and of the holders of the transition bonds and any assignee
or finance party. See "Risk Factors--Unusual Nature of Intangible Transition
Property--Possible Commonwealth Amendment or Repeal of Competition Act" and
"--Dependence on the Competition Act and the QRO" in this Prospectus.
ADJUSTMENTS OF THE INTANGIBLE TRANSITION CHARGES. The Competition Act
requires the PUC to provide in all qualified rate orders a procedure for
expeditiously approving periodic adjustments to the intangible transition
charges. The Competition Act requires that such adjustments be made on at least
an annual basis on each anniversary of the issuance of the qualified rate order
and at additional intervals as specified therein. The PUC must approve such
annual adjustments within 90 days of each request for adjustment.
NONBYPASSABILITY. The Competition Act provides that the competitive
transition charges and the intangible transition charges will be imposed on
customers accessing the utility's transmission and distribution system even if
those customers elect to purchase electricity from another supplier or if the
customer chooses to operate self-generation equipment in tandem with accessing
the utility's transmission and distribution system. The Competition Act further
provides that to the extent that the utility, or any assignee of intangible
transition property, assigns, sells, transfers or pledges any interest in
intangible transition property, the PUC authorizes the utility to contract with
such assignee for the
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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 TRANSFERRED INTANGIBLE TRANSITION PROPERTY
AS TRUE SALE. The Competition Act provides that a transfer by the utility or an
assignee of intangible transition property will be treated as a true sale of the
transferor's right, title and interest and not as a pledge or other financing,
other than for federal and state income and franchise tax purposes, if (i) the
parties expressly state in governing documents that a transfer is to be a sale
or other absolute transfer and (ii) the transaction is approved in a qualified
rate order. See "Risk Factors--Bankruptcy; Creditors' Rights" in this
Prospectus.
JURISDICTION OVER DISPUTES; STANDING
Actions against customers for nonpayment of the intangible transition
charges may only be brought by the utility, its successor or any other entity
providing electric service to the customers. In addition, the Competition Act
grants to the PUC exclusive jurisdiction over all disputes arising out of the
obligations to impose and collect the intangible transition charges by a
utility, its successor or any other entity which provides electric service to a
customer.
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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 8.5 years beginning in 1999.
On January 21, 1998, PECO Energy filed a complaint in the U.S. District
Court for the Eastern District of Pennsylvania (the "Eastern District Court")
seeking injunctive and monetary relief on the grounds that the provisions of the
PUC Restructuring Order relating to transmission rates were preempted by the
Federal Power Act and that implementation of the Competition Act by the PUC in
the Restructuring Order violated several provisions of the U.S. Constitution. On
January 22, 1998, PECO Energy also filed two Petitions for Review in the
Commonwealth Court of Pennsylvania (the "Commonwealth Court") appealing the PUC
Restructuring Order based upon errors of law, an arbitrary and capricious abuse
of administrative discretion and the deprivation of the due process of law. In
addition to PECO Energy's appeals, numerous other parties, including various
intervenors, filed appeals and cross-appeals of the PUC Restructuring Order.
On April 29, 1998, PECO Energy and all but one of the 25 parties who
challenged PECO Energy's Restructuring Plan filed the Settlement with the PUC.
The Settlement was approved by the PUC in the Final Order. The Final Order was
subsequently appealed by Indianapolis Power & Light Company ("IP&L").
THE SETTLEMENT
RECOVERY OF STRANDED COSTS. The Settlement authorizes PECO Energy to
recover $5.26 billion of Stranded Costs, together with a return of 10.75%
thereon. For good cause shown, the PUC authorized the recovery of Stranded Costs
over a 12-year transition period beginning January 1, 1999 and ending December
31, 2010. Recovery of Stranded Costs and the allowed return are to be through
competitive transition charges (with respect to PECO Energy, the "Competitive
Transition Charges") and, at PECO Energy's election to issue or cause the
issuance of transition bonds, Intangible Transition Charges, designed to recover
the $5.26 billion of Stranded Costs. The Competitive Transition Charges have
been established assuming annual growth in sales of 0.8% and will be reconciled
annually to actual sales.
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The following table shows the estimated average levels of Competitive
Transition Charges and Intangible 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>
REVENUES EXCLUDING
GROSS RECEIPTS TAX(3)
CTC ----------------------------------------
ANNUAL AND RETURN
YEAR SALES ITC(2) TOTAL @ 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
Intangible Transition Charges will be collected, taking into account the
discounts from the current total bundled bill of Customers, based on the
discounts to be provided in accordance with the terms of the Restructuring
Plan. Both the Competitive Transition Charges and the Intangible Transition
Charges are subject to adjustment.
(3) The utilities gross receipts tax is imposed on public utilities (including
electric utilities) organized under the laws of, or doing business in, the
Commonwealth and is currently levied at the rate of 5% on each dollar of the
utility's gross receipts arising from certain sales of energy.
AUTHORIZATION TO SECURITIZE UP TO $4 BILLION. As part of its approval of
the Settlement, the PUC issued the QRO allowing PECO Energy to securitize up to
$4 billion of its $5.26 billion of Stranded Cost recovery through the issuance
of transition bonds. The Intangible Transition Charges associated with the
issuance of transition bonds must terminate no later than December 31, 2010. The
rate reductions and rate caps described in Table 2 included as part of the
Settlement anticipate the benefits of the securitization, and no adjustment in
PECO Energy's base rates will be made upon issuance of any transition bonds as
Competitive Transition Charges, and PECO Energy's variable distribution rates,
as applicable, will be reduced by the amount of Intangible Transition Charges.
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 do not or cannot choose to purchase electricity
from alternate electric generation suppliers (referred to as serving as the
"provider of last resort").
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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.
TABLE 2
SCHEDULE OF SYSTEM-WIDE AVERAGE RATES (PER KILOWATT-HOUR ("KWH"))(1)
<TABLE>
<CAPTION>
CTC
T&D AND/OR SHOPPING GENERATION
EFFECTIVE DATE TRANSMISSION(2) DISTRIBUTION RATE CAP(3) ITC(4) CREDIT RATE CAP
- -------------- --------------- ------------ ----------- ------- -------- -----------
(1) (2) (3)=(1)+(2) (4) (5) (6)=(4)+(5)
$KWH $KWH $KWH $KWH $KWH $KWH
<S> <C> <C> <C> <C> <C> <C>
January 1, 1999...... $0.0045 $0.0253 $0.0298 $0.0172 $0.0446 $0.0618
January 1, 2000...... 0.0045 0.0253 0.0298 0.0192 0.0446 0.0638
January 1, 2001...... 0.0045 0.0253 0.0298 0.0251 0.0447 0.0698
January 1, 2002...... 0.0045 0.0253 0.0298 0.0251 0.0447 0.0698
January 1, 2003...... 0.0045 0.0253 0.0298 0.0247 0.0451 0.0698
January 1, 2004...... 0.0045 0.0253 0.0298 0.0243 0.0455 0.0698
January 1, 2005...... 0.0045(5) 0.0253(5) 0.0298(5) 0.0240 0.0458 0.0698
January 1, 2006...... N/A N/A N/A 0.0266 0.0485 0.0751
January 1, 2007...... N/A N/A N/A 0.0266 0.0535 0.0801
January 1, 2008...... N/A N/A N/A 0.0266 0.0535 0.0801
January 1, 2009...... N/A N/A N/A 0.0266 0.0535 0.0801
January 1, 2010...... N/A N/A N/A 0.0266 0.0535 0.0801
</TABLE>
- ------------------
(1) All prices reflect average retail billing for all Rate Classes (including
gross receipts tax). The average prices as presented in this table reflect
the profile of service contained in PECO Energy's proof of revenue set forth
in the Restructuring Plan.
(2) The transmission prices listed are for unbundled rates only. The PUC does
not regulate the rates for transmission service.
(3) The T&D (Transmission & Distribution) Rate Cap under Section 2804(4) of the
Competition Act will be extended until June 30, 2005.
(4) Figures result in the recovery of $5.26 billion of Stranded Costs plus the
allowed return on such costs from the estimated number of Customers and at
projected usage levels in the period during which the Competitive Transition
Charges and Intangible Transition Charges will be collected, taking into
account the discounts from the current total bundled bill of Customers,
based on the discounts to be provided in accordance with the terms of the
Restructuring Plan. Both the Competitive Transition Charges and the
Intangible Transition Charges are subject to adjustment.
(5) Effective until June 30, 2005.
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The Competition Act authorizes electric distribution companies to recover
changes in their state tax liability resulting from the introduction of
competition in the electric market through adjustments in the rates charged to
customers, which in certain circumstances set forth in the regulations adopted
by the PUC may result in rates exceeding the applicable rate cap. PECO Energy
may apply for such recovery of state tax liability changes in accordance with
the procedures outlined in the PUC's regulations if PECO Energy in fact
experiences adverse consequences to its state tax liability as contemplated in
the Competition Act.
COMPETITIVE METERING AND BILLING. As provided in the Restructuring Plan,
the Settlement and the Final Order of the PUC, on January 1, 1999, PECO Energy
unbundled its retail electric rates for metering, meter reading, and billing and
collection services to provide credits for those customers that have elected to
have alternate suppliers perform these services. Effective January 1, 1999, PUC-
licensed entities, including electric generation suppliers, may act as agents to
provide a single bill and provide associated billing and collection services to
retail customers located in PECO Energy's retail electric service territory. The
PUC-licensed entities, including electric generation suppliers, may also
finance, install, own, maintain, calibrate and remotely read advanced meters for
service to retail customers located in PECO Energy's service territory. An
electric generation supplier or other third party that bills on behalf of PECO
Energy must comply with all applicable billing and disclosure requirements
absent waiver by the PUC, including the unbundling of transmission and
distribution rates. Only PECO Energy can physically disconnect or reconnect a
customer's distribution service. Physical termination of the service may only be
permitted for failure to pay for transmission and distribution service or
provider of last resort service. See also "The QRO and the Intangible Transition
Charges--The Intangible Transition Charges" in this Prospectus.
CUSTOMER CHOICE. Under the Settlement, customer choice of electric
generation suppliers is being phased in between January 1, 1999 and January 2,
2000 with one-third of each Rate Class entitled to choose their electric
generation supplier by January 1, 1999, an additional one-third by January 2,
1999 and the remaining one-third by January 1, 2000. If on January 1, 2001 and
January 1, 2003 less than 35% and 50%, respectively, of all of PECO Energy's
residential and commercial Customers by Rate Class are obtaining generation
service from alternate electric generation suppliers, non-shopping Customers
will be randomly assigned to electric generation suppliers, including those
affiliated with PECO Energy, to meet those thresholds. Assignment of
non-shopping Customers shall be through a PUC-approved process. No assignment
will be made until all Customers have been notified in advance of the process
and have been given the option to remain with PECO Energy as the provider of
last resort or to select an electric generation supplier of their choice. The
35% and 50% threshold amounts will be determined for Customers in the
Residential and Small Commercial and Industrial Customer Category on the basis
of the number of customers and for Customers in the Large Commercial and
Industrial Customer Category on the basis of peak load. Customers assigned to a
provider of last resort, other than PECO Energy, will be counted as customers
receiving service from an alternate electric generation supplier.
PROVIDER OF LAST RESORT
Under the Restructuring Plan, PECO Energy will act as a provider of last
resort for all retail electric customers in its retail electric service
territory who do not choose or cannot choose to purchase power from alternative
suppliers through December 31, 2010, subject to certain terms, conditions and
qualifications. On January 1, 2001, 20% of all of PECO Energy's residential
customers, determined by random selection, including low-income and
inability-to-pay customers, and without regard to whether such customers are
obtaining generation service from an electric generation supplier, will be
assigned to a provider of last resort other than PECO Energy (the service
provided by 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
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<PAGE>
by Competitive Default Service has fallen below 17%, a further random selection
of customers will be assigned to Competitive Default Service to restore the
number of customers to the 20% level. The further random selection will be made
from the customers not already assigned to Competitive Default Service and
customers served by electric generation suppliers other than PECO Energy. In
February, 1999, certain utilities, customer advocates and electric generation
suppliers convened to develop proposed regulations on Competitive Default
Service. On Friday, February 26, the Chairman of the group forwarded a suggested
procedure for choosing a Competitive Default Supplier to the PUC. Under those
suggested procedures, entities that desire to act as a Competitive Default
Supplier have until April 1, 2000 to submit both their qualifications to act as
a Competitive Default Supplier and their bid for providing such service.
Competitive Default Service will begin on January 1, 2001 for 20% of PECO
Energy's Residential Customers. The suggested procedures would require an
electric generation supplier to provide, among other things, proof that it has
received the requisite licenses from the state and federal governments, proof
that it meets certain creditworthiness standards and assurances that it can
acquire additional bonding as necessary. The supplier of Competitive Default
Service will be required to provide billing, including its payment of Intangible
Transition Charges and other revenues, to PECO Energy on the terms and
conditions set forth in PECO Energy's tariff for those entities who currently
provide competitive billing services to Customers.
The suggested procedures will not become final until the PUC adopts them.
The PUC may choose to reject or modify the suggested procedures. The PUC has no
time deadline for rendering its decision on this issue. The PUC may allow a
public comment period before reaching a final resolution of these issues.
OTHER PROVISIONS. The Settlement also provides for flexible generation
service pricing for residential customers served by Competitive Default Service,
authorization of PECO Energy to transfer its generation assets to a separate
subsidiary, inclusion under the capped transmission and distribution rates of
.01 cent per kilowatt-hour for a sustainable energy and economic development
fund and expansion of PECO Energy's program for low-income customers.
PRIOR LITIGATION
IP&L appealed the first qualified rate order granted to PECO Energy by the
PUC in May, 1997, filing an action in the Commonwealth Court challenging the
Competition Act, alleging 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 of Pennsylvania dismissed
IP&L's action, holding, as a matter of law, that the Competition Act does not
violate the Commerce Clause. Following that dismissal, IP&L petitioned the
Pennsylvania Supreme Court for allowance of appeal. In the petition, IP&L
claimed that the payment of Stranded Costs to PECO Energy discriminates against
interstate commerce by favoring in-state electricity producers over out-of-state
electricity producers. On September 29, 1998, the Pennsylvania Supreme Court
denied IP&L's petition for allowance of appeal. On December 28, 1998, IP&L filed
a petition for a writ of certiorari with the United States Supreme Court to
appeal the Commonwealth Court's decision on the claim described above. On March
8, 1999, the United States Supreme Court denied the petition.
During the period from January 1998 through March 1998, appeals and
cross-appeals were filed at the Commonwealth Court against the Restructuring
Order by PECO Energy, IP&L and numerous other parties. On April 29, 1998, PECO
Energy and all of the parties who had filed appeals and cross-appeals, with the
exception of IP&L, filed the Settlement with the PUC. The Settlement was
approved by the PUC through the Final Order. Under the terms of the Settlement,
PECO Energy and all signatories to the Settlement requested, and were granted, a
general continuance of their appeals and cross-appeals of the Restructuring
Order until such time as the Final Order is no longer subject to administrative
or judicial challenge. In June, 1998, IP&L withdrew its appeal to the
Restructuring Order and filed an appeal at the Commonwealth Court challenging
the Final Order. The IP&L appeal of the Final Order was identical in scope to
its Commerce Clause arguments described above. The IP&L appeal constituted a
judicial challenge to the Final Order and, under the terms of the Settlement,
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the appeals of PECO Energy and the other signatories to the Settlement remained
pending, but inactive, until resolution of the IP&L appeal. PECO Energy and IP&L
entered into a stipulation that the final outcome of the IP&L Commerce Clause
case would be controlling for the IP&L appeal of the Final Order. With the
denial of the IP&L petition for certiorari by the United States Supreme Court,
all appeals and cross-appeals of the Final Order are in the process of being
withdrawn in accordance with the terms of the Settlement and the stipulation
with IP&L.
Two additional actions, one filed by the Utility Workers Union of America
and one filed by a group of plaintiffs including State Senator Vincent J. Fumo
alleged that the adoption of the Competition Act violated certain provisions of
the Pennsylvania Constitution governing legislative procedure. The PUC filed
preliminary objections seeking dismissal of these actions at the pleading stage,
on the ground that enactment of the Competition Act did not violate such
Pennsylvania constitutional provisions as a matter of law. The Commonwealth
Court of Pennsylvania upheld the PUC's preliminary objections and dismissed both
actions with prejudice. The appeal period has expired without appeals being
filed and the dismissal of these actions is final and non-appealable.
THE QRO AND THE INTANGIBLE TRANSITION CHARGES
THE QRO
As part of its approval of the Settlement, the PUC issued the QRO on May
14, 1998. In the QRO, the PUC determined that PECO Energy's recovery of Stranded
Costs as set forth in the Settlement is just and reasonable and in the public
interest and that securitization of up to $4 billion of its $5.26 billion of
Stranded Costs as set forth in the Settlement is just and reasonable and in the
public interest.
The QRO provides that, to the extent that PECO Energy, or any assignee,
assigns, sells, transfers, or pledges any interest in Intangible Transition
Property created by the QRO, the PUC authorizes PECO Energy to contract, for a
specified fee, with such assignee for PECO Energy to continue to operate the
system to provide electric services to PECO Energy's customers, to impose and
collect the applicable Intangible Transition Charges for the benefit and account
of the assignee, to make periodic adjustments of Intangible Transition Charges
contemplated under the QRO and to account for and remit the applicable
Intangible Transition Charges to or for the account of the assignee free of any
charge, deduction or surcharge of any kind (other than the specified contractual
fee referred to above). The QRO also authorizes PECO Energy to contract with the
issuers of transition bonds and an alternative party, which may be a trustee,
that the alternative party will replace PECO Energy under its contract with such
issuers and perform the obligations of PECO Energy contemplated in the QRO. The
obligations of PECO Energy (i) shall be binding upon PECO Energy, its successors
and assigns and (ii) shall be required by the PUC to be undertaken and performed
only by PECO Energy and any other entity which provides transmission and
distribution services to a person who was a customer of PECO Energy located
within PECO Energy's certificated territory on January 1, 1997, or who became a
customer of electric services within such territory after January 1, 1997, and
is still located within such territory.
AUTHORIZATION OF ISSUANCE OF TRANSITION BONDS. In the QRO, the PUC
authorized the issuance of transition bonds in an aggregate principal amount not
to exceed $4 billion. PECO Energy, or any assignee of PECO Energy to whom
Intangible Transition Property is sold, may issue and sell, in reliance on the
QRO, one or more series of transition bonds, each series in one or more classes,
secured by Intangible Transition Property, provided that the final maturity of
any series of transition bonds may not be later than ten years from the date of
issuance and in no event after December 31, 2010. PECO Energy, or its assignee,
is also authorized to refinance transition bonds in a face amount not to exceed
the unamortized principal thereof.
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The QRO provides that PECO Energy retains the sole discretion whether to
issue or cause the issuance of transition bonds. Within 120 days after each
issuance of transition bonds, PECO Energy is required to file with the PUC a
description of the financing structure of the transition bonds, including the
principal amount, the price at which each series or class of transition bonds
was sold, payment schedules, interest rate and other financing costs and the
final plans for PECO Energy's use of the proceeds of such offering.
Notwithstanding such filing, the final structure of each issuance of transition
bonds is not subject to change or revision by the PUC after the date of such
issuance.
AUTHORIZATION TO IMPOSE INTANGIBLE TRANSITION CHARGES. Pursuant to the
QRO, the PUC determined that it was just and reasonable and in the public
interest for PECO Energy to recover from its customers, through Intangible
Transition Charges, $4 billion of its $5.26 billion of Stranded Costs. Under the
QRO, the PUC authorized PECO Energy to impose on and collect from Customers,
either directly or through bills rendered by electric generation suppliers,
Intangible Transition Charges in an amount sufficient to recover Qualified
Transition Expenses. In accordance with the Competition Act, the PUC found that
good cause had been shown to extend the payment period for imposing Intangible
Transition Charges beyond the ten-year period specified in the Competition Act
to December 31, 2010.
In accordance with the Settlement, the rate reductions included as part of
the Settlement anticipated the benefits of securitization, and no rate
adjustment will be made upon issuance of any transition bonds. After January 1,
1999, Competitive Transition Charges (or PECO Energy's variable distribution
rates) will be reduced by the amount of Intangible Transition Charges associated
with the issuance of Transition Bonds and transition bonds issued by Other
Issuers, if any.
In the QRO, the PUC approves the allocation and methodology for imposing
Competitive Transition Charges and Intangible Transition Charges on Customers.
The QRO also authorizes PECO Energy to make annual adjustments to Intangible
Transition Charges if collections of such Intangible Transition Charges fall
below or exceed the amount necessary to ensure the receipt by the transition
bond trustee of revenues sufficient to fully recover the Qualified Transition
Expenses in accordance with the applicable Expected Amortization Schedule,
provided, however, that such adjustments during the final calendar year during
which any series of transition bonds are outstanding may be quarterly or monthly
if necessary to ensure full recovery of Intangible Transition Charges. The QRO
states that the revenues received by the transition bond trustee through
Intangible Transition Charges shall be determined to be sufficient for the
foregoing purpose if, and only if, the ITC Collections so received are
sufficient to amortize the transition bonds, fund any reserves and to pay
premiums, if any, thereon (after payment of accrued interest, redemption
premiums, if any, related credit enhancement, servicing fees and other related
costs and expenses) in accordance with the terms thereof. For each annual
adjustment, the QRO directs PECO Energy to file with the PUC (i) an accounting
of Intangible Transition Charges received by the transition bond trustee for the
previous annual period; (ii) a statement of any over-or-under receipts; and
(iii) the charge or credit to be added to Intangible Transition Charges to
ensure that the Intangible Transition Charges received by the transition bond
trustee will be sufficient to amortize the Qualified Transition Expenses in
accordance with the amortization schedule for the transition bonds and the
corresponding reduction or increase in Competitive Transition Charges or PECO
Energy's variable 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
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<PAGE>
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 (other than
the specified contractual fee referred to above). The QRO also authorized the
assignee to contract with an alternate party to replace PECO Energy as servicer
of the Intangible Transition Property. The QRO provides that the obligations of
PECO Energy in servicing the Intangible Transition Property shall be required by
the PUC to be undertaken and performed by PECO Energy and any other entity which
provides transmission or distribution services to Customers.
IRREVOCABILITY OF QRO. The QRO declares that the paragraphs in the QRO
concerning the recovery of $4 billion of PECO Energy's Stranded Costs through
the issuance of transition bonds, the imposition of Intangible Transition
Charges on Customers in an amount sufficient to recover Qualified Transition
Expenses, the methodology and allocation and timing of adjustments to the
Intangible Transition Charges and the sale of Intangible Transition Property,
among other things, are irrevocable for purposes of the Competition Act, and the
PUC accordingly agrees that it will not, directly or indirectly, by any
subsequent action, reduce, postpone, impair or terminate the QRO or the
Intangible Transition Charges. In the QRO, the PUC further declared that the
right, title and interest of PECO Energy and any assignee in the QRO and the
Intangible Transition Charges, the rates and other charges authorized by the
QRO, and all revenues, collections, claims, payments, money or proceeds of or
arising from the same constitute Intangible Transition Property.
THE INTANGIBLE TRANSITION CHARGES
CALCULATION OF THE INTANGIBLE TRANSITION CHARGES. The Qualified Transition
Expenses authorized in the QRO are to be recovered from Customers in each of
PECO Energy's separate Rate Classes based on the allocation of Stranded Cost
recovery borne by each Rate Class 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 in accordance with the Expected Amortization
Schedule from affected Rate Classes. The Intangible Transition Charges will be
allocated from Competitive Transition Charges (as periodically adjusted) and
variable distribution charges (both of which are usage-based charges) and will
appear as a footnote to one of or both such items on each Customer's bill.
Intangible Transition Charges (as periodically adjusted) will be allocated first
from Competitive Transition Charges, then, to the extent Intangible Transition
Charges exceed such amounts, from variable distribution charges. In no event
will Intangible Transition Charges (as periodically adjusted) exceed the sum of
Competitive Transition Charges (as periodically adjusted) and variable
distribution charges. ITC Collections will vary with 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 allocation from Competitive Transition Charges and variable
distribution charges to Intangible Transition Charges on each Calculation Date.
See "Description of the Seller's Business" in the related Prospectus Supplement
and "--The ITC Adjustment Process" below.
INITIAL BILLING AND TERMINATION OF ITC COLLECTIONS. Intangible Transition
Charges for each Series of Transition Bonds will be assessed on all Customer
bills rendered on or after the effective date of the rates for Intangible
Transition Charges associated with the relevant Series Issuance Date. For
instance, if a particular Series Issuance Date is January 1 and the rates for
Intangible Transition Charges are effective January 15, bills rendered on or
after January 15 will 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
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<PAGE>
effect in an amount equal to such Intangible Transition Charges, such that the
total amount billed to Customers will remain unchanged.
The Servicer (or electric generation supplier or other third-party biller)
will continue to bill the Intangible Transition Charges, and the Servicer will
make ITC Collections from Customers and electric generation suppliers and other
third parties with respect to each outstanding Series of Transition Bonds until
the Series Termination Date or Class Termination Date, if applicable, with
respect to each such Series or Class, as applicable, but in no event later than
December 31, 2010. Upon the Series Termination Date or Class Termination Date,
as applicable, relating to the Series or Class, as applicable, of Transition
Bonds having the latest Series Termination Date or Class Termination Date, as
applicable, the Servicer will cease assessing the Intangible Transition Charges.
However, the Servicer (or electric generation supplier or other third-party
biller) will continue to collect the Intangible Transition Charges previously
billed to Customers. To the extent that ITC Collections exceed the amount
necessary to amortize fully all Transition Bonds and pay interest thereon and
certain fees and expenses, such ITC Collections will be retained by the Issuer.
THE ITC ADJUSTMENT PROCESS. In order to enhance the likelihood that the
actual ITC Collections allocated to the Issuer pursuant to the Master Servicing
Agreement are neither more nor less than the amount necessary to amortize the
Transition Bonds of each Series in accordance with the Expected Amortization
Schedule therefor and to fund the Overcollateralization Subaccount to the
Calculated Overcollateralization Level, the Master Servicing Agreement requires
the Servicer to seek, and the Competition Act and the QRO require the PUC to
approve, adjustments to the Intangible Transition Charges based on actual ITC
Collections allocated to the Issuer and updated assumptions by the Servicer as
to projected future billed revenue from which Intangible Transition Charges are
allocated, expected delinquencies and write-offs, and future expenses relating
to Intangible Transition Property and the Transition Bonds. Adjustments will be
made to the Intangible Transition Charges imposed upon Customers to reflect
shortfalls in or excesses of ITC Collections for the period since the last
adjustment, including amounts of shortfalls or excesses resulting from
inaccurate forecasts by the Servicer. For example, if actual electricity
consumption is less than the Servicer forecasted because of an unusually mild
summer, and this resulted in an ITC Collection shortfall, the Servicer would be
required to seek an adjustment from the PUC to the Intangible Transition Charges
imposed thereafter to compensate for such shortfall as described herein. In
addition, the adjustments will take into account any projected trends in
Customers or billed revenues from which Intangible Transition Charges are
allocated in order to prevent shortfalls or excesses of ITC Collections from
arising in future periods so that if, for example, usage is declining at an
accelerating pace, such trend will be taken into account in the calculation of
the current adjustment. The QRO provides for annual adjustments, except that
adjustments during the final calendar year of ITC Collections for any Series of
Transition Bonds may be made quarterly or monthly. If at the time of issuance of
a Series, the Servicer determines such additional adjustments are required, the
dates for such adjustments will be specified in the Prospectus Supplement for
such Series. Such adjustments will cease with respect to a Series on the final
Adjustment Date specified in the related Prospectus Supplement for such Series.
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 outstanding principal balance of
each Series equaling the amount provided for in the Expected Amortization
Schedule therefor and the amount on deposit in the Overcollateralization
Subaccount equalling the Calculated Overcollateralization Level, by (i) the next
Adjustment Date or the Payment Date immediately succeeding such Adjustment Date,
as specified in the related Prospectus Supplement, or (ii) the Expected Final
Payment Date, as applicable, for each Series, taking into account any amounts on
deposit in the Reserve Subaccount other than certain Customer prepayments of
Intangible Transition Charges, if any, not allocable to the period covered by
the applicable Adjustment Request. For a discussion of Customer prepayments, see
"The Seller and Servicer--Limited Information on Customers'
Creditworthiness--Customer Payments" in this Prospectus. The Competition Act and
the QRO require the PUC to approve such annual adjustments within 90 days of
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<PAGE>
the Calculation Date. The adjustments to the Intangible Transition Charges are
expected to be implemented on each Adjustment Date.
COMPETITIVE BILLING
The Restructuring Plan and subsequent orders of the PUC give customers who
purchase electric generation from electric generation suppliers the opportunity
to choose from several billing source options as of January 1, 1999:
consolidated billing from the utility, consolidated billing from the electric
generation supplier or separate billing from the utility and from the electric
generation supplier providing billing services. By PUC order dated November 4,
1998, after July 1, 1999, third parties that are not electric generation
suppliers will also be able to provide billing services. Any electric generation
supplier or other third party that provides consolidated billing is required to
pay the utility amounts billed by the utility to the electric generation
supplier or other third party, including the Intangible Transition Charges,
regardless of the electric generation supplier's or other third party's ability
to collect such amounts from its Customers. In such event, the electric
generation supplier or other third party will replace the Customer as the
obligor with respect to such Intangible Transition Charges, and the Servicer, on
behalf of the Issuer, will generally have no right to collect such Intangible
Transition Charges from the Customer. The Servicer will have the right to bill
and collect Intangible Transition Charges and other amounts payable to the
Servicer directly from all of the electric generation supplier's or other third
party's consolidated billing Customers following certain payment defaults by an
electric generation supplier or other third party and the expiration of the
applicable grace period. See "Risk Factors--Servicing--Credit Concerns Arising
Out of Third-Party Billing" in this Prospectus.
The Restructuring Plan sets forth, and future orders of the PUC will set
forth, guidelines governing metering, billing and other activities by electric
generation suppliers and other third parties. The PUC has determined that if an
electric generation supplier or other third party provides consolidated billing,
the electric generation supplier or other third party must first establish its
creditworthiness by either (i) demonstrating that it has an investment grade
rating for its own long-term debt or (ii) depositing with the PUC a letter of
credit or other mechanism sufficient to cover 30 days of its expected
collections from Intangible Transition Charges. While the Restructuring Plan and
PUC orders provide that an electric generation supplier or other third party
that bills Customers must comply with all billing, financial and disclosure
requirements applicable to electric generation suppliers, the PUC may waive any
of those requirements at any time in the future. Further, the parties to the
Settlement agreed to review and, as appropriate, to recommend changes to, PUC
regulations and procedures in order to facilitate the efficient and full
recovery of revenues from Customers, while at the same time protecting
Customers. On July 17, 1998, PECO Energy filed a Petition for Reconsideration
requesting that the PUC reconsider and reverse its decision to allow third
parties (other than a customer's electric distribution company or electric
generation supplier) to provide metering and billing services and, if the PUC
rejected that request, to give PECO Energy more time to develop standards,
including operational standards, for third-party entities. On November 4, 1998,
the PUC ordered PECO Energy to permit third-party metering and billing by July
1, 1999. See also "Risk Factors--The Electric Industry Generally--Uncertainties
Created by the 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 each such Customer's last 12 months of demand and PECO Energy's
weighted average cost of capital. Electric sales revenue
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attributable to Customers who will be eligible to exercise this option was 31.2%
of total sales revenue for the 1998 fiscal year. No Customer has elected to
exercise this option to date.
The recovery of both Competitive Transition Charges and Intangible
Transition Charges from industrial and commercial Customers that significantly
reduce their purchases of electricity generation from PECO Energy through the
installation of on-site generation equipment will be governed by special rules
set forth in the Restructuring Plan. These special arrangements were designed so
that Customers who operate generation equipment in parallel with PECO Energy's
transmission and distribution system pay their fully allocated share of Stranded
Costs through Competitive Transition Charges and Intangible Transition Charges.
For each self-generating Customer, the Servicer will determine annually, after
the end of each calendar year in which Competitive Transition Charges or
Intangible Transition Charges are assessed, whether such Customer purchased at
least 10% fewer kilowatt-hours of electricity through the transmission and
distribution system than the Customer purchased in the applicable base year. For
Customers who began self-generation on or after January 1, 1997, the base year
is the immediately preceding calendar year. For all others, the base year is
1996. If the ratio between (i) the amount of usage difference caused by the
on-site generation and (ii) the base year usage is 10% or more, the Servicer
will bill the Customer separately in an amount equal to the difference between
(x) the total Competitive Transition Charges and Intangible Transition Charges
that the Customer would have paid using usage and demand data for the base year
(as adjusted for any portion not related to self-generation) and (y) the total
Competitive Transition Charges and Intangible Transition Charges that the
Customer did pay in the preceding calendar year. There are other special rules
for Customers whose peak load during 1996 was at least 4 megawatts and who can
prove that they were actively self-generating as of December 31, 1996 or
earlier. PECO Energy does not expect the number of Customers who self-generate
or the kilowatt-hours produced by self-generation to be significant. The
calculation of the Intangible Transition Charges and any adjusted Intangible
Transition Charges will reflect actual self-generation at the time of such
calculation and the Servicer's projection with respect to future
self-generation.
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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.
In response to increased competition in the electric generation market,
PECO Energy is considering forming a holding company of which PECO Energy will
be a wholly owned subsidiary. Management has proposed the formation of the
holding company to facilitate the disaggregation of the Company's transmission
and distribution, generation and unregulated business and corporate central
services in order to create increased financial, management and organizational
flexibility.
CUSTOMERS AND OPERATING REVENUES
PECO Energy's Customer base is divided into three Customer 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: Residential Service is available in the entire
service territory of PECO Energy to single private family dwellings for the
domestic requirements of family members, which service is supplied through
one meter. This Rate Class also includes Rate RS Customers receiving
service under a solar rate and payment-troubled low income Customers
receiving discounted rates under the CAP Program, Rate CAP.
Rate R-H--Residential Heating Service: Residential Heating Service is
available to single private family dwellings (or to a multiple dwelling
unit building consisting of two to five dwelling units, whether occupied or
not) for domestic requirements when such service is supplied through one
meter and where the dwelling is heated by specified types of electric space
heating systems.
Rate OP--Off-Peak Service: Available in conjunction with other residential
service rates, Rates R, R-H and GS, for any Customer receiving delivery at
certain voltage levels; during in-peak periods, PECO Energy can interrupt
service.
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.
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Rate SL-P--Street Lighting in the City of Philadelphia: Available only to a
governmental agency, municipal, state or federal, for outside lighting of
streets, highways, bridges, parks or similar places, including directional
highway signs at locations where other outdoor lighting service is
established hereunder, for the safety and convenience of the public within
the City of Philadelphia.
Rate SL-S--Street Lighting--Suburban Divisions: Available for the outdoor
lighting of streets, highways, bridges, parks and similar places for the
safety and convenience of the public in Suburban Divisions.
Rate SL-E--Street Lighting Customer-Owned Facilities: Available to any
governmental agency outside of the City of Philadelphia for outdoor
lighting of streets, highways, bridges, parks or similar places, including
directional highway signs at locations where outdoor lighting service is
established hereunder for the safety and convenience of the public where
all of the utilization facilities are installed, owned and maintained by a
governmental agency.
Rate TL--Traffic Lighting: Available to any municipality using PECO
Energy's standard delivery service for electric traffic signal lights
installed, owned and maintained by the municipality.
Rate BLI--Borderline Interchange: Available under reciprocal agreements to
neighboring electric utilities for resale in their adjacent territory. No
Intangible Transition Charges will be imposed on Rate BLI Customers.
Large Commercial and Industrial Rate Classes:
Rate PD--Primary-Distribution Power: Untransformed electric delivery
service available from the primary supply lines of PECO Energy's
distribution system where the Customer installs, owns and maintains any
transforming, switching and other receiving equipment required.
Rate HT--High-Tension Power: Untransformed electric delivery service from
PECO Energy's standard high-tension lines, where the Customer installs,
owns and maintains, any transforming, switching and other receiving
equipment required. Excludes certain special contracts.
Rate EP--Electric Propulsion: This rate is available only to the National
Rail Passenger Corporation and to the Southeastern Pennsylvania
Transportation Authority for untransformed electric delivery service from
PECO Energy's standard high-tension lines, where the Customer installs,
owns and maintains any transforming, switching and other receiving
equipment required and where the service is supplied for the operation of
electrified transit and railroad systems and appurtenances.
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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.
TABLE 3
RETAIL ELECTRIC CUSTOMERS FOR THE YEAR ENDED
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------
12/31/94 12/31/95 12/31/96 12/31/97 12/31/98
--------------------------------------------------------------------------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
NUMBER OF % OF NUMBER OF % OF NUMBER OF % OF NUMBER OF % OF NUMBER OF % OF
CUSTOMERS TOTAL CUSTOMERS TOTAL CUSTOMERS TOTAL CUSTOMERS TOTAL CUSTOMERS TOTAL
--------- ------- --------- ------- --------- ------- --------- ------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Residential
R(1)......................... 1,164,470 79.67% 1,167,866 79.59% 1,169,654 79.50% 1,177,996 79.47% 1,182,305 79.47%
R-H.......................... 152,393 10.43 153,513 10.46 154,794 10.52 155,865 10.51 156,424 10.51
OP (2)....................... 99,258 6.79 98,923 6.74 98,781 6.71 98,417 6.64 97,891 6.58
Total (Excludes OP).......... 1,316,863 90.10 1,321,379 90.05 1,324,448 90.03 1,333,861 89.99 1,338,729 89.99
Small Commercial and Industrial
GS........................... 140,241 9.60% 141,653 9.65% 142,431 9.68% 144,142 9.72% 144,726 9.73%
POL(3)....................... 3,313 0.23 3,291 0.22 3,173 0.22 3,067 0.21 3,082 0.21
SL-P......................... 9 0.00 9 0.00 10 0.00 10 0.00 10 0.00
SL-S......................... 395 0.03 391 0.03 442 0.03 408 0.03 677 0.05
SL-E......................... 285 0.02 325 0.02 319 0.02 396 0.03 69 0.00
TL........................... 215 0.01 215 0.01 216 0.01 171 0.01 216 0.01
BLI(4)....................... 3 0.00 12 0.00 12 0.00 12 0.00 12 0.00
Total (Excludes POL)......... 141,148 9.66 142,605 9.72 143,430 9.75 145,139 9.79 145,710 9.79
Large Commercial and Industrial
PD........................... 1,213 0.08% 1,130 0.08% 1,047 0.07% 1,231 0.08% 1,210 0.08%
HT........................... 2,314 0.16 2,264 0.15 2,252 0.15 2,077 0.14 2,055 0.14
EP........................... 3 0.00 3 0.00 3 0.00 3 0.00 3 0.00
Total........................ 3,530 0.24 3,397 0.23 3,302 0.22 3,311 0.22 3,268 0.22
Total (Excludes OP and
POL)....................... 1,461,541 100.00% 1,467,381 100.00% 1,471,180 100.00% 1,482,311 100.00% 1,487,707 100.00%
--------- ------- --------- ------- --------- ------- --------- ------- --------- -------
--------- ------- --------- ------- --------- ------- --------- ------- --------- -------
</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.
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TABLE 4
ACTUAL RETAIL ELECTRIC USAGE (PER MEGAWATT-HOUR ("MWH")) FOR THE YEAR ENDED
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------
12/31/94 12/31/95 12/31/96 12/31/97
-----------------------------------------------------------------------------------------
% OF % OF % OF % OF
MWH TOTAL MWH TOTAL MWH TOTAL MWH TOTAL
---------- ------- ---------- ------- ---------- ------- ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Residential
R(1)......................... 7,380,127 22.57% 7,669,938 22.87% 7,474,224 22.74% 7,548,861 22.90%
R-H.......................... 2,653,978 8.12 2,625,621 7.83 2,807,279 8.54 2,600,231 7.89
OP(2)........................ 378,298 1.16 364,856 1.09 375,823 1.14 365,605 1.11
Total........................ 10,412,403 31.84 10,660,415 31.78 10,657,326 32.42 10,514,697 31.89
Small Commercial and Industrial
GS........................... 5,945,233 18.18% 6,213,330 18.52% 6,400,620 19.47% 6,680,070 20.26%
POL(3)....................... 9,050 0.03 9,160 0.03 9,002 0.03 8,721 0.03
SL-P......................... 90,717 0.28 91,689 0.27 88,820 0.27 81,474 0.25
SL-S......................... 20,965 0.06 19,380 0.06 16,908 0.05 15,700 0.05
SL-E......................... 42,430 0.13 44,644 0.13 47,017 0.14 44,367 0.13
TL........................... 38,457 0.12 39,336 0.12 39,681 0.12 39,461 0.12
BLI(4)....................... 70 0.00 155 0.00 243 0.00 236 0.00
Total........................ 6,146,922 18.80 6,417,694 19.13 6,602,291 20.08 6,870,029 20.84
Large Commercial and Industrial
PD........................... 1,298,117 3.97% 1,213,554 3.62% 1,130,530 3.44% 1,069,260 3.24%
HT........................... 14,324,131 43.80 14,655,439 43.69 13,845,485 42.12 13,922,827 42.23
EP........................... 521,951 1.60 594,543 1.77 638,800 1.94 594,319 1.77
Total........................ 16,144,199 49.37 16,463,536 49.08 15,614,815 47.50 15,586,406 47.27
Total........................ 32,703,524 100.00% 33,541,645 100.00% 32,874,432 100.00% 32,971,132 100.00%
---------- ------- ---------- ------- ---------- ------- ---------- -------
---------- ------- ---------- ------- ---------- ------- ---------- -------
<CAPTION>
--------------------
12/31/98
--------------------
% OF
MWH TOTAL
---------- -------
<S> <C> <C>
Residential
R(1) .................................. 7,862,151 23.17%
R-H ................................... 2,408,645 7.10
OP(2) ................................. 352,107 1.04
Total ................................. 10,622,903 31.31
Small Commercial and Industrial GS .... 6,879,100 20.28%
POL(3) ................................ 8,398 0.02
SL-P .................................. 86,998 0.26
SL-S .................................. 52,643 0.16
SL-E .................................. 13,953 0.04
TL .................................... 36,657 0.11
BLI(4) ................................ 215 0.00
Total ................................. 7,077,964 20.86
Large Commercial and Industrial PD .... 1,034,516 3.05%
HT .................................... 14,643,800 43.16
EP .................................... 549,539 1.62
Total ................................. 16,227,855 47.83
Total ................................. 33,928,722 100.00%
---------- -------
---------- -------
</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 Residential electric delivery service.
(3) Rate POL is available in conjunction with Small Commercial and Industrial
Rate Class GS.
(4) No Intangible Transition Charges will be imposed on Rate BLI Customers.
57
<PAGE>
TABLE 5
RETAIL ELECTRIC REVENUES (DOLLARS IN THOUSANDS) FOR THE YEAR ENDED
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------
12/31/94 12/31/95 12/31/96 12/31/97
-----------------------------------------------------------------------------------------
% OF % OF % OF % OF
$(000S) TOTAL $(000S) TOTAL $(000S) TOTAL $(000S) TOTAL
---------- ------- ---------- ------- ---------- ------- ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Residential
R(1)......................... $1,037,408 32.13% $1,066,437 32.47% $1,066,519 32.35% $1,066,245 32.40%
R-H.......................... 265,904 8.23 264,027 8.04 277,760 8.42 265,781 8.08
OP(2)........................ 25,321 0.78 25,134 0.77 25,879 0.78 25,423 0.77
Total........................ 1,328,633 41.15 1,355,598 41.27 1,370,158 41.56 1,357,449 41.25
Small Commercial and Industrial
GS........................... $ 690,802 21.39% $ 719,759 21.91% $ 746,706 22.65% $ 776,938 23.61%
POL(3)....................... 1,841 0.06 1,887 0.06 1,855 0.06 1,805 0.05
SL-P......................... 14,407 0.45 14,596 0.44 13,685 0.42 12,916 0.39
SL-S......................... 6,649 0.21 6,148 0.19 5,116 0.16 4,236 0.13
SL-E......................... 8,512 0.26 9,032 0.27 9,494 0.29 8,777 0.27
TL........................... 4,327 0.13 4,480 0.14 4,520 0.14 4,375 0.13
BLI(4)....................... 10 0.00 26 0.00 37 0.00 36 0.00
Total........................ 726,548 22.50 755,928 23.01 781,413 23.70 809,083 24.59
Large Commercial and Industrial
PD........................... $ 122,102 3.78% $ 115,491 3.52% $ 108,056 3.28% $ 101,513 3.08%
HT........................... 1,009,882 31.27 1,012,462 30.82 990,251 30.04 975,862 29.65
EP........................... 41,919 1.30 45,234 1.38 46,979 1.42 46,994 1.43
Total........................ 1,173,903 36.35 1,173,187 35.72 1,145,286 34.74 1,124,369 34.17
Total........................ $3,229,084 100.00% $3,284,713 100.00% $3,296,857 100.00% $3,290,901 100.00%
---------- ------- ---------- ------- ---------- ------- ---------- -------
---------- ------- ---------- ------- ---------- ------- ---------- -------
<CAPTION>
--------------------
12/31/98
--------------------
% OF
$(000S) TOTAL
---------- -------
<S> <C> <C>
Residential
R(1) ................................... $1,097,242 33.20%
R-H .................................... 255,891 7.74
OP(2) .................................. 24,064 0.73
Total .................................. 1,377,197 41.68
Small Commercial and Industrial GS ..... $ 781,936 23.66%
POL(3) ................................. 1,725 0.05
SL-P ................................... 13,622 0.41
SL-S ................................... 11,312 0.34
SL-E ................................... 2,677 0.08
TL ..................................... 4,026 0.12
BLI(4) ................................. 33 0.00
Total .................................. 815,331 24.67
Large Commercial and Industrial PD ..... $ 96,466 2.92%
HT ..................................... 970,432 29.37
EP ..................................... 45,118 1.37
Total .................................. 1,112,016 33.65
Total .................................. $3,304,544 100.00%
---------- ------
---------- ------
</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 Residential 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 December 31, 1998, the largest ten
Customers represented approximately 9.2% of PECO Energy's retail electric
revenues, and the largest ten Customers represented approximately 12.3% of PECO
Energy's retail electric sales. There can be no assurance that current Customers
will remain Customers or that the levels of Customer concentration in the future
will be similar to those set forth above. See "Risk
Factors--Servicing--Inaccurate Projections" in this Prospectus.
58
<PAGE>
DELINQUENCY AND WRITE-OFF EXPERIENCE. The following tables set forth the
delinquency and write-off experience with respect to payments to PECO Energy by
Customer Category for each of the periods indicated below. There can be no
assurance that the future delinquency and write-off experience for PECO Energy
or for the Intangible Transition Charges will be similar to the historical
experience set forth below:
TABLE 6
DELINQUENCIES AS A PERCENTAGE OF BILLED RETAIL ELECTRIC REVENUES
<TABLE>
<CAPTION>
----------------------------------------------------------------
FOR THE YEAR ENDED
12/31/94 12/31/95 12/31/96 12/31/97 12/31/98
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
RESIDENTIAL
30+ days............................... 8.56% 8.14% 9.37% 9.51% 9.64%
60+ days............................... 7.21 6.89 8.09 8.21 8.51
90+ days............................... 6.16 5.99 7.08 7.18 7.67
SMALL COMMERCIAL AND INDUSTRIAL
30+ days............................... 0.63% 0.71% 1.08% 1.29% 1.23%
60+ days............................... 0.39 0.48 0.76 0.92 0.96
90+ days............................... 0.28 0.35 0.59 0.70 0.79
LARGE COMMERCIAL AND INDUSTRIAL
30+ days............................... 0.29% 0.23% 0.18% 0.17% 0.16%
60+ days............................... 0.20 0.15 0.10 0.07 0.07
90+ days............................... 0.16 0.12 0.07 0.04 0.04
</TABLE>
TABLE 7
NET WRITE-OFFS AS A PERCENTAGE OF BILLED RETAIL ELECTRIC REVENUES
<TABLE>
<CAPTION>
----------------------------------------------------------------
FOR THE YEAR ENDED
12/31/94 12/31/95 12/31/96 12/31/97 12/31/98
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
RESIDENTIAL.............................. 4.26% 4.52% 4.56% 4.79% 4.66%
SMALL COMMERCIAL AND INDUSTRIAL.......... 0.64 0.86 0.72 0.65 0.91
LARGE COMMERCIAL AND INDUSTRIAL.......... 0.22 0.11 0.09 0.14 0.31
TOTAL (WEIGHTED BY CUSTOMER CATEGORY
BILLED RETAIL ELECTRIC REVENUES)....... 1.97 2.10 2.09 2.18 2.27
</TABLE>
For the past five years, the Residential Customer Category has experienced
a slight increase in net write-offs. This increase is partially attributable to
costs associated with PECO Energy's low-income Customer Assistance Program (the
"CAP Program") and to increases in other delinquencies. PECO Energy has recently
established programs that are intended to reduce overall delinquencies and
write-offs attributable to this Customer Category. See "Limited Information on
Customers' Creditworthiness" in this Prospectus.
During the last five years, the delinquency and write-off experience for
the Small Commercial and Industrial Customer Category experienced an increase,
primarily due to the complex mechanisms required for termination of electric
service to these Customers. Changes in vendor termination policies are currently
in place to attempt to correct this situation.
Delinquency and write-off experience for the Large Commercial and
Industrial Customer Category has fluctuated slightly over the last five years.
The bankruptcy of a single Customer in this category is responsible for the
negative impact on the December 31, 1998 write-off figure.
PECO Energy does not expect the delinquency or write-off experience with
respect to ITC Collections to differ substantially from the rates indicated
above.
59
<PAGE>
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 in accordance with the
Expected Amortization Schedule, to maintain the Calculated Overcollateralization
Level and to pay the Bond Trustee's fee, the Issuer Trustee's 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.
PECO Energy's forecasts are produced by an employee of PECO Energy and are
reviewed internally by senior management executives.
Customer projections are determined by PECO Energy based on demographic and
economic information obtained from various sources. There are different
methodologies used for various Customer Categories. All three Customer
Categories are included in the forecasts. The key variables used have included
number of Customers, employment, price of electricity, economic growth based on
the forecasts of an independent economic forecasting and consulting firm,
weather (temperature and rainfall) and billing day data.
The Residential Customer forecasting process begins with a review of
regional household growth population projections and residential construction
trends within PECO Energy's retail electric service territory and the
surrounding counties. An independent economic forecasting and consulting firm
employed by PECO Energy separately from any transaction with respect to the
issuance of Transition Bonds provides data for such projections, including data
on industry changes, changes in employment, new construction starts and changes
in population. PECO Energy uses this data to develop internal household
forecasts for the five counties in which it operates. PECO Energy then employs
its own historical data regarding the number of households served by PECO Energy
and their historical usage, as well as such other factors as PECO Energy deems
relevant, to convert the internal population forecast into a projection of
Customers in the Residential Customer Category within its service area.
The Small Commercial and Industrial Customer forecasting process begins
with a review of projections of employment trends, gross regional product for
Pennsylvania and an overview of economic prospects in the Philadelphia
metropolitan area. These external data are obtained from an independent economic
forecasting and consulting firm and local business organizations. PECO Energy
uses these sources to develop internal business forecasts. PECO Energy then
considers its historical data regarding the businesses served by PECO Energy, as
well as such other factors as PECO Energy deems relevant, to convert the
internal business forecast into a projection of Small Commercial and Industrial
usage within its service area.
PECO Energy does not forecast Customer usage or retail electric revenues
for Rate Class BLI. Customers subject to Rate BLI are located outside PECO
Energy's retail electric service territory yet receive electricity from PECO
Energy through a reciprocal agreement with the Customer's utility. PECO Energy
is reimbursed for any service provided to Customers subject to Rate BLI by the
utility in whose retail electric service territory such Customer belongs. At
December 31, 1998, there were 12 Customers subject to Rate BLI (see Table 3).
Such Customers will not be charged Intangible Transition Charges.
The usage of Customers in the Large Commercial and Industrial Customer
Category is estimated in two stages. Usage for the top ten such Customers is
projected separately. This is added to estimates of other Customers in the Large
Commercial and Industrial Customer Category to obtain the aggregate forecast.
The usage of the largest Customers is derived in consultation with the
appropriate account executives for these Customers. The account executives
provide data on such Customers' plans regarding increases or decreases in
output, hours worked, space and potential cogeneration. The data is converted
into kilowatt-hours, and the net increment is added to the previous year's data
to derive the forecast. For other Customers in the Large Commercial and
Industrial Customer Category, usage forecast is derived through regression and
trend series analysis and using historical data corrected for unusual weather
and billing-corrected usage patterns.
60
<PAGE>
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
ability of Customers to acquire these new products.
For calendar year 1998, PECO Energy underestimated the number of Customers
by 0.09%. For calendar year 1998, actual usage exceeded forecasted usage by
1.32% because of higher than average usage by Customers in the Large Commercial
and Industrial Customer Category. Summaries of the total annual forecasted and
actual number of PECO Energy's Customers and their usage since 1994 are shown
below. During the last five years, no discernible trend is apparent with respect
to the historical forecast of Customers. There can be no assurance that the
future variance between actual and projected Customers in the aggregate or by
Customer Category or their usage will be similar to the historical experience
set forth below.
TABLE 8
FORECASTED NUMBER OF CUSTOMERS VARIANCE FOR THE YEAR ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1994 1995 1996 1997 1998
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Residential
R and OP
Forecasted............ 1,186,724 1,172,193 1,174,208 1,174,037 1,185,818
Actual................ 1,186,391 1,167,866 1,169,654 1,177,996 1,186,864
Variance.............. (0.03%) (0.37%) (0.39%) 0.34% 0.09%
R-H
Forecasted............ 165,955 156,765 157,336 157,045 156,739
Actual................ 163,819 153,513 154,794 155,865 156,927
Variance.............. (1.29%) (2.07%) (1.62%) (0.75%) 0.12%
Small Commercial and Industrial
GS and POL
Forecasted............ 142,508 142,207 142,441 143,445 145,019
Actual................ 143,605 141,653 142,431 144,142 145,055
Variance.............. 0.77% (0.39%) (0.01%) 0.49% 0.02%
SL-P, SL-S, SL-E and TL
Forecasted............ 877 904 1,034 987 987
Actual................ 925 940 987 985 1,050
Variance.............. 5.47% 3.98% (4.55%) (0.20%) 6.38%
Large Commercial and Industrial
PD and HT
Forecasted............ 3,780 3,485 3,363 3,264 3,241
Actual................ 3,603 3,394 3,299 3,308 3,248
Variance.............. (4.68%) (2.61%) (1.90%) 1.35% 0.22%
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>
61
<PAGE>
TABLE 9
FORECASTED CUSTOMER USAGE (IN KWH) VARIANCE FOR THE YEAR ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1994 1995 1996 1997 1998
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Residential
R and OP
Forecasted....... 7,812,000 7,913,998 7,852,000 7,867,001 8,111,000
Actual........... 7,965,494 8,130,607 7,906,048 7,858,466 8,214,257
Variance......... 1.96% 2.74% 0.69% (0.11%) 1.27%
R-H
Forecasted....... 2,871,000 2,959,381 2,724,000 2,722,000 2,741,000
Actual........... 2,851,076 2,728,472 2,765,279 2,548,231 2,408,645
Variance......... (0.69%) (7.80%) 1.52% (6.38%) (12.13%)
Small Commercial and Industrial
GS and POL
Forecasted....... 5,843,999 6,405,882 6,377,000 6,775,999 6,835,000
Actual........... 6,108,112 6,299,251 6,490,621 6,684,791 6,887,497
Variance......... 2.76% (1.66%) 1.78% (1.35%) 0.77%
SL-P, SL-S, SL-E and
TL
Forecasted....... 204,000 204,998 197,000 198,003 192,469
Actual........... 193,690 195,507 192,425 181,002 190,251
Variance......... (5.05%) (4.63%) (2.32%) (8.59%) (1.15%)
Large Commercial and Industrial
PD and HT
Forecasted....... 16,043,000 16,009,377 15,804,000 15,597,482 14,980,154
Actual........... 15,847,047 15,975,731 15,208,015 15,034,087 15,678,320
Variance......... (1.22%) (0.21%) (3.77%) (3.61%) 4.66%
EP
Forecasted....... 732,000 688,000 658,000 668,000 626,291
Actual........... 521,951 594,543 638,800 594,319 549,539
Variance......... (28.70%) (13.58%) (2.92%) (11.03%) (12.26%)
</TABLE>
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, 1998, PECO Energy mailed out an average of 75,000 bills daily. PECO
Energy bills the majority of its Customers monthly. Accounts with potential
billing errors are held by the computer system for review. This review examines
accounts that have abnormally high or low bills, potential meter-reading errors,
safety problems as identified by the meter-reading staff and possible meter
malfunctions. Subject to statutory and legal requirements, PECO Energy may
change its billing policies and procedures from time to time. It is expected
that any such changes would be designed to enhance PECO Energy's ability to make
timely recovery of amounts billed to Customers.
LIMITED INFORMATION ON CUSTOMERS' CREDITWORTHINESS
Under the Master Servicing Agreement, any changes instituted by PECO Energy
will apply to the servicing of Intangible Transition Property so long as PECO
Energy is the Servicer.
Under Pennsylvania law, PECO Energy is obligated to provide service to new
Customers in the Residential Customer Category. Credit bureau investigations are
performed on such new Customers
62
<PAGE>
through a social security number investigation. PECO Energy is also starting to
use other fraud detection measures so that actions can be taken at the earliest
stages to reduce the costs associated with delinquent accounts. PECO Energy
relies on the information provided by the Customer and its Customer information
system audits to indicate whether the Customer has been previously served by
PECO Energy.
As part of its obligation to provide universal service, PECO Energy has
developed a special rate program, the CAP Rate Program, provided to certain low
income Customers who are currently served under or otherwise qualify for Rate R
or R-H. Customers must apply for this rate and must demonstrate annual household
gross income below 150% of the federal poverty guidelines. Customers in the CAP
Rate Program qualify for certain rate adjustments and payment programs and have
their pre-program arrearages in excess of $500 forgiven if they remain current
on the CAP Rate Program for six to twelve consecutive months. The development of
any new arrearages during this period will delay forgiveness. PECO Energy
estimates the annual costs of the CAP Rate Program at $50 million, which it
recovers through adjustments to the distribution rates applicable to all
Customers. Pursuant to the Restructuring Plan, the initial maximum participation
for the CAP Rate Program is 100,000 Customers, subject to review by the
participants in the Settlement, to ensure that total annual CAP Rate Program
costs do not exceed $50 million and all eligible Customers are able to
participate. As of December 31, 1998, there were more than 55,000 Customers
enrolled in the CAP Rate Program accounting for approximately $17.5 million of
revenues for the twelve months ended December 31. Pursuant to the provisions of
the Competition Act, the PUC has adopted regulations which establish reporting
requirements for universal service programs, such as the CAP Rate Program, that
are applicable to all electric distribution companies including PECO Energy.
In 1998, 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 1998. At December 31, 1998, PECO
Energy had reduced the number of pay stations to 84. This has not had any
material effect on the timing or amount of collections.
Collection Process for the Residential and Small Commercial and Industrial
Customer Categories. Customer bills are due approximately 22 days after
mailing. If the Customer does not pay the bill by the due date, the Customer
will not be considered for termination until the next bill is rendered, which is
approximately 30 days from the last mailing date. PECO Energy's Residential and
Small Commercial and Industrial Customer Category collection process is based on
a recovery score assigned to each delinquent account. Each delinquent Customer
is scored for approximate risk based on outstanding balance, payment habits,
length of time as a Customer, time since last payment and previous termination
history. The score has been used since early 1998 to segment Customers into four
specific collection strategies. The lowest risk Customers are monitored with no
collection activity, since most Customers in this category usually pay but pay
late and pay the associated finance charges. The next segment of Customers are
moved into a proactive collection call program which is a collection call
strategy designed to remind the Customer of the delinquency. Customers in the
third segment are moved into a portfolio management program where each
Customer's account is referred to a collection agency which follows up on the
account for 60 days using letters and collection calls. The most chronic
delinquent accounts comprise the fourth segment of Customers which are moved
into a service termination process that is initiated by mailing a ten-day
notice. If no payment is made within seven days, a 72-hour notice will be given
either over the telephone or at the property. If sufficient payment has not been
received within ten days after the original notice, the account is sent to a
service termination vendor for termination. If the service termination vendor
makes contact with a responsible adult, the service is terminated. If the
service termination vendor does not make contact, a deferred notice is left. Two
days later, the service is terminated with or without contact if sufficient
payment has not been made. Power is not customarily disconnected if the
delinquent Customer is subject to a PUC-
63
<PAGE>
mandated winter moratorium (the "Winter Moratorium"), which requires special
approval from the PUC prior to the disconnection of electricity to certain
Customers in the Residential Customer Category from December 1 through March 31
of each year. Currently, such 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's account is closed, either because the Customer has moved or
the Customer has failed to remedy a delinquent account, the account is sent to a
collection agency. Accounts are written-off only after efforts by the collection
agency are unsuccessful. Written-off accounts are then placed with a second
vendor to increase collections. In 1998, 172,436 accounts, totaling $106
million, were referred to the collection agency; $70 million was recovered by
the collection agency from accounts previously referred to it. Further, $2.5
million in additional recoveries of delinquencies were received through
litigation. During 1998, PECO received total recoveries from all collection
initiatives of $200 million which was achieved through a total of 1,873,350
customer collection contacts. 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 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 Customers in the Small Commercial and Industrial Customer Category. Such
deposits are maintained for three years.
Collection Process for the Large Commercial and Industrial Customer
Category. PECO Energy's Large Commercial and Industrial Customer Category
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 the Large Commercial and Industrial Customer
Category 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
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 for
billing cycles beginning in January, 1999. 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;
64
<PAGE>
(iv) To the balance due or the installment amount for a payment
agreement for Competitive Transition Charges;
(v) To the balance due or the installment amount for a payment
agreement for fixed and variable utility distribution service charges;
(vi) To the current state tax charges;
(vii) To the current Intangible Transition Charges;
(viii) To the current Competitive Transition Charges;
(ix) To the current fixed and variable utility distribution service
charges;
(x) To the balance due for prior charges for energy and capacity (if
PECO Energy is the provider of last resort);
(xi) To the current charges for energy and capacity charges (if PECO
Energy is the provider of last resort); and
(xii) To the non-basic service charges.
In the event PECO Energy is not providing separate billing for its
transmission and distribution charges, the Master Servicing Agreement provides
that partial payments received by the Servicer will be applied first to state
tax charges, then to Intangible Transition Charges, then to Competitive
Transition Charges, then to transmission and distribution charges and finally to
electric generation charges.
The Restructuring Plan requires PECO Energy to allow certain Customers to
prepay their bills, including Intangible Transition Charges, in a lump sum,
based on a calculation that takes into account such Customer's last 12 months of
demand and PECO Energy's weighted average cost of capital. Prepayments, if any,
will be deposited into the Reserve Subaccount and allocated pro rata among the
outstanding Transition Bonds in accordance with the principal amount and
remaining months or years to maturity, so as to apply such prepayments ratably
over the remaining life of the outstanding Transition Bonds. Only the portion of
such Customer prepayments allocable to the period covered by any Adjustment
Request will be used to calculate the adjustments to the Intangible Transition
Charges for the period covered by such Adjustment Request.
ELECTRIC GENERATION SUPPLIERS AND OTHER THIRD-PARTY BILLERS
The Servicer, on behalf of the Issuer, will pursue any electric generation
supplier or other third party that fails to remit the applicable Intangible
Transition Charges in a manner similar to that by which the Servicer will pursue
any failure by a Customer to remit Intangible Transition Charges. The Servicer
will have the right to bill and collect Intangible Transition Charges and other
amounts payable to the Issuer or the Servicer directly from all Customers
electing consolidated billing from an electric generation supplier or other
third party as follows: if the Servicer does not receive payment for undisputed
charges within 25 calendar days for Customers in the Residential Customer
Category or 20 calendar days for Customers in the Small Commercial and
Industrial and Large Commercial and Industrial Customer Categories after the
charges are communicated to the electric generation supplier or other third
party, then the Servicer may provide notice of breach to the electric generation
supplier or other third party at any time thereafter, at the Servicer's
discretion. Upon notice of a breach, the electric generation supplier or other
third party will have 20 calendar days to cure such breach. If the electric
generation supplier or other third party has not cured such breach within 20
calendar days, the Servicer may terminate consolidated billing by the electric
generation supplier or other third party and take over billing functions for the
Customer. In no event will these procedures result in a Customer being sent two
bills covering the same service. Neither the Seller nor the Servicer will pay
any shortfalls resulting from the failure of any electric generation suppliers
or other third parties to forward ITC Collections to the Servicer. See "Risk
Factors--Servicing--Credit Concerns Arising Out of Third-Party Billing" in this
Prospectus.
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YEAR 2000 COMPLIANCE
PECO Energy is faced with the task of addressing the Year 2000 issue. The
Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year and other programming
techniques which constrain date calculations or assign special meanings to
certain dates. Any of PECO Energy's computer systems that have date-sensitive
software or microprocessors may recognize a date using "00" as the year 1900
rather than the year 2000. This could result in a system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to measure usage, read meters, process
transactions, send bills or operate electric generation stations. In addition,
the Year 2000 issue could affect the ability of Customers to receive bills sent
by PECO Energy or make payments on such bills.
PECO Energy has determined that it will be required to modify or replace
significant portions of its software so that its computer systems will properly
use dates beyond December 31, 1999. PECO Energy presently believes that, with
modifications to existing software and conversions to new software, the Year
2000 issue can be mitigated. However, if such modifications and conversions are
not made or are not completed in a timely manner, the Year 2000 issue could have
a material adverse impact on the operations and financial condition of PECO
Energy. The costs associated with this potential impact are speculative and not
presently quantifiable. PECO Energy has not investigated and has no intention of
investigating the Year 2000 issue as it relates to any Customer's ability to
receive bills sent by PECO Energy or make payments on bills.
THE ISSUER
PECO Energy Transition Trust, a statutory business trust established under
the laws of the State of Delaware, was formed on June 23, 1998 pursuant to a
trust agreement (the "Prior Trust Agreement") between PECO Energy, as grantor
and sole owner of all beneficial interests in the Issuer, the Issuer Trustee and
the other Trustees identified below. The Prior Trust Agreement was subsequently
superseded in its entirety by an Amended and Restated Trust Agreement dated as
of February 19, 1999 (the "Trust Agreement") executed by the parties to the
Prior Trust Agreement. The assets of the Issuer will consist of the Transferred
Intangible Transition Property, the other Collateral and any money distributed
to the Issuer from the Collection Account in accordance with the Indenture. As
of the date of this Prospectus, the Issuer has not carried on any business
activities and has no operating history. Audited financial statements of the
Issuer are included as an exhibit to this Prospectus.
The Issuer has been created for the purpose of purchasing and owning the
Transferred Intangible Transition Property, issuing Transition Bonds from time
to time, pledging its interest in the Transferred Intangible Transition Property
and other Collateral to the Bond Trustee under the Indenture in order to secure
the Transition Bonds and performing activities that are necessary, suitable or
convenient to accomplish these purposes, including but not limited to activities
relating to any necessary hedge or swap transaction or credit enhancement.
The Issuer's business will be managed by no fewer than one and no more than
three trustees (if the Delaware Trustee, the Independent Trustee and the Issuer
Trustee are the same entity) or five trustees (if the Delaware Trustee, the
Independent Trustee and the Issuer Trustee are different entities) appointed
from time to time by PECO Energy or, in the event PECO Energy transfers its
interest in the Trust, by the new owner or owners. The Issuer will at all times
have at least one trustee, which, in the case of a natural person, will be a
person who is a resident of the State of Delaware, or in all other cases, has
its principal place of business in the State of Delaware (the "Delaware
Trustee"). In addition, the Issuer will always have at least one trustee (the
"Independent Trustee") that is not and has not been for at least three years
from the date of his or her or its appointment (i) a direct or indirect legal or
beneficial owner of the Issuer or PECO Energy or any of their respective
affiliates, (ii) a relative, supplier, employee, officer, director, manager,
contractor or material creditor of the Issuer or PECO Energy or any of their
respective affiliates, or (iii) a person who controls PECO Energy or its
affiliates. Finally, the Issuer will always have at least one trustee (referred
to in the Trust Agreement as the "Issuer Trustee") which is a bank or trust
company incorporated and doing business within the United States of America and
having a combined capital and surplus of at least $50 million. The Delaware
Trustee, the Independent Trustee and the Issuer Trustee may, and will initially,
be the same
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person or entity and is referred to in this Prospectus as the Issuer Trustee.
First Union Trust Company, National Association of Wilmington, Delaware will
serve as the initial Issuer Trustee and as the Delaware Trustee and the
Independent Trustee. The remaining trustees are representatives of PECO Energy
and are referred to as the "Beneficiary Trustees." The Issuer Trustee and the
Beneficiary Trustees are collectively referred to as the "Trustees."
The Issuer Trustee and the Beneficiary Trustees have served since the
establishment of the Issuer. The Trustees will devote such time as is necessary
to the affairs of the Issuer. The following two people are Beneficiary Trustees
as of the date of this Prospectus:
<TABLE>
<CAPTION>
NAME AGE TITLE
- ---- --- -----
<S> <C> <C>
Diana Moy Kelly........................... 45 Beneficiary Trustee
George R. Shicora......................... 52 Beneficiary Trustee
</TABLE>
Diana Moy Kelly is a Beneficiary Trustee of the Issuer. Ms. Moy Kelly has
served as Assistant Treasurer of PECO Energy since she joined PECO Energy in
1995. From 1984 to 1994, she served as Vice President - Treasurer of Tokai
Financial Services, Inc.
George R. Shicora is a Beneficiary Trustee of the Issuer. Mr. Shicora has
served as Assistant Treasurer of PECO Energy since 1995 and has held various
positions at PECO Energy since 1968.
The Issuer has not paid any compensation to any of the Trustees since the
Issuer was formed. The Beneficiary Trustees will not be compensated by the
Issuer for their services on behalf of the Issuer. The Issuer Trustee will be
paid an annual retainer from the assets of the Issuer and will be reimbursed for
its reasonable expenses, including, without limitation, the reasonable
compensation, expenses and disbursements of such agents, representatives,
experts and counsel as the Issuer Trustee may employ in connection with the
exercise and performance of its rights and duties under the Trust Agreement, the
Indenture, the Sale Agreement and the Master Servicing Agreement. The Trust
Agreement provides that the Trustees shall not be personally liable under any
circumstances except for (i) liabilities arising from their own wilful
misconduct or gross negligence, (ii) liabilities arising from the failure by any
of the Trustees to perform obligations expressly undertaken in the Trust
Agreement or (iii) taxes, fees or other charges, based on or measured by any
fees, commissions or compensation received by the Trustees in connection with
the transactions described in this Prospectus. The Trust Agreement further
provides that, to the fullest extent permitted by law, the Trust shall indemnify
the Trustees against any liability incurred in connection with their services as
Trustees for the Issuer, unless such liability is based on or arises in
connection with the circumstances described in clauses (i) through (iii) above.
The Trust Agreement provides that the trust created thereunder shall
dissolve and, after satisfaction of the creditors of the Issuer as required by
applicable law, property held by the Issuer will be distributed to PECO Energy,
or in the event of a transfer to any other owner, such other owner, thirty years
from the date of its creation or sooner, at the option and expense, and upon
written instruction, of PECO Energy, but in no event before payment in full of
all Series of Transition Bonds.
The Issuer has no intent to file, and PECO Energy has advised the Issuer
that it has no intent to cause the filing of, a voluntary petition for relief
under the Bankruptcy Code with respect to the Issuer so long as the Issuer is
solvent and does not reasonably foresee becoming insolvent.
The Trust Agreement requires the Issuer to take all reasonable steps to
continue its identity as a separate legal entity and to make it apparent to
third persons that it is an entity with assets and liabilities distinct from
those of PECO Energy, other affiliates of PECO Energy, the Trustees or any other
person, and that, except for financial reporting purposes (to the extent
required by generally accepted accounting principles) and for state and federal
income and franchise tax purposes, it is not a division of 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.
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USE OF PROCEEDS
The Issuer will use the proceeds of the issuance of the Transition Bonds to
pay certain expenses of issuance and to purchase the Transferred Intangible
Transition Property from PECO Energy. PECO Energy proposes using the proceeds it
receives from the sale of the Transferred Intangible Transition Property
principally to reduce Stranded Costs and related capitalization.
THE TRANSITION BONDS
The Transition Bonds will be issued under and secured by a base indenture
between the Issuer and the Bond Trustee substantially in the form filed as an
exhibit to the Registration Statement of which this Prospectus forms a part. The
terms of each Series of Transition Bonds will be provided in a separate
supplement to the base indenture (each such supplement, a "Supplemental
Indenture" and together with the base Indenture, the "Indenture"). The following
summary describes certain general terms and provisions of the Transition Bonds.
The particular terms of the Transition Bonds of any Series offered by any
Prospectus Supplement will be described in such Prospectus Supplement. This
summary does not purport to be complete and is subject to, and is qualified by
reference to, the terms and provisions of the Transition Bonds and the
Indenture.
GENERAL
The Transition Bonds may be issued in one or more Series, each comprised of
one or more Classes. The terms of all Transition Bonds of the same Series will
be identical in all respects, unless such Series is comprised of more than one
Class, in which case the terms of all Transition Bonds of the same Class will be
identical in all respects.
The Supplemental Indenture will specify the following terms of the related
Series of Transition Bonds and, if applicable, the Classes thereof:
(i) the designation of the Series and, if applicable, the Classes
thereof;
(ii) the aggregate principal amount of the Transition Bonds of the
Series and, if applicable, each Class thereof;
(iii) the Bond Rate of the Series and, if applicable, each Class
thereof or the formula, if any, used to calculate the applicable Bond Rate
or Bond Rates;
(iv) the Payment Dates for the Series;
(v) the Monthly Allocated Interest Balances for the Series;
(vi) the Monthly Allocated Principal Balances for the Series;
(vii) the Expected Final Payment Date of the Series and, if
applicable, each Class thereof;
(viii) the Series Termination Date for the Series and, if applicable,
the Class Termination Dates for each Class thereof;
(ix) the Series Issuance Date for the Series;
(x) the place or places for payments with respect to the Series;
(xi) the authorized initial denominations for the Series;
(xii) the provisions, if any, for redemption of the Series by the
Issuer;
(xiii) the Expected Amortization Schedule for the Series;
(xiv) the Overcollateralization Amount with respect to the Series,
the pro forma Calculated Overcollateralization Level for each Payment Date
and the Monthly Allocated Overcollateralization Balance for each Monthly
Allocation Date;
(xv) the Calculation Dates and Adjustment Dates for the Series;
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(xvi) the terms of any credit enhancement applicable to the Series or
Class;
(xvii) the terms of any hedge or swap transaction applicable to the
Series or Class; and
(xviii) any other terms of the Series or Class that are not
inconsistent with the provisions of the Indenture.
The applicable Prospectus Supplement will set forth the procedure for the
manner of the issuance of the Transition Bonds of each Series. Generally, each
Series of Transition Bonds will initially be represented by one or more
Transition Bonds registered in the name of Cede, as the nominee of DTC. The
Transition Bonds will be available for purchase in initial denominations
specified in the applicable Prospectus Supplement (which denominations will be
not less than $1,000). Unless and until definitive Transition Bonds are issued
under the limited circumstances described in this Prospectus, no Transition
Bondholder will be entitled to receive a physical bond representing a Transition
Bond. All references in this Prospectus to actions by Transition Bondholders
will refer to actions taken by DTC upon instructions from the Participants and
all references in this Prospectus to payments, notices, reports and statements
to Transition Bondholders will refer to payments, notices, reports and
statements to DTC or Cede, as the registered holder of each Series of Transition
Bonds, for distribution to Transition Bondholders in accordance with DTC's
procedures with respect thereto. See "--Book-Entry Registration" and
"--Definitive Transition Bonds" below.
INTEREST AND PRINCIPAL
Interest will accrue on the principal balance of Transition Bonds of a
Series or Class at the Bond Rate specified in or determined in the manner
specified in the applicable Prospectus Supplement and will be payable to the
Transition Bondholders of such Series or Class on each Payment Date, commencing
on the Payment Date specified in the related Prospectus Supplement.
On any Payment Date with respect to any Series, the Issuer will make
principal payments on such Series only until the outstanding principal balance
thereof has been reduced to the principal balance specified for such Payment
Date in the Expected Amortization Schedule for such Series on such Payment Date
and 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.
FLOATING RATE TRANSITION BONDS
In connection with the issuance of a Class or Classes of floating rate
Transition Bonds, the Issuer may arrange for one or more hedge or swap
transactions. If the Issuer enters into or arranges for any hedge or swap
transaction, the applicable Prospectus Supplement will include a description of
(i) the material terms of such transaction, (ii) the identity of the
counterparty or counterparties, (iii) any payments under such hedge or swap
transaction to be made by or to the Issuer or the Bond Trustee, as assignee of
the Issuer, (iv) deposits in and withdrawals from any subaccount of the
Collection Account with respect to such Class or Classes of floating rate
Transition Bonds and such transaction, (v) the formula for calculating the
floating rate of interest of such Class or Classes prior to termination of such
transaction and (vi) the rights of Transition Bondholders with respect to the
termination of or certain
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other events related to such transaction. Under the Indenture, the Issuer is
obligated to duly and punctually perform all of its obligations pursuant to any
hedge or swap agreement to which it is a party. Further, the Issuer may not
terminate or amend any hedge or swap agreement to which it is a party while any
floating rate Transition Bonds of a Class related thereto remain outstanding
except pursuant to the terms of such hedge or swap agreement and then only with
the consent of the holders of 66 2/3% of the aggregate outstanding amount of the
Transition Bonds of such Class. See "The Indenture."
REDEMPTION
Each Series of Transition Bonds will be subject to mandatory redemption in
whole at a redemption price equal to the principal amount thereof, plus interest
accrued to the redemption date, if PECO Energy is obligated to pay Liquidated
Damages. PECO Energy, as Seller, will be required to pay Liquidated Damages as a
result of a breach by PECO Energy of certain of its representations relating to
Intangible Transition Property under the Sale Agreement if (i) such breach (x)
continues beyond a 90-day grace period and (y) has a material adverse effect on
the Transition Bondholders (if, however, certain rating criteria are not met or
the requisite escrow deposit is not made, the Seller must pay Liquidated Damages
within two days of such breach) or (ii)(x) the payment of certain
indemnification amounts by the Seller related to a breach of certain other
representations is reasonably expected to be incurred beyond the 90-day period
immediately succeeding such breach and (y) such amounts are reasonably expected
to exceed the De Minimis Loss Amount. The Bond Trustee, which may consult with
the Servicer and other third parties, will have sole responsibility to determine
whether a breach by PECO Energy of any such representation has a material
adverse effect on the Transition Bondholders. See "The Sale Agreement--Seller
Representations and Warranties" in this Prospectus.
Additional redemption provisions, if any, for any Series will be specified
in the related Prospectus Supplement, including the premiums, if any, payable
upon redemption (the redemption price in any event will not be less than the
principal balance thereof, plus interest at the applicable Bond Rate accrued to
the redemption date). Unless the context requires otherwise, all references in
this Prospectus to principal of the Transition Bonds of a Series insofar as it
relates to redemption includes any premium that might be payable thereon if
Transition Bonds of such Series are redeemed, as described in the applicable
Prospectus Supplement. Notice of redemption of any Series of Transition Bonds
will be given by the Bond Trustee to each registered holder of a Transition Bond
to be redeemed by first-class mail, postage prepaid, mailed not less than five
days nor more than 45 days prior to the date of redemption or in such other
manner or at such other time as may be specified in the related Prospectus
Supplement. Notice of optional redemption may be conditioned upon the deposit of
moneys with the Bond Trustee before the redemption date and such notice shall be
of no effect unless such moneys are so deposited. All Transition Bonds called
for redemption will cease to bear interest on the specified redemption date,
provided funds for their redemption are on deposit with the Bond Trustee at that
time, and shall no longer be considered "outstanding" under the Indenture. The
Transition Bondholders of such Transition Bonds will have no further rights with
respect thereto, except to receive payment of the redemption price thereof and
unpaid interest accrued to the date fixed for redemption, from the Bond Trustee.
CREDIT ENHANCEMENT
Credit enhancement with respect to the Transition Bonds of all Series will
be provided by adjustments to the Intangible Transition Charges and amounts on
deposit in the Reserve Subaccount, the Overcollateralization Subaccount and the
Capital Subaccount. In addition, for any Series of Transition Bonds or one or
more Classes thereof, additional credit enhancement may be provided with respect
thereto. The amounts and types of credit enhancement, and the provider of credit
enhancement, if any, with respect to each Series of Transition Bonds or one or
more Classes thereof will be described in the applicable Prospectus Supplement.
Credit enhancement may be in the form of an additional reserve account,
additional overcollateralization, a financial guaranty insurance policy, letter
of credit, credit or liquidity facility, repurchase obligation, third-party
payment or other support, cash deposit or
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other credit enhancement, or any combination of the foregoing, as may be set
forth in the applicable Prospectus Supplement. If specified in the applicable
Prospectus Supplement, credit enhancement for a Series of Transition Bonds may
cover one or more other Series of Transition Bonds.
If any such additional credit enhancement is provided with respect to a
Series offered hereby, the applicable Prospectus Supplement will include a
description of (i) the amount payable under such credit enhancement, (ii) any
conditions to payment thereunder not otherwise described in this Prospectus,
(iii) the conditions (if any) under which the amount payable under such credit
enhancement may be reduced and under which such credit enhancement may be
terminated or replaced and (iv) any material provisions of any applicable
agreement relating to such credit enhancement. Additionally, in certain cases,
the applicable Prospectus Supplement may describe certain information with
respect to the provider of any third-party credit enhancement, including (i) a
brief description of its principal business activities, (ii) its principal place
of business, place of incorporation and the jurisdiction under which it is
chartered or licensed to do business, (iii) if applicable, the identity of
regulatory agencies which exercise primary jurisdiction over the conduct of its
business and (iv) its total assets and stockholders' equity or policyholders'
surplus, if applicable, as of a date specified in the applicable Prospectus
Supplement.
BOOK-ENTRY REGISTRATION
All Classes of Transition Bonds will be book-entry Transition Bonds, which
are initially represented by one or more bonds registered in the name of Cede,
as nominee of DTC, or another securities depository and are available only in
the form of book-entries ("Book-Entry Transition Bonds"); provided, however, the
applicable Prospectus Supplement relating to a Series of Transition Bonds may
provide that the Transition Bonds of such Series or a Class thereof will be
issued as definitive Transition Bonds. Transition Bondholders may also hold
Transition Bonds of a Class through Cedel Bank, 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
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and procedures and within its established deadlines (European time). The
relevant European international clearing system will, if the transaction meets
its settlement requirements, deliver instructions to its Depositary to take
action to effect final settlement on its behalf by delivering or receiving
Transition Bonds in DTC, and making or receiving payments in accordance with
normal procedures for same-day funds settlement applicable to DTC. CEDEL
Participants and Euroclear Participants may not deliver instructions directly to
the Depositaries.
Because of time-zone differences, credits of securities received in CEDEL
or Euroclear as a result of a transaction with a Participant will be made during
subsequent settlement processing and dated the Business Day following the DTC
settlement date. Such credits or any transactions in such Transition Bonds
settled during such processing will be reported to the relevant Euroclear or
CEDEL Participant on such Business Day. Cash received in CEDEL or Euroclear as a
result of sales of Transition Bonds by or through a CEDEL Participant or a
Euroclear Participant to a DTC Participant will be received with value on the
DTC settlement date but will be available in the relevant CEDEL or Euroclear
cash account only as of the Business Day following settlement in DTC.
Transition Bondholders that are not direct or indirect Participants but
desire to purchase, sell or otherwise transfer ownership of, or other interests
in, Transition Bonds may do so only through direct or indirect Participants. In
addition, Transition Bondholders will receive all payments of principal and
interest on the Transition Bonds, through the Participants who in turn will
receive them from DTC. Under a book-entry format, Transition Bondholders will
receive payments after the related Payment Date, because, while payments are
required to be forwarded to Cede, as nominee for DTC, on each such date, DTC
will forward such payments to its Participants, which thereafter will be
required to forward them to indirect Participants or holders of beneficial
interests in the Transition Bonds. The Issuer and the Bond Trustee, and any
paying agent, transfer agent or registrar may treat the registered holder in
whose name any Transition Bond is registered (expected to be Cede) as the
absolute owner thereof (whether or not such Transition Bond is overdue and
notwithstanding any notice of ownership or writing thereon or any notice to the
contrary) for the purpose of making payments and for all other purposes.
Unless and until definitive Transition Bonds are issued, it is anticipated
that the only "holder" of Transition Bonds of any Series will be Cede, as
nominee of DTC. Transition Bondholders will only be permitted to exercise their
rights as Transition Bondholders indirectly through Participants and DTC. All
references herein to actions by Transition Bondholders thus refer to actions
taken by DTC upon instructions from its Participants, and all references herein
to payments, notices, reports and statements to Transition Bondholders refer to
payments, notices, reports and statements to Cede, as the registered holder of
the Transition Bonds, for payments to the beneficial owners of the Transition
Bonds in accordance with DTC procedures.
While any Book-Entry Transition Bonds of a Series are outstanding (except
under the circumstances described below), under the rules, regulations and
procedures creating and affecting DTC and its operations (the "Rules"), DTC is
required to make book-entry transfers among Participants on whose behalf it acts
with respect to the Book-Entry Transition Bonds and is required to receive and
transmit payments of principal of, and interest on, the Book-Entry Transition
Bonds. Participants with whom Transition Bondholders have accounts with respect
to Book-Entry Transition Bonds are similarly required to make book-entry
transfers and receive and transmit such payments on behalf of their respective
Transition Bondholders. Accordingly, although Transition Bondholders will not
possess physical bonds, the Rules provide a mechanism by which Transition
Bondholders will receive payments and will be able to transfer their interests.
Because DTC can only act on behalf of Participants, who in turn act on
behalf of indirect Participants and certain banks, the ability of holders of
beneficial interests in the Transition Bonds to pledge Transition Bonds to
persons or entities that do not participate in the DTC system, or otherwise take
actions in respect of such Transition Bonds, may be limited due to the lack of
definitive Transition Bonds.
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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.
Securities clearance accounts and cash accounts with the Euroclear Operator
are governed by the Terms and Conditions Governing Use of Euroclear and the
related Operating Procedures of Euroclear and applicable Belgian law
(collectively, the "Terms and Conditions"). The Terms and Conditions govern
transfers of securities and cash within Euroclear, withdrawals of securities and
cash from Euroclear and receipts of payments with respect to securities in
Euroclear. All securities in Euroclear are held on a fungible basis without
attribution of specific securities to specific securities clearance accounts.
The Euroclear Operator acts under the Terms and Conditions only on behalf of
Euroclear Participants and has no record of or relationship with persons holding
through Euroclear Participants.
Payments with respect to Transition Bonds held through CEDEL or Euroclear
will be credited to the cash accounts of CEDEL Participants or Euroclear
Participants in accordance with the relevant systems' rules and procedures, to
the extent received by its Depositary. Such payments will be subject to tax
reporting in accordance with relevant United States tax laws and regulations.
See "Material Tax
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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
Series or 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 Series or 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 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.
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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 Schedule 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 Schedule or later than the related
Expected Final Payment Dates. Redemption of any Class or Series of Transition
Bonds in accordance with the terms thereof will result in payment of principal
earlier than the related Expected Final Payment Dates.
The actual payments on each Payment Date for each Series or Class of
Transition Bonds and the weighted average life thereof will be affected
primarily by the rate of ITC Collections and the timing of receipt of ITC
Collections, as well as amounts available in the Reserve Subaccount, the
Overcollateralization Subaccount and the Capital Subaccount. Because the
Intangible Transition Charges will be calculated based on estimates of usage and
revenue, the aggregate amount of ITC Collections and the rate of principal
amortization on the Transition Bonds will depend, in part, on actual energy
usage by Customers and the rate of delinquencies and write-offs. Although the
Intangible Transition Charges will be adjusted from time to time based in part
on the actual rate of ITC Collections, no assurances are given that the Servicer
will be able to forecast accurately actual electricity usage impacting billed
revenue from which Intangible Transition Charges are allocated and the rate of
delinquencies and write-offs or implement adjustments to the Intangible
Transition Charges that will cause 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. 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 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.
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THE SALE AGREEMENT
The following summary describes all material terms and provisions of the
Sale Agreement pursuant to which the Seller is selling and the Issuer is
purchasing Intangible Transition Property. The Sale Agreement may be amended by
the parties thereto, with the consent of the Bond Trustee, provided notice of
the substance of such amendment is provided by the Issuer to each Rating Agency.
The form of the Sale Agreement has been filed as an exhibit to the Registration
Statement of which this Prospectus forms a part. This summary does not purport
to be complete and is subject to, and is qualified by reference to, the
provisions of the Sale Agreement.
The Seller may sell Intangible Transition Property retained by the Seller
to one or more entities other than the Issuer to finance Stranded Costs other
than through the Issuer. Neither such sales nor the terms of any transition
bonds issued will be subject to the prior review by or consent of the Transition
Bondholders of any Series. All ITC Collections received by the Servicer during
any Collection Period will be allocated among the Issuer and any Other Issuers
based on their respective Percentages. "Percentage" means, with respect to the
Issuer or any Other Issuer of transition bonds and any Collection Period, the
percentage equivalent of a fraction, the numerator of which is the aggregate
Intangible Transition Charges (as adjusted from time to time) applicable to all
series of transition bonds issued by the Issuer or such Other Issuer, as
applicable, and scheduled to be collected in such Collection Period and the
denominator of which is the aggregate Intangible Transition Charges (as adjusted
from time to time) scheduled to be collected in such Collection Period
applicable to all series of transition bonds issued by the Issuer and all the
Other Issuers. "Other Issuer" means any person other than the Issuer that issues
transition bonds secured by Intangible Transition Property sold by the Seller to
such person. See "The Master Servicing Agreement" in this Prospectus. The sale
of Intangible Transition Property to an Other Issuer will be subject to the
conditions that the Rating Agency Condition is satisfied with respect to all
outstanding Transition Bonds and the purchaser of such Intangible Transition
Property becomes a party to the Master Servicing Agreement. See "The Master
Servicing Agreement--Addition of Other Issuers" in this Prospectus.
SALE AND ASSIGNMENT OF INTANGIBLE TRANSITION PROPERTY
On the Series Issuance Date for the first Series of Transition Bonds (the
"Initial Transfer Date"), pursuant to the Sale Agreement, the Seller will sell
and assign to the Issuer, without recourse, except as provided therein, Initial
Intangible Transition Property representing the irrevocable right to receive
through Intangible Transition Charges amounts sufficient to recover Qualified
Transition Expenses with respect to such Series of Transition Bonds. The net
proceeds received from the sale of the Transition Bonds issued on the Initial
Transfer Date will be applied to the purchase of such Transferred Intangible
Transition Property. In addition, the Seller may from time to time offer to sell
additional Intangible Transition Property to the Issuer, subject to the
satisfaction of certain conditions (each, a "Subsequent Sale"). Each Subsequent
Sale will be financed through the issuance of an additional Series of Transition
Bonds. If any such offer is accepted by the Issuer, the Subsequent Sale will be
effective on a date (a "Subsequent Transfer Date") specified in a written notice
provided by the Seller to the Issuer.
In accordance with the Competition Act, upon the execution and delivery of
the Sale Agreement and the related bill of sale, the transfer of the Initial
Intangible Transition Property will be perfected as against all third persons,
including judicial lien creditors, and upon the execution of a subsequent bill
of sale and an addition notice, a transfer of Subsequent Intangible Transition
Property will also be perfected against all third persons, including judicial
lien creditors.
"Initial Intangible Transition Property" means Intangible Transition
Property, as identified in the related bill of sale, sold to the Issuer on the
Initial Transfer Date pursuant to the Sale Agreement in connection with the
issuance of the initial Series of Transition Bonds. "Subsequent Intangible
Transition Property" means Intangible Transition Property, as identified in the
related bill of sale, sold to the Issuer on any Subsequent Transfer Date
pursuant to the Sale Agreement in connection with the subsequent issuance of a
Series of Transition Bonds.
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The Seller's accounting records and computer systems will reflect the sale
and assignment of Intangible Transition Property to the Issuer, and the Seller
shall treat the Transition Bonds as debt of the Seller for federal income tax
purposes so long as any of the Transition Bonds are outstanding.
Each sale of Intangible Transition Property under the Sale Agreement is
subject to the satisfaction or waiver of each of the following conditions:
(i) on or prior to the Initial Transfer Date or Subsequent Transfer
Date, as applicable, the Seller shall have delivered to the Issuer a duly
executed bill of sale identifying the Intangible Transition Property to be
conveyed on that date, in the form required by the Sale Agreement;
(ii) as of the Initial Transfer Date or the Subsequent Transfer Date,
as applicable, the Seller was not insolvent and will not have been made
insolvent by such sale, and the Seller is not aware of any pending
insolvency with respect to itself;
(iii) as of the Initial Transfer Date or the Subsequent Transfer Date,
as applicable, no breach by the Seller of its representations, warranties
or covenants in the Sale Agreement shall exist, and no Servicer Default
shall have occurred and be continuing;
(iv) as of the Initial Transfer Date or the Subsequent Transfer Date,
as applicable, the Issuer shall have sufficient funds available to pay the
purchase price for the Transferred Intangible Transition Property to be
conveyed on such date, and all conditions to the issuance of one or more
Series of Transition Bonds intended to provide such funds set forth in the
Indenture shall have been satisfied or waived;
(v) on or prior to the Initial Transfer Date or Subsequent Transfer
Date, as applicable, the Seller shall have taken all action required to
transfer to the Issuer ownership of the Transferred Intangible Transition
Property to be conveyed on such date, free and clear of all liens other
than liens created by the Issuer pursuant to the Indenture, and the Issuer
shall have taken, or the Servicer shall have taken on behalf of the Issuer,
any action required for the Issuer to grant the Bond Trustee a first
priority perfected security interest in the Collateral and maintain such
security interest as of such date;
(vi) in the case of a sale of Subsequent Intangible Transition
Property only, the Seller shall have provided the Issuer and the Rating
Agencies with a timely addition notice specifying the Subsequent Transfer
Date for such Subsequent Intangible Transition Property, on or prior to
such Subsequent Transfer Date;
(vii) the Seller shall have delivered to the Rating Agencies and the
Issuer the opinion of counsel specified in the Sale Agreement and certain
other opinions of counsel to the Issuer Trustee and Bond Trustee; and
(viii) the Seller shall have delivered to the Bond Trustee and the
Issuer an officers' certificate confirming the satisfaction of each
condition precedent specified above.
SELLER REPRESENTATIONS AND WARRANTIES
In the Sale Agreement, the Seller will make representations and warranties
to the Issuer as of the Initial Transfer Date and any Subsequent Transfer Date
to the effect, among other things, that:
(i) all information provided by the Seller to the Issuer with respect
to the Transferred Intangible Transition Property is correct in all
material respects;
(ii) the transfers and assignments contemplated by the Sale Agreement
constitute sales of the Initial Intangible Transition Property or the
Subsequent Intangible Transition Property, as the case may be, from the
Seller to the Issuer, and the beneficial interest in and title to the
Transferred Intangible Transition Property would not be part of the
debtor's estate in the event of the filing of a bankruptcy petition by or
against the Seller under any bankruptcy law;
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(iii) the Seller is the sole owner of the Intangible Transition
Property being sold to the Issuer on the Initial Transfer Date or
Subsequent Transfer Date, as applicable, the Transferred Intangible
Transition Property has been validly transferred and sold to the Issuer
free and clear of all liens other than liens created by the Issuer pursuant
to the Indenture and all filings (including filings with the PUC under the
Competition Act) necessary in any jurisdiction to give the Issuer a valid
ownership interest in Transferred Intangible Transition Property free and
clear of all liens of the Seller or anyone claiming through the Seller and
to give the Bond Trustee a first priority perfected security interest in
Transferred Intangible Transition Property have been made, other than any
such filings (except for filings with the PUC under the Competition Act and
filings under the Uniform Commercial Code with the Secretary of State of
the State of Delaware) the absence of which would not have an adverse
impact on (x) the ability of the Servicer to collect Intangible Transition
Charges with respect to the Serviced Intangible Transition Property or (y)
the rights of the Issuer or the Bond Trustee with respect to the
Transferred Intangible Transition;
(iv) the QRO has been issued by the PUC in accordance with the
Competition Act, the QRO and the process by which it was issued comply with
all applicable laws, rules and regulations and the QRO is in full force and
effect;
(v) as of the date of issuance of any Series of Transition Bonds, such
Transition Bonds are entitled to the protections provided by the
Competition Act and, accordingly, the provisions of the QRO relating to the
Intangible Transition Property and Intangible Transition Charges are not
revocable by the PUC;
(vi) (x) under the Competition Act, neither the Commonwealth of
Pennsylvania nor the PUC may limit, alter or in any way impair or reduce
the value of Intangible Transition Property or Intangible Transition
Charges approved by the QRO or any rights thereunder, except such a
limitation or alteration may be made by the Commonwealth of Pennsylvania
or the PUC if adequate compensation is made by law for the full
protection of the Intangible Transition Charges and of Transition
Bondholders;
(y) under the Contract Clauses of the Constitutions of the
Commonwealth of Pennsylvania and the United States, neither the
Commonwealth of Pennsylvania nor the PUC can take any action that
substantially impairs the rights of the Transition Bondholders unless
such action is a reasonable exercise of the Commonwealth of
Pennsylvania's sovereign powers and appropriate to further a legitimate
public purpose; and
(z) under the Takings Clauses of the Constitutions of the
Commonwealth of Pennsylvania and the United States, if such action
constitutes a permanent appropriation of the property interest of
Transition Bondholders in the Intangible Transition Property and
deprives the Transition Bondholders of their reasonable expectations
arising from their investments in Transition Bonds, just compensation,
as determined by a court of competent jurisdiction, is provided to
Transition Bondholders;
(vii) there is no order by any court providing for the revocation,
alteration, limitation or other impairment of the Competition Act, QRO,
Intangible Transition Property or the Intangible Transition Charges or any
rights arising under any of them or which seeks to enjoin the performance
of any obligations under the QRO;
(viii) no other approval, authorization, consent, order or other
action of, or filing with any court, federal or state regulatory body,
administrative agency or other governmental instrumentality is required in
connection with the creation of Intangible Transition Property, except
those that have been obtained or made;
(ix) except as disclosed by the Seller to the Issuer there are no
proceedings or investigations pending or, to the best of the Seller's
knowledge, threatened before any court, federal or state regulatory body,
administrative agency or other governmental instrumentality having
jurisdiction over the Seller or its properties challenging the QRO or the
Competition Act;
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(x) no failure on the Initial Transfer Date or any Subsequent Transfer
Date or any time thereafter to satisfy any condition imposed by the
Competition Act with respect to the recovery of stranded costs will
adversely affect the creation or sale under the Sale Agreement of the
Intangible Transition Property or the right to collect Intangible
Transition Charges;
(xi) the assumptions used in calculating Intangible Transition Charges
are reasonable and made in good faith;
(xii) (x) Intangible Transition Property, other than Intangible
Transition Property retained by the Seller, constitutes a current
property right;
(y) Intangible Transition Property includes, without limitation,
(A) the irrevocable right of the Issuer and any Other Issuers to receive
through Intangible Transition Charges an amount sufficient to recover
all of the Seller's Qualified Transition Expenses described in the QRO
in an amount equal to the aggregate principal amount of Transition Bonds
and other transition bonds issued by Other Issuers plus an amount
sufficient to provide for any credit enhancement (including the
Overcollateralization Amount relating to each Series of Transition
Bonds), to fund any reserves and to pay interest, premium, if any,
servicing fees and other expenses relating to the Transition Bonds and
transition bonds issued by Other Issuers, and (B) all right, title and
interest of the Seller or its assignee applicable to the Transition
Bonds and transition bonds issued by Other Issuers in the QRO and in all
revenues, collections, claims, payments, money, or proceeds of or
arising from the Intangible Transition Charges applicable to the
Transition Bonds and transition bonds issued by Other Issuers set forth
in the QRO to the extent that in accordance with the Competition Act,
the QRO and the rates and charges authorized under the QRO are declared
to be irrevocable; and
(z) paragraphs 4 through 19 of the QRO, including the right to
collect Intangible Transition Charges, have been declared to be
irrevocable by the PUC;
(xiii) the Seller is a corporation duly organized and in good standing
under the laws of the Commonwealth of Pennsylvania, with corporate power
and authority to own its properties and conduct its business as currently
owned or conducted;
(xiv) the Seller has the corporate power and authority to execute and
deliver the Sale Agreement and to carry out its terms, the Seller has full
corporate power and authority to own the Intangible Transition Property and
sell and assign the Initial Intangible Transition Property, in the case of
the Initial Transfer Date, and the Subsequent Intangible Transition
Property, in the case of each Subsequent Transfer Date, as applicable, and
the Seller has duly authorized such sale and assignment to the Issuer by
all necessary corporate action and the execution, delivery and performance
of the Sale Agreement have been duly authorized by the Seller by all
necessary corporate action;
(xv) the Sale Agreement constitutes a legal, valid and binding
obligation of the Seller, enforceable against the Seller in accordance with
its terms, subject to customary exceptions relating to bankruptcy and
equitable principles;
(xvi) the consummation of the transactions contemplated by the Sale
Agreement and the fulfillment of the terms thereof do not conflict with,
result in any breach of any of the terms and provisions of, nor constitute
(with or without notice or lapse of time) a default under, the articles of
incorporation or by-laws of the Seller, or any indenture, agreement or
other instrument to which the Seller is a party or by which it shall be
bound; nor result in the creation or imposition of any lien upon any of its
properties (other than the lien of the PECO Energy mortgage indenture on
the Seller's interest in the Monthly Servicing Fee and any other rights
under the Sale Agreement) pursuant to the terms of any such indenture,
agreement or other instrument; nor violate any law or any order, rule or
regulation applicable to the Seller of any court or of any federal or state
regulatory body, administrative agency or other governmental
instrumentality having jurisdiction over the Seller or its properties;
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(xvii) except for continuation filings under the Uniform Commercial
Code, no approval, authorization, consent, order or other action of, or
filing with, any court, federal or state regulatory body, administrative
agency or other governmental instrumentality is required in connection with
the execution and delivery by the Seller of the Sale Agreement, the
performance by the Seller of the transactions contemplated by the Sale
Agreement or the fulfillment by the Seller of the terms of the Sale
Agreement, except those which have previously been obtained or made;
(xviii) there are no proceedings or investigations pending or, to the
Seller's best knowledge, threatened, before any court, federal or state
regulatory body, administrative agency or other governmental
instrumentality having jurisdiction over the Seller or its properties (x)
asserting the invalidity of the Sale Agreement, the Master Servicing
Agreement, any bills of sale for Intangible Transition Property, the Trust
Agreement or the certificate of trust filed with the State of Delaware to
establish the Issuer (collectively, the "Basic Documents") or the
Transition Bonds, (y) seeking to prevent the issuance of Transition Bonds
or the consummation of the transactions contemplated by the Basic Documents
or the Transition Bonds or (z) except as disclosed by the Seller to the
Issuer, seeking any determination or ruling that could be reasonably
expected to materially and adversely affect the performance by the Seller
of its obligations under, or the validity or enforceability of, the Basic
Documents or the Transition Bonds;
(xix) after giving effect to the sale of any Transferred Intangible
Transition Property under the Sale Agreement, the Seller (x) is solvent and
expects to remain solvent, (y) is adequately capitalized to conduct its
business and affairs considering its size and the nature of its business
and intended purposes, (z) is not engaged nor does it expect to engage in a
business for which its remaining property represents an unreasonably small
capital, (xx) believes that it will be able to pay its debts as they become
due and that such belief is reasonable and (yy) is able to pay its debts as
they mature and does not intend to incur, or believe that it will incur,
indebtedness that it will not be able to repay at its maturity; and
(xx) the Seller is duly qualified to do business as a foreign
corporation in good standing, and has obtained all necessary licenses and
approvals, in all jurisdictions in which the ownership or lease of property
or the conduct of its business shall require such qualifications, licenses
or approvals (except where the failure to so qualify would not be
reasonably likely to have a material adverse effect on the Seller's
business, operations, assets, revenues, properties or prospects).
Subject to the conditions set forth below, the Seller will be required to
pay Liquidated Damages in the following two circumstances: first, if the Seller
breaches any representation or warranty specified in (ii), (iii), (iv), (v),
(vii) and (xii) above that has a material adverse effect on the Transition
Bondholders or second, if the Seller breaches any representation or warranty
specified in (vi), (viii), (ix), (xiii), (xiv), (xv) and (xvi) above and the
full amount of losses attributable to such breach are reasonably expected to be
incurred beyond a 90-day period immediately following such breach. In both
circumstances, the Seller will pay the Liquidated Damages to the Bond Trustee,
as assignee of the Issuer, for deposit into the General Subaccount of the
Collection Account.
In the first circumstance, the Liquidated Damages will be payable 90 days
after the breach if the Seller had, immediately prior to the breach, a long term
debt rating of at least "A3" by Moody's and "BBB" by S&P and the equivalent of
"BBB" by any other Rating Agency and the Seller enters into a binding agreement
with the Issuer to pay any amounts necessary so that all interest payments which
will become due on the Transition Bonds during such 90-day period will be paid
in full. If the Seller does not have such long term debt ratings, the Seller may
still pay Liquidated Damages 90 days after such breach so long as it deposits an
amount in escrow with the Bond Trustee sufficient, taking into account amounts
on deposit in the Collection Account which will be available for such purpose,
to pay all interest payments which will become due on the Transition Bonds
during such 90-day period. This deposit must occur within two Business Days
after such breach. If the Seller does not have such long term debt ratings and
does not make such deposit, Liquidated Damages will be payable two Business Days
after the date of the breach.
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The Seller will not be obligated, however, for a breach in the first
circumstance (i.e., a breach of the representations or warranties in (ii),
(iii), (iv), (v), (vii) and (xii) above) in the event Liquidated Damages are
payable 90 days after such breach if, within 90 days after the date of the
occurrence thereof, such breach is cured or the Seller takes remedial action
such that there is not and will not be a material adverse effect on the
Transition Bondholders as a result of such breach. In the event that within such
90-day period, the breach is cured or the Seller takes the remedial action
described in subsection (i) above, any amounts paid by the Seller to the Bond
Trustee, as assignee of the Issuer, which have not been distributed pursuant to
the Indenture will be returned to the Seller at the end of such 90-day period.
In the second circumstance (i.e., a breach of the representations or
warranties in (vi), (viii), (ix), (xiii), (xiv), (xv) and (xvi) above),
Liquidated Damages will be payable on the first Monthly Allocation Date
following the expiration of the 90-day period which follows such breach. The
Seller need not pay such Liquidated Damages, however, if the full amount of
losses attributable to the breach is reasonably expected not to exceed the De
Minimis Loss Amount. In that case, on the Monthly Allocation Date immediately
following the Initial Loss Calculation Date, the Seller shall pay to the Bond
Trustee, as assignee of the Issuer, for deposit in the Loss Subaccount of the
Collection Account, the aggregate expected amount of such losses for all Monthly
Allocations Dates on which losses are expected to be incurred. Following this
deposit, the Seller's obligation to pay indemnification or Liquidated Damages,
as applicable, as a result of such losses shall be waived so long as actual
losses incurred on any Monthly Allocation Date do not exceed the De Minimis Loss
Amount. If the amount of such losses on any Monthly Allocation Date exceeds the
amounts paid by the Seller, on the next Monthly Allocation Date, the Seller
shall pay to the Bond Trustee, as assignee of the Issuer, the amount of such
excess for such Monthly Allocation Date and the expected amount of excess for
all subsequent Monthly Allocation Dates. If the amount of such losses on any
Monthly Allocation Date exceeds the De Minimis Loss Amount, Liquidated Damages
are payable on the next Monthly Allocation Date.
The Seller shall also indemnify the Issuer and the Bond Trustee and certain
other related parties, against (i) all taxes (other than any taxes imposed on
Transition Bondholders solely as a result of their ownership of Transition
Bonds) resulting from the acquisition or holding of Transferred Intangible
Transition Property by the Issuer or the issuance and sale by the Issuer of
Transition Bonds and (ii) any liabilities, obligations, losses, damages,
payments or expenses which result from (x) the Seller's willful misconduct, bad
faith or gross negligence in the performance of its duties under the Sale
Agreement, (y) the Seller's reckless disregard of its obligations and duties
under the Sale Agreement, or (z) the Seller's breach of any representations or
warranties in (i), (x), (xi), (xvii), (xviii), (xix) and (xx) above; provided,
that the amount of such losses for which the Seller shall be obligated to
provide indemnification shall not exceed the amount of Liquidated Damages. If
such an event occurs, upon receipt of written notice of the breach by the Seller
from the Issuer or Bond Trustee, the Seller will notify the Servicer of the
occurrence of such event so that the Servicer may calculate the amount of
indemnification in accordance with the provisions of the Master Servicing
Agreement. If such breach continues unremedied beyond the Initial Loss
Calculation Date, the Seller shall pay such amount to the Bond Trustee for
deposit into the General Subaccount of the Collection Account. Amounts on
deposit in the Reserve Subaccount and the Capital Subaccount shall not be
available to satisfy any indemnification amounts owed by the Seller under the
Sale Agreement.
The Seller will not indemnify the Issuer or the Bond Trustee on behalf of
the Transition Bondholders as a result of the Commonwealth of Pennsylvania's
exercise of its power under the Competition Act or a change in law by
legislative enactment or constitutional amendment or the Commonwealth's
limitation, alteration, impairment or reduction of the value of Intangible
Transition Property or Intangible Transition Charges after the Issuance Date of
any Series of Transition Bonds in breach of the pledge of the Commonwealth under
the Competition Act. See "Risk Factors--Unusual Nature of Intangible Transition
Property--Possible Commonwealth Amendment or Repeal of Competition Act" and
"--Dependence on the Competition Act and the QRO" in this Prospectus.
In addition to the foregoing representations and warranties, the Seller has
also covenanted, among other things, that it will deliver all ITC Collections it
receives or the proceeds thereof, other than
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collections of Intangible Transition Charges relating to Intangible Transition
Property retained by the Seller, to the Servicer and will promptly notify the
Issuer Trustee and the Bond Trustee of any lien on any Intangible Transition
Property other than the conveyances under the Sale Agreement or the Indenture,
conveyances to Other Issuers and, in the case of Intangible Transition Property
retained by the Seller, the lien of the Seller's mortgage.
The Seller shall also be obligated to take such legal or administrative
actions, including defending against or instituting and pursuing legal actions
and appearing or testifying at hearings or similar proceedings, as may be
reasonably necessary (i) to protect the Issuer and the Transition Bondholders
from claims, state actions or other actions or proceedings of third parties
which, if successfully pursued, would result in a breach of any of the Seller's
representations and warranties in the Sale Agreement or (ii) to block or
overturn any attempts to cause a repeal of, modification of or supplement to the
Competition Act, the QRO or the rights of holders of Intangible Transition
Property by legislative enactment or constitutional amendment that would be
adverse to the holders of Intangible Transition Property. In addition, the
Seller is required to execute and file such filings, including filings with the
PUC pursuant to the Competition Act, as may be required to fully preserve,
maintain and protect the interests of the Issuer in the Transferred Intangible
Transition Property. Other than as described above, the Seller shall not be
under any obligation to appear in, prosecute or defend any legal action that
shall not be incidental to its obligations under the Sale Agreement and that in
its opinion may involve it in any expense or liability.
CERTAIN MATTERS REGARDING THE SELLER
The Sale Agreement provides that certain persons which succeed to the major
part of the electric distribution business of the Seller shall be the successor
to the Seller if such persons execute an agreement of assumption to perform
every obligation of the Seller under the Sale Agreement. The Sale Agreement
further requires that (i) immediately after giving effect to such transaction,
no representation or warranty made in the Sale Agreement shall have been
breached and no Servicer Default, and no event that, after notice or lapse of
time, or both, would become a Servicer Default shall have occurred and be
continuing, (ii) the Rating Agencies shall have received prior written notice of
such transaction and (iii) certain officers' certificates and opinions of
counsel shall have been delivered to the Issuer and the Bond Trustee.
GOVERNING LAW
The Sale Agreement will be governed by and construed under the laws of the
Commonwealth of Pennsylvania.
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THE MASTER SERVICING AGREEMENT
The following summary describes all material terms and provisions of the
Master Servicing Agreement pursuant to which the Servicer is undertaking to
service Intangible Transition Property. The form of the Master Servicing
Agreement has been filed as an exhibit to the Registration Statement of which
this Prospectus forms a part. This summary does not purport to be complete and
is subject to, and is qualified by reference to, the provisions of the Master
Servicing Agreement. Because the Master Servicing Agreement relates to all
Serviced Intangible Transition Property (as opposed to just the Transferred
Intangible Transition Property owned by the Issuer), the rights and obligations
set forth in such agreement will involve other bond trustees to the extent that
the purchasers of Intangible Transition Property from the Seller (other than the
Issuer) do not select the same Bond Trustee.
The Master Servicing Agreement may be amended by the parties thereto with
the consent of the Bond Trustee under the Indenture and all bond trustees of any
Other Issuer, if any.
SERVICING PROCEDURES
General. The Servicer, as agent for the Issuer and the Other Issuers, will
manage, service and administer, and make collections in respect of the Serviced
Intangible Transition Property. The Servicer's duties will include (i)
calculating and billing the Intangible Transition Charges and collecting (from
Customers, electric generation suppliers and other third parties, as applicable)
and posting all ITC Collections, (ii) responding to inquiries by Customers,
electric generation suppliers and other third parties, the PUC, or any federal,
local or other state governmental authority with respect to the Serviced
Intangible Transition Property and Intangible Transition Charges, (iii)
accounting for ITC Collections, investigating delinquencies, processing and
depositing collections and making periodic remittances, furnishing periodic
reports to the Issuer, any Other Issuers, the Bond Trustee (and any bond
trustees of any Other Issuers) and the Rating Agencies, (iv) selling, as agent
for the Issuer and any Other Issuers, as their respective interests may appear,
defaulted or written-off accounts in accordance with the Servicer's usual and
customary practices and (v) taking action in connection with adjustments to the
Intangible Transition Charges as described below. See also "The QRO and the
Intangible Transition Charges--Competitive Billing" in this Prospectus. The
Servicer shall notify the Issuer, any Other Issuers, the Bond Trustee (and any
bond trustees of any Other Issuers) and the Rating Agencies in writing of any
laws or PUC regulations promulgated after the execution of the Master Servicing
Agreement that have a material adverse effect on the Servicer's ability to
perform its duties under the Master Servicing Agreement.
Any ITC Collections received by the Servicer shall be allocated between the
Issuer and any Other Issuers based on their respective Percentages.
The Servicer shall institute any action or proceeding necessary to compel
performance by the PUC or the Commonwealth of any of their obligations or duties
under the Competition Act or the QRO with respect to the Intangible Transition
Property. The cost of any such action reasonably allocated by the Servicer to
the Serviced Intangible Transition Property, based on the ratio the Serviced
Intangible Transition Property bears to the total Intangible Transition
Property, shall be payable from ITC Collections as an operating expense and
shall be allocated among the Issuer and any Other Issuers based on the ratio the
outstanding principal amount of Transition Bonds issued by each of the Issuer
and any Other Issuers bears to the aggregate outstanding principal amount of
Transition Bonds issued by the Issuer and any Other Issuers at the time such
costs are incurred.
ITC Adjustment Process. Among other things, the Master Servicing Agreement
requires the Servicer to file, and the Competition Act and the QRO require the
PUC to approve, Adjustment Requests on each Calculation Date based on actual ITC
Collections and updated assumptions by the Servicer as to projected future
billed revenue from which Intangible Transition Charges are allocated, expected
delinquencies and write-offs and future payments and expenses relating to the
Serviced 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 outstanding
principal balance of each Series equaling the amount provided in the Expected
Amortization Schedule, and the amount on deposit in the Overcollateralization
Subaccount equaling the Calculated Overcollateralization Level, by (i) the next
Adjustment Date or the Payment Date immediately succeeding such Adjustment Date,
as specified in the related Prospectus Supplement,
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or (ii) the Expected Final Payment Date, as applicable, for each Series, taking
into account any amounts on deposit in the Reserve Subaccount other than certain
Customer prepayments of Intangible Transition Charges, if any, not allocable to
the period covered by the applicable Adjustment Request. For a discussion of
Customer prepayments, see "The Seller and Servicer--Limited Information on
Customers' Creditworthiness--Customer Payments" in this Prospectus. The Servicer
will file Adjustment Requests on each Calculation Date for the Issuer as
specified in the Master Servicing Agreement. In accordance with the Competition
Act and the QRO, the PUC has 90 days to approve annual adjustments. The
adjustments to the Intangible Transition Charges are expected to be implemented
on each Adjustment Date. Such adjustments to the Intangible Transition Charges
will cease with respect to each Series on the final Adjustment Date specified in
the Prospectus Supplement for that Series.
ITC Collections. The Servicer is required to remit all ITC Collections
(from whatever source) allocated to the Issuer or Other Issuers, if any, and all
proceeds of other Collateral, if any, of the Issuer or Other Issuers, if any,
received by the Servicer (i) in the case of the Issuer, to the Bond Trustee for
deposit pursuant to the Indenture or (ii) in the case of Other Issuers, to the
bond trustees of such Other Issuers under the indenture to which each such Other
Issuer is a party on each Remittance Date. Until ITC Collections are remitted to
the Collection Account, the Servicer will not segregate them from its general
funds. Remittances of ITC Collections will not include interest thereon prior to
the Remittance Date or late fees from customers, which the Servicer will be
entitled to retain.
SERVICER ADVANCES
If specified in the related annex to the Master Servicing Agreement, the
Servicer will make advances of interest or principal on the related Series of
Transition Bonds in the manner and to the extent specified in such annex.
SERVICING COMPENSATION; RELEASES
The Issuer and each Other Issuer, severally and not jointly, agrees to pay
the Servicer the Monthly Servicing Fees with respect to their respective series
of transition bonds. The Monthly Servicing Fee for each Series (together with
any portion of such Monthly Servicing Fee that remains unpaid from prior Monthly
Allocation Dates) will be paid solely to the extent funds are available therefor
as described under "The Indenture--Allocations and Payments" in this Prospectus.
The Monthly Servicing Fee will be paid prior to the payment of or provision for
any amounts in respect of interest on and principal of the Transition Bonds.
In the Master Servicing Agreement, the Servicer releases the Issuer, every
Other Issuer, the Bond Trustee and any bond trustees of any Other Issuers from
any and all claims, subject to certain exceptions relating to the Serviced
Intangible Transition Property or the Servicer's servicing activities with
respect thereto.
SERVICER DUTIES
In the Master Servicing Agreement, the Servicer has agreed, among other
things, that, in servicing the Serviced Intangible Transition Property:
(i) except where the failure to comply with any of the following would
not adversely affect the Issuer's, any Other Issuer's, the Bond Trustee's
or any Other Issuer's bond trustee's respective interests in Intangible
Transition Property,
(x) it will manage, service, administer and make collections in
respect of the Serviced Intangible Transition Property with reasonable
care and in material compliance with applicable law, including all
applicable PUC regulations and guidelines, using the same degree of care
and diligence that the Servicer exercises with respect to billing and
collection activities that the Servicer conducts for itself and others;
(y) it will follow standards, policies and procedures in performing
its duties as Servicer that are customary in the Servicer's industry;
(z) it will use all reasonable efforts, consistent with its
customary servicing procedures, to enforce and maintain rights in
respect of the Serviced Intangible Transition Property;
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(xx) it will calculate the Intangible Transition Charges in
compliance with the Competition Act, the QRO and any applicable tariffs;
(ii) it will keep on file, in accordance with customary procedures,
all documents related to Intangible Transition Property and will maintain
accurate and complete accounts, records and computer systems pertaining to
the Serviced Intangible Transition Property; and
(iii) it will use all reasonable efforts consistent with its customary
servicing procedures to collect all amounts owed in respect of Intangible
Transition Property as they become due.
The duties of the Servicer set forth in the Master Servicing Agreement are
qualified by any PUC regulations or orders in effect at the time such duties are
to be performed.
SERVICER REPRESENTATIONS AND WARRANTIES
In the Master Servicing Agreement, the Servicer will make representations
and warranties as of each date the Seller sells or otherwise transfers any
Intangible Transition Property to the Issuer and any Other 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 the corporate power
and authority to own its properties and conduct its business as such
properties are currently owned and such business is presently conducted and
to execute, deliver and carry out the terms of the Master Servicing
Agreement and has the power, authority and legal right to service the
Serviced Intangible Transition Property;
(ii) the Servicer is duly qualified to do business as a foreign
corporation in good standing in all jurisdictions in which it is required
to do so;
(iii) the Servicer's execution, delivery and performance of the Master
Servicing Agreement have been duly authorized by the Servicer by all
necessary corporate action;
(iv) the Master Servicing Agreement constitutes a legal, valid and
binding obligation of the Servicer, enforceable against the Servicer in
accordance with its terms, subject to customary exceptions relating to
bankruptcy and equitable principles;
(v) the consummation of the transactions contemplated by the Master
Servicing Agreement does not conflict with or result in any breach of the
terms and provisions of or constitute a default under the Servicer's
articles of incorporation or by-laws or any material agreement to which the
Servicer is a party or bound, result in the creation or imposition of any
lien upon the Servicer's properties (other than the lien of the Seller's
mortgage on its interest in the Master Servicing Agreement) or violate any
law or any order, rule or regulation applicable to the Servicer or its
properties;
(vi) except for filings with the PUC for revised Intangible Transition
Charges and Uniform Commercial Code continuation filings, no governmental
approvals, authorizations, consents, orders, or other actions or filings
are required for the Servicer to execute, deliver and perform its
obligations under the Master Servicing Agreement, except those which have
previously been obtained or made; and
(vii) no proceeding or investigation is pending or, to the Servicer's
best knowledge, threatened before any court, federal or state regulatory
body, administrative agency or other governmental instrumentality having
jurisdiction over the Servicer or its properties (x) except as disclosed by
the Servicer to the Issuer and any Other Issuers, seeking any determination
or ruling that might materially and adversely affect the performance by the
Servicer of its obligations under, or the validity or enforceability
against the Servicer of, the Master Servicing Agreement or (y) relating to
the Servicer and which might adversely affect the federal or state income
tax attributes of the Transition Bonds.
SERVICER INDEMNIFICATION
Under the Master Servicing Agreement, the Servicer agrees to indemnify the
Issuer, any Other Issuers, the Bond Trustee, on behalf of the Transition
Bondholders, the bond trustees of any Other Issuers, on behalf of the holders of
transition bonds issued by such Other Issuers, and certain other related
parties, against any costs, expenses, losses, damages, claims and liabilities
that may be imposed upon, incurred by or asserted against such person as a
result of (i) the Servicer's willful misfeasance,
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bad faith or gross negligence in the performance of its duties or observance of
its covenants under the Master Servicing Agreement or the Servicer's reckless
disregard of its obligations and duties under the Master Servicing Agreement and
(ii) the Servicer's breach of any of its representations or warranties under the
Master Servicing Agreement.
STATEMENTS TO ISSUER AND BOND TRUSTEE
For each Calculation Date, the Servicer will provide to the Issuer, the
Bond Trustee and each of the Rating Agencies a statement indicating, with
respect to the Transferred Intangible Transition Property (i) the outstanding
principal balance for each Series and the amount provided in the Expected
Amortization Schedule for each Series as of the immediately preceding Payment
Date, (ii) the amount on deposit in the Overcollateralization Subaccount and the
Calculated Overcollateralization Level as of the immediately preceding Payment
Date, (iii) the sum of the amounts provided in the Expected Amortization
Schedule for each outstanding Series for each Payment Date prior to the next
Adjustment Date and the Servicer's projection of the aggregate principal amount
of all Series as of each Payment Date prior to the next Adjustment Date, (iv)
the Calculated Overcollateralization Level for each Payment Date prior to the
next Adjustment Date and the Servicer's projection of the amount on deposit in
the Overcollateralization Subaccount as of each Payment Date prior to the next
Adjustment Date and (v) the projected ITC Collections from the Payment Date
immediately preceding the next Adjustment Date through such Adjustment Date.
Moreover, on or before each Remittance Date, the Servicer will prepare and
furnish to the Issuer, the Bond Trustee and each of the Rating Agencies a
statement setting forth the aggregate amount remitted or to be remitted by the
Servicer to the Bond Trustee for deposit on such Remittance Date pursuant to the
Indenture.
In addition, at least three Business Days before each Monthly Allocation
Date, the Servicer will prepare and furnish to the Issuer, the Bond Trustee and
each of the Rating Agencies a statement setting forth the transfers and payments
to be made on such Monthly Allocation Date and the amounts thereof. Further, at
least three Business Days before each Payment Date for each Series of Transition
Bonds, the Servicer will prepare and furnish to the Issuer, the Bond Trustee and
each of the Rating Agencies a statement setting forth the amounts to be paid to
the holders of Transition Bonds of such Series. On the basis of this
information, the Bond Trustee will furnish to the Transition Bondholders on each
Payment Date the report described under "The Indenture--Reports to Transition
Bondholders" in this Prospectus.
EVIDENCE AS TO COMPLIANCE
The Master Servicing Agreement will provide that a firm of independent
public accountants will furnish to the Issuer, any Other Issuer, the Bond
Trustee, the bond trustees of any Other Issuers and the Rating Agencies, on or
before March 31 of each year, beginning March 31, 2000, a statement as to
compliance by the Servicer during the preceding calendar year (or the relevant
portion thereof) with certain standards relating to the servicing of Intangible
Transition Property. This report (the "Annual Accountant's Report") will state
that such firm has performed certain procedures in connection with the
Servicer's compliance with the servicing procedures of the Master Servicing
Agreement, identifying the results of such procedures and including any
exceptions noted. The Annual Accountant's Report will also indicate that the
accounting firm providing such report is independent of the Servicer within the
meaning of the Code of Professional Ethics of the American Institute of
Certified Public Accountants.
The Master Servicing Agreement will also provide for delivery to the
Issuer, any Other Issuer, the Bond Trustee and the bond trustees of such Other
Issuer on or before March 31 of each year, a certificate signed by an officer of
the Servicer to the effect that the Servicer has fulfilled its obligations under
the Master Servicing Agreement for the preceding calendar year (or the relevant
portion thereof) or, if there has been a default in the fulfillment of any such
obligation, describing each such default. The Servicer has agreed to give the
Issuer, any Other Issuer, each Rating Agency, the Bond Trustee or the bond
trustee of such Other Issuer, as the case may be, notice of any Servicer Default
under the Master Servicing Agreement.
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CERTAIN MATTERS REGARDING THE SERVICER
Pursuant to the QRO, PECO Energy may assign its obligations under the
Master Servicing Agreement to any electric distribution company, as such term is
defined in the Competition Act, which succeeds to the major part of PECO
Energy's electric distribution business. Prior to any such assignment, the
Servicer shall provide written notice thereof to each of the Rating Agencies.
Under the Master Servicing Agreement, certain persons which succeed to the major
part of the electric distribution business of the Servicer, which persons assume
the obligations of the Servicer, will be the successor of the Servicer under the
Master Servicing Agreement. The Master Servicing Agreement further requires that
(i) immediately after giving effect to such transaction, no representation or
warranty made by the Servicer in the Master Servicing Agreement shall have been
breached and no Servicer Default, and no event which, after notice or lapse of
time, or both, would become a Servicer Default shall have occurred and be
continuing; (ii) certain officers' certificates and opinions of counsel shall
have been delivered to the Issuer, any Other Issuers, the Bond Trustee (and any
other bond trustees of any Other Issuers), as the case may be, and the Rating
Agencies; and (iii) prior written notice shall have been received by the Rating
Agencies.
The Master Servicing Agreement provides that, subject to the foregoing
provisions, PECO Energy shall not resign from the obligations and duties imposed
on it as Servicer except upon a determination, communicated to the Issuer, any
Other Issuers, the Bond Trustee (and any bond trustees of any Other Issuers),
and each Rating Agency and evidenced by an opinion of counsel, that the
performance of its duties under the Master Servicing Agreement are no longer
permissible under applicable law. No such resignation shall become effective
until a successor servicer has assumed the servicing obligations and duties of
PECO Energy under the Master Servicing Agreement.
In addition, the QRO and the Competition Act require that the Servicer's
responsibility to collect the applicable Intangible Transition Charges and other
obligations under the Master Servicing Agreement must be undertaken and
performed by any other entity that provides transmission and distribution
service to the customers.
Except as expressly provided in the Master Servicing Agreement, the
Servicer will not be liable to the Issuer or any Other Issuer for any action
taken or for refraining from taking any action pursuant to the Master Servicing
Agreement or for errors in judgment, except to the extent such liability is
imposed by reason of the Servicer's willful misfeasance, bad faith or gross
negligence in the performance of its duties or by reason of reckless disregard
of obligations and duties under the Master Servicing Agreement.
SERVICER DEFAULTS
"Servicer Defaults" under the Master Servicing Agreement will include,
among other things:
(i) any failure by the Servicer to deliver to the Bond Trustee, on
behalf of the Issuer, or to the bond trustee of any Other Issuer, on behalf
of such Other Issuer, any required remittance that shall continue
unremedied for a period of three Business Days after written notice of such
failure is received by the Servicer;
(ii) any failure by the Servicer, duly to observe or perform in any
material respect any other covenant or agreement in the Master Servicing
Agreement or any other Basic Document to which it is a party, which failure
materially and adversely affects Intangible Transition Property and which
continues unremedied for 30 days after notice of such failure has been
given to the Servicer, by the Issuer, any Other Issuer or the Bond Trustee
(or bond trustees of any Other Issuer), as the case may be, or after
discovery of such failure by an officer of the Seller, as the case may be;
(iii) any representation or warranty made by the Servicer in the
Master Servicing Agreement shall prove to have been incorrect when made,
which has a material adverse effect on any of the Transition Bondholders,
the holders of transition bonds issued by any Other Issuer, the Issuer or
any Other Issuer and which continues unremedied for 60 days after notice of
such failure has been given to the Servicer by the Issuer, any Other
Issuer, the Bond Trustee or any bond trustee of any Other Issuer, as the
case may be; and
(iv) certain events of insolvency, readjustment of debt, marshalling
of assets and liabilities, or similar proceedings with respect to the
Servicer and certain actions by the Servicer indicating
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its insolvency, reorganization pursuant to bankruptcy proceedings or
inability to pay its obligations.
The Bond Trustee, together with all bond trustees of any Other Issuers, if
any, may waive any default by the Servicer, except a default in making any
required remittances to the Bond Trustee, or any bond trustee of any Other
Issuer, if any.
RIGHTS UPON SERVICER DEFAULT
As long as a Servicer Default under the Master Servicing Agreement remains
unremedied, the Bond Trustee or, if transition bonds issued by Other Issuers are
outstanding, one or more of the bond trustees of such Other Issuers and the Bond
Trustee, representing a majority of the outstanding principal amount of all
transition bonds issued by such Other Issuers and the Issuer, as assignees of
such Other Issuers and the Issuer, as applicable, may terminate all the rights
and obligations of the Servicer under the Master Servicing Agreement (other than
the Servicer's indemnification obligation and obligation to continue performing
its functions as Servicer until a successor servicer is appointed), whereupon a
Successor Servicer appointed by the Bond Trustee or, if there are more than one,
by the bond trustees representing a majority of the outstanding amount of
transition bonds issued by the Issuer and the Other Issuers will succeed to all
the responsibilities, duties and liabilities of the Servicer under the Master
Servicing Agreement and will be entitled to similar compensation arrangements.
Upon a Servicer Default based upon the commencement of a case by or against the
Servicer under the Bankruptcy Code or similar laws (the "Insolvency Laws"), the
Bond Trustee, the Issuer, any Other Issuers and bond trustees of such Other
Issuers, if any, may be prevented from effecting a transfer of servicing. See
"Risk Factors--Bankruptcy; Creditors' Rights" in this Prospectus. The Bond
Trustee may make arrangements for compensation to be paid to any Successor
Servicer, which in no event may be greater than the servicing compensation paid
to the Servicer under the Master Servicing Agreement. See "Risk
Factors--Bankruptcy; Creditors' Rights" in this Prospectus. In addition, upon a
Servicer Default because of a failure to make required remittances, the Issuer,
any Other Issuers or their respective pledgees or transferees will have the
right to apply to the PUC for sequestration and payment of revenues arising from
the Intangible Transition Property.
SUCCESSOR SERVICER
In accordance with the provisions of the QRO and pursuant to the provisions
of the Master Servicing Agreement, if for any reason a third party assumes or
succeeds to the role of the Servicer under the Master Servicing Agreement (in
such role, the "Successor Servicer"), the Master Servicing Agreement will
require the Servicer to cooperate with the Issuer, any Other Issuer, the Bond
Trustee (or any bond trustee of any Other Issuer), as the case may be, and the
Successor Servicer in terminating the Servicer's rights and responsibilities
under the Master Servicing Agreement, including the transfer to the Successor
Servicer of all documentation pertaining to Intangible Transition Property and
all cash amounts then held by the Servicer for remittance or subsequently
acquired by the Servicer. The Master Servicing Agreement will provide that the
Servicer shall be liable for all reasonable costs and expenses incurred in
transferring servicing responsibilities to the Successor Servicer. A Successor
Servicer may not resign unless it is prohibited from serving by law. The
predecessor Servicer is obligated, on an ongoing basis, to cooperate with the
Successor Servicer and provide whatever information is, and take whatever
actions are, reasonably necessary to assist the Successor Servicer in performing
its obligations under the Master Servicing Agreement.
ADDITION OF OTHER ISSUERS
Upon the execution and delivery by the Servicer and a purchaser of
Intangible Transition Property from the Seller of a supplement to the Master
Servicing Agreement entered into for the purpose of adding such purchaser as a
party, such purchaser shall become a party to the Master Servicing Agreement, as
if originally named therein. The addition of any such purchaser shall not
require the consent of the Issuer or any Other Issuer under the Master Servicing
Agreement.
GOVERNING LAW
The Master Servicing Agreement will be governed by and construed under the
laws of the Commonwealth of Pennsylvania.
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THE INDENTURE
The following summary describes all material terms and provisions of the
Indenture pursuant to which Transition Bonds will be issued. The form of the
Indenture, including the form of the Supplemental Indenture, has been filed as
an exhibit to the Registration Statement of which this Prospectus forms a part.
This summary does not purport to be complete and is subject to, and is qualified
by reference to, the provisions of the Indenture. See "PECO Energy Company" in
this Prospectus.
SECURITY
To secure the payment of principal of and premium, if any, and interest on,
and any other amounts owing in respect of, the Transition Bonds pursuant to the
Indenture, the Issuer will grant to the Bond Trustee for the benefit of the
Transition Bondholders a security interest in all of the Issuer's right, title
and interest in and to the following Collateral: (i) the Transferred Intangible
Transition Property sold by the Seller to the Issuer from time to time pursuant
to the Sale Agreement and all proceeds thereof, (ii) the Sale Agreement (except
for certain provisions for indemnification of the Issuer), (iii) all bills of
sale delivered by the Seller pursuant to the Sale Agreement, (iv) the Master
Servicing Agreement (except for certain provisions for indemnification of the
Issuer), (v) the Collection Account and all amounts on deposit therein from time
to time, (vi) any hedge or swap agreements to which the Issuer is a party, (vii)
certain rights under any hedge or swap transaction entered into with respect to
floating rate Transition Bonds or other credit enhancements, (viii) all present
and future claims, demands, causes and choses in action in respect of any or all
of the foregoing and (ix) all payments on or under, and all proceeds of every
kind and nature whatsoever in respect of, any or all of the foregoing, provided
that cash or other property distributed to the Issuer from the Collection
Account in accordance with the provisions of the Indenture will not be subject
to the lien of the Indenture. See "--Allocation and Payments" below.
ISSUANCE IN SERIES OR CLASSES
Transition Bonds may be issued under the Indenture from time to time to
finance the purchase by the Issuer of Intangible Transition Property (a
"Financing Issuance") or to pay the cost of refunding, through redemption or
payment, all or part of the Transition Bonds (a "Refunding Issuance"). Any
Series of Transition Bonds may include one or more Classes which differ, among
other things, as to interest rate and amortization of principal. The terms of
all Transition Bonds of the same Series will be identical, unless such Series is
comprised of more than one Class, in which case the terms of all Transition
Bonds of the same Class will be identical. The particular terms of the
Transition Bonds of any Series and, if applicable, Classes thereof, will be set
forth in the related Prospectus Supplement for that Series. The terms of such
Series and any Classes thereof will not be subject to prior review by, or
consent of, the Transition Bondholders of any previously issued Series. See
"Risk Factors--The Transition Bonds--Effect of Additional Series and Other
Financings on Outstanding Transition Bonds," "The Transition Bonds" and "PECO
Energy Company" in this Prospectus.
Under the Indenture, the Bond Trustee will authenticate and deliver an
additional Series of Transition Bonds only upon receipt by the Bond Trustee of,
among other things, a certificate of the Issuer that no Event of Default has
occurred and is continuing, an opinion of counsel to the Issuer and evidence of
satisfaction of the Rating Agency Condition.
In addition, in connection with the issuance of the each new Series, the
Bond Trustee will have to provide a certificate or opinion of a firm of
independent certified public accountants of recognized national reputation to
the effect that, based on the assumptions used in calculating the initial
Intangible Transition Charges with respect to the Transferred Intangible
Transition Property or, if applicable, the most recent revised Intangible
Transition Charges with respect to the Transferred Intangible Transition
Property, after giving effect to the issuance of such Series and the application
of the proceeds therefrom, such Intangible Transition Charges will be sufficient
to pay all fees and expenses of servicing the Transition Bonds, interest on each
Series of Transition Bonds when due and principal of
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each Series of Transition Bonds in accordance with the Expected Amortization
Schedule therefor and to fund the Calculated Overcollateralization Level as of
each Payment Date.
If the issuance is a Refunding Issuance, the amount of money necessary to
pay premiums, if any, and the outstanding principal balance of and interest on
the Transition Bonds being refunded shall be deposited into a separate account
with the Bond Trustee.
COLLECTION ACCOUNT
Under the Indenture, the Issuer will establish one or more segregated trust
accounts in the Bond Trustee's name, which collectively comprise the Collection
Account, with the Bond Trustee or at another Eligible Institution. The
Collection Account will be divided into subaccounts, which need not be separate
bank accounts: the General Subaccount, one or more Series Subaccounts, one or
more Class Subaccounts, the Overcollateralization Subaccount, the Capital
Subaccount, the Reserve Subaccount and, if required by the Indenture, one or
more Defeasance Subaccounts, a Loss Subaccount and an Interest Deposit
Subaccount. All amounts in the Collection Account not allocated to any other
subaccount will be allocated to the General Subaccount. Unless the context
indicates otherwise, references in this Prospectus to the Collection Account
include all of the subaccounts contained therein. All monies deposited from time
to time in the Collection Account, all deposits therein pursuant to the
Indenture, and all investments made in Eligible Investments with such monies,
shall be held by the Bond Trustee in the Collection Account as part of the
Collateral.
"Eligible Institution" means (i) the corporate trust department of the Bond
Trustee or (ii) a depository institution organized under the laws of the United
States of America or any state (or any domestic branch of a foreign bank), which
(x) has (A) a long-term unsecured debt rating of "AAA" by S&P and "Aa3" by
Moody's and (B) a certificate of deposit rating of "A-1+" by S&P and "P-1" by
Moody's, or any other long-term, short-term or certificate of deposit rating
acceptable to the Rating Agencies and (y) whose deposits are insured by the
Federal Deposit Insurance Corporation.
So long as no default or Event of Default has occurred and is continuing,
all funds in the Collection Account may be invested in any of the following: (i)
direct obligations of, or obligations fully and unconditionally guaranteed as to
timely payment by, the United States of America, (ii) demand deposits, time
deposits, certificates of deposit, or bankers' acceptances of Eligible
Institutions which are described in clause (x) of the preceding paragraph, (iii)
commercial paper (other than commercial paper issued by the Seller or the
Servicer or any of their affiliates) having, at the time of investment or
contractual commitment to invest, a rating in the highest rating category from
each Rating Agency, (iv) money market funds which have the highest rating from
each Rating Agency, (v) 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 the obligations of which are
backed by the full faith and credit of the United States of America, entered
into with an Eligible Institution, or (vi) any other investment permitted by
each Rating Agency (collectively, the "Eligible Investments"), in each case
which mature no later than the Business Day prior to (i) with respect to funds
in the General Subaccount, Overcollateralization Subaccount, Capital Subaccount,
Reserve Subaccount, Loss Subaccount and Interest Deposit Subaccount, the next
Monthly Allocation Date or (ii) with respect to funds in the Series Subaccount
for any Series of Transition Bonds or the Class Subaccount for any Class of
Transition Bonds, the next Payment Date for such Series or Class. The Bond
Trustee will have access to the Collection Account for the purpose of making
deposits in and withdrawals from the Collection Account in accordance with the
Indenture.
On each Remittance Date, the Servicer will remit all ITC Collections (from
whatever source) allocated to the Issuer pursuant to the Master Servicing
Agreement and all proceeds of other Collateral received by the Servicer to the
Bond Trustee under the Indenture for deposit pursuant to the Indenture. In
addition, amounts remitted by any counterparty to any hedge or swap transaction
will be deposited in the Class Subaccount for the Class to which such amount
relates. Further, the Bond Trustee will deposit all Indemnity Amounts remitted
to the Bond Trustee by the Seller or the Servicer or otherwise received by the
Bond Trustee, and Liquidated Damages remitted by the Seller into the General
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Subaccount of the Collection Account. Loss Amounts remitted by the Seller to the
Bond Trustee shall be deposited in the Loss Subaccount and Interest Deposit
Amounts remitted by the Seller to the Bond Trustee shall be deposited in the
Interest Deposit Subaccount. "Interest Deposit Amounts" means any amounts
remitted by the Seller to the Bond Trustee in respect of interest payments
pursuant to a binding agreement with the Issuer entered into by the Seller or an
escrow arrangement pursuant to the Sale Agreement. "Loss Amounts" means any
amounts remitted by the Seller to the Bond Trustee pursuant to the Sale
Agreement in respect of losses as a result of certain willful misconduct, bad
faith, gross negligence, or reckless disregard of its obligations therein or the
breach of certain representations and warranties therein by the Seller. See "The
Sale Agreement" and the "The Master Servicing Agreement" in this Prospectus.
General Subaccount. ITC Collections remitted by the Servicer to the Bond
Trustee, as well as Liquidated Damages and Indemnity Amounts remitted by the
Seller or the Servicer or otherwise received by the Bond Trustee or the Issuer,
shall be deposited in the General Subaccount. On each Monthly Allocation Date,
the Bond Trustee will draw on amounts in the General Subaccount to make the
allocations and payments described in "--Allocations and Payments" below.
Reserve Subaccount. ITC Collections available on any Monthly Allocation
Date above that necessary to pay (i) amounts payable in respect of fees and
expenses of the Bond Trustee and the Servicer and certain other fees and
expenses, (ii) amounts distributable to Series Subaccounts and Class
Subaccounts, if any, in respect of principal of and interest paid on the next
Payment Date therefor and (iii) amounts allocable to the Overcollateralization
Subaccount (all as described under "--Allocations and Payments" below),
including certain Customer prepayments of Intangible Transition Charges, if any,
will be allocated to the Reserve Subaccount. Amounts in the Reserve Subaccount
will be invested in Eligible Investments, and the Issuer will be entitled to
earnings thereon, subject to the limitations described under "--Allocations and
Payments" below. On each Monthly Allocation Date, the Bond Trustee will draw on
amounts in the Reserve Subaccount, if any, to the extent amounts available in
the General Subaccount, the Interest Deposit Subaccount (with respect to
payments of Interest) and the Loss Subaccount (with respect to payments
contemplated by (i) through (viii) in "--Allocations and Payments" below) are
insufficient to make scheduled distributions to the Series Subaccounts and pay
expenses of the Issuer, the Bond Trustee, the Servicer and certain other fees
and expenses. Subject to the conditions described in "--Allocations and
Payments" below, the Bond Trustee may also use funds in the Reserve Subaccount
to cover any shortfall arising from the failure by the counterparty to any hedge
or swap transaction entered into by the Issuer to fully pay amounts due to the
Issuer under the applicable hedge or swap agreement.
Overcollateralization Subaccount. ITC Collections to the extent available,
as described under "--Allocation and Payments" below, will be deposited in the
Overcollateralization Subaccount on each Monthly Allocation Date up to the
Monthly Allocated Overcollateralization Balances for all Series. Amounts in the
Overcollateralization Subaccount will be invested in Eligible Investments and
the Issuer will be entitled to earnings thereon, subject to the limitations
described under "--Allocations and Payments" below. On each Monthly Allocation
Date, the Bond Trustee will draw on amounts in the Overcollateralization
Subaccount to the extent amounts on deposit in the General Subaccount, the
Interest Deposit Subaccount (with respect to payments of Interest), the Loss
Subaccount (with respect to payments contemplated by (i) through (viii) in
"--Allocations and Payments" below) and the Reserve Subaccount are insufficient
to make scheduled distributions to the Series Subaccounts and to pay expenses of
the Issuer, the Bond Trustee and the Servicer and certain other fees and
expenses. If any Series or Class of Transition Bonds is redeemed or any Series
is fully amortized as of any Monthly Allocation Date, the amount by which
amounts on deposit in the Overcollateralization Subaccount exceed the Monthly
Allocated Overcollateralization Balances for all Series will be released to the
Issuer, free of the lien of the Indenture.
Capital Subaccount. 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
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described under "--Allocations and Payments" below. The Bond Trustee will draw
on amounts in the Capital Subaccount, if any, to the extent amounts available in
the General Subaccount, Interest Deposit Subaccount (with respect to payments of
Interest), the Loss Subaccount (with respect to payments contemplated by (i)
through (viii) in "Allocations and Payments" below), the Reserve Subaccount and
the Overcollateralization Subaccount are insufficient to make scheduled
distributions to the Series Subaccounts and to pay expenses of the Issuer, the
Bond Trustee and the Servicer and certain other fees and expenses. If any Series
or Class of Transition Bonds is redeemed or any Series is fully amortized as of
any Monthly Allocation Date, the amount by which amounts on deposit in the
Capital Subaccount exceed the Required Capital Amount will be released to the
Issuer, free of the lien of the Indenture.
Series Subaccount. Upon the issuance of each Series of Transition Bonds, a
Series Subaccount will be established with respect to such Series. On each
Monthly Allocation Date, deposits will be made to each Series Subaccount as
described under "--Allocations and Payments" below. On each Payment Date, the
Bond Trustee will withdraw funds from the Series Subaccount to make payments on
the related Series of Transition Bonds as specified in the related Prospectus
Supplement. Any balance remaining in any Series Subaccount on any Payment Date
after payments have been made to Transition Bondholders of the related Series
will be transferred to the General Subaccount for allocation on the next Monthly
Allocation Date.
Class Subaccount. Upon the issuance of a Class of Transition Bonds that
bears a floating rate of interest, a Class Subaccount will be established with
respect to such Class. Payments to and from any counterparty to a hedge or swap
transaction will be made from or deposited to, as applicable, the applicable
Class Subaccounts as described in the related Prospectus Supplement. On each
Payment Date, amounts on deposit in the Class Subaccount will be applied to make
payments with respect to the related Class, as specified in the related
Prospectus Supplement. Any balance remaining in any Class Subaccount on any
Payment Date after payments have been made to Transition Bondholders of the
related Class will be transferred to the General Subaccount for allocation on
the next Monthly Allocation Date.
Loss Subaccount. Prior to the deposit of any Loss Amounts in the
Collection Account, the Issuer shall establish the Loss Subaccount, and any Loss
Amounts remitted by the Seller to the Bond Trustee shall be deposited in such
subaccount. The Bond Trustee will draw on amounts in the Loss Subaccount, if
any, as described under "Allocations and Payments" below.
Interest Deposit Subaccount. Prior to the deposit of any Interest Deposit
Amounts in the Collection Account, the Issuer shall establish the Interest
Deposit Subaccount and any Interest Deposit Amounts remitted by the Seller to
the Bond Trustee shall be deposited in such subaccount. The Bond Trustee will
draw on amounts in the Interest Deposit Subaccount, if any, as described under
"--Allocations and Payments" below.
Defeasance Subaccount. In the event funds are remitted to the Bond Trustee
in connection with the exercise of the Legal Defeasance Option or the Covenant
Defeasance Option, the Issuer shall establish a Defeasance Subaccount for each
Series to be defeased into which such funds shall be deposited. All amounts in
the Defeasance Subaccount will be applied by the Bond Trustee, in accordance
with the provisions of the Transition Bonds and the Indenture, to the payment to
the holders of the particular Transition Bonds for the payment or redemption of
which such amounts were deposited with the Bond Trustee, including all sums due
for principal, premium, if any, and interest. See "--Legal Defeasance and
Covenant Defeasance" below.
ALLOCATIONS AND PAYMENTS
On each Monthly Allocation Date, the Bond Trustee shall apply all amounts
on deposit in the General Subaccount of the Collection Account and any
investment earnings thereon in the following priority:
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(i) all amounts owed to the Bond Trustee (including legal fees and
expenses, Indemnity Amounts and Loss Amounts) will be paid to the Bond
Trustee;
(ii) all amounts owed to the Issuer Trustee (including legal fees and
expenses, Indemnity Amounts and Loss Amounts) will be paid to the Issuer
Trustee;
(iii) the Monthly Servicing Fee and all unpaid Monthly Servicing Fees
from prior Monthly Allocation Dates will be paid to the Servicer;
(iv) so long as no Event of Default has occurred and is continuing or
would be caused by such payment, all operating expenses other than those
referred to in clauses (i), (ii) and (iii) above will be paid to the
persons entitled thereto, provided that the amount paid on any Monthly
Allocation Date pursuant to this clause (iv) may not exceed $12,500 in the
aggregate for all Series;
(v) an amount equal to Interest with respect to each Series of
Transition Bonds for such Monthly Allocation Date will be transferred on a
Pro Rata basis to the Series Subaccount for such Series;
(vi) an amount equal to any Principal of any Series or Class of the
Transition Bonds payable as a result of acceleration triggered by an Event
of Default, any Principal of any Series or Class of Transition Bonds
payable on a Series Termination Date or Class Termination Date, as
applicable, that will occur prior to the next Monthly Allocation Date and
any Principal of and premium on a Series or Class of Transition Bonds
payable on a Redemption Date that will occur prior to the next Monthly
Allocation Date will be transferred on a Pro Rata basis to the Series
Subaccount for such Series, taking into account amounts on deposit therein
in respect of Principal as of such Monthly Allocation Date;
(vii) an amount equal to Principal with respect to each Series of
Transition Bonds for such Monthly Allocation Date not provided for pursuant
to clause (vi) above will be transferred on a Pro Rata basis to the Series
Subaccount for such Series;
(viii) all unpaid operating expenses, Indemnity Amounts and Loss
Amounts will be paid to the persons entitled thereto;
(ix) Overcollateralization with respect to all Series of Transition
Bonds for such Monthly Allocation Date will be transferred to the
Overcollateralization Subaccount;
(x) any amounts owed to any counterparty to a swap or hedge
transaction;
(xi) provided that no Event of Default has occurred and is continuing,
an amount up to the amount of net investment earnings on amounts in the
Collection Account since the previous Monthly Allocation Date will be
released to the Issuer free from the lien of the Indenture;
(xii) the balance, if any, will be allocated to the Reserve
Subaccount; and
(xiii) following repayment of all outstanding Series of Transition
Bonds, the balance, if any, will be released to the Issuer free from the
lien of the Indenture.
If on any Monthly Allocation Date funds on deposit in the General
Subaccount are insufficient to make the allocations contemplated by clauses (i)
through (ix) above, the Bond Trustee will draw from amounts on deposit in the
following subaccounts up to the amount of such shortfall, in order to make such
payments and transfers: (i) from the Interest Deposit Subaccount, with respect
to the payments or transfers contemplated by clause (v) above only, (ii) then
from the Loss Subaccount, with respect to the payments or transfers contemplated
by clauses (i) through (viii) above only, and (iii) thereafter from the Reserve
Subaccount, then from the Overcollateralization Subaccount and finally from the
Capital Subaccount.
On each Payment Date for any Series, the amounts on deposit in the
applicable Series Subaccount for that Series remaining after the allocations, if
any, described in the next paragraph (other than net income or other gain,
which, so long as no Event of Default has occurred and is continuing, shall be
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released to the Issuer free of the lien of the Indenture) will be applied as
follows (in the priority indicated): (i) interest due and payable on the
Transition Bonds of such Series, together with any overdue interest and, to the
extent permitted by law, interest thereon, will be paid to the Transition
Bondholders of such Series (in the case of Classes with swap or hedge
transactions, such interest will be the amounts payable to the applicable
counterparty to such transactions), (ii) the balance, if any, up to the
principal amount of the Transition Bonds of such Series that is scheduled to be
paid by such Payment Date in accordance with the Expected Amortization Schedule
for such Series or, with respect to any Series of Transition Bonds payable as a
result of acceleration pursuant to the Indenture or to be redeemed pursuant to
the Indenture, the outstanding principal amount of such Series and premium, if
any, will be paid to the Transition Bondholders of such Series in respect of
principal and premium, if any, on the Transition Bonds of such Series and (iii)
the balance, if any, will be transferred to the General Subaccount for
allocation on the next Monthly Allocation Date. See "The Indenture--Allocations
and Payments" in this Prospectus. Amounts applied to a Series as described in
this paragraph will be allocated among the Classes of such Series, if any
(including to the Class Subaccounts, if any, as described in this following
paragraph), as described in the Prospectus Supplement.
On the Business Day preceding each Payment Date, the amounts on deposit in
any Series Subaccount with respect to classes of such Series for which one or
more Class Subaccounts have been established (other than net income or other
gain, which, so long as no Event of Default has occurred and is continuing,
shall be released to the Issuer free of the lien of the Indenture) will be
allocated to the applicable Class Subaccount in accordance with the related
Prospectus Supplement, up to the gross amount, if any, owed to the applicable
counterparty to any hedge or swap transaction entered into by the Issuer
pursuant to the related hedge or swap agreement. On such day, net amounts owed
to such counterparty will be paid from, or net amounts paid by such counterparty
will be deposited into, such Class Subaccount. On the related Payment Date,
amounts in each Class Subaccount will be paid as interest to the holders of the
applicable Class. See "The Indenture -- Allocations and Payments" in this
Prospectus.
All payments to Transition Bondholders of a Series pursuant to clauses (i)
and (ii) of the preceding paragraph shall be made pro rata based on the
respective principal amounts of Transition Bonds of such Series held by such
Transition Bondholders, unless, in the case of a Series comprised of two or more
Classes, the applicable Supplemental Indenture for such Series specifies
otherwise. All payments to Transition Bondholders of a Class pursuant to clause
(i) or (ii) of the preceding paragraph shall be made pro rata based on the
respective principal amounts of Transition Bonds of such Class held by such
Transition Bondholders. If on any Payment Date a counterparty to any hedge or
swap transaction entered into by the Issuer has failed to fully pay amounts due
to the Issuer under the applicable hedge or swap agreement related to a Class of
Transition Bonds for which a Class Subaccount has been established, after all
Series Subaccounts have accessed the Reserve Subaccount as provided for in the
Indenture, the Bond Trustee shall transfer amounts on deposit in the Reserve
Subaccount up to the amount of any applicable shortfall; provided, that the Bond
Trustee shall have received from the Servicer a certificate to the effect that,
based on the Servicer's best assumptions and projections at the time, such
amounts will not be needed to cover shortfalls on any other Class or Series on
any Monthly Allocation Date prior to the next Adjustment Date.
LIQUIDATED DAMAGES
Liquidated Damages will be deposited into the General Subaccount of the
Collection Account as provided in the Sale Agreement and applied on the date
specified by the Issuer for the redemption of the Transition Bonds as a result
of receiving such Liquidated Damages (the "Liquidated Damages Redemption Date"),
which date may not be more than five days after receipt of Liquidated Damages by
the Issuer, in the following amounts and priority:
(i) all amounts owed by the Issuer to the Bond Trustee and the Issuer
Trustee (including legal fees and expenses) shall be paid to the Bond
Trustee and the Issuer Trustee, respectively;
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(ii) the Monthly Servicing Fee or the portion thereof accrued from and
including the immediately preceding Monthly Allocation Date to but
excluding the Liquidated Damages Redemption Date and all unpaid Monthly
Servicing Fees from prior Monthly Allocation Dates shall be paid to the
Servicer;
(iii) all other operating expenses shall be paid to the persons
entitled thereto;
(iv) the redemption price and accrued interest for each Series of
Transition Bonds shall be paid to Transition Bondholders of such Series;
(v) any breakage costs or termination fees due to any counterparty to
any hedge or swap transaction entered into by the Issuer shall be paid to
such counterparty; and
(vi) the balance, if any, will be released to the Issuer, free from
the lien of the Indenture.
REPORTS TO TRANSITION BONDHOLDERS
With respect to each Series of Transition Bonds, on or prior to each
Payment Date, the Bond Trustee will deliver a statement prepared by the Bond
Trustee to each Transition Bondholder of that Series which will include (to the
extent applicable) the following information (and any other information so
specified in the applicable Supplemental Indenture) as to the Transition Bonds
of such Series with respect to such Payment Date or the period since the
previous Payment Date, as applicable:
(i) the amount paid to such Transition Bondholders in respect of
principal;
(ii) the amount paid to such Transition Bondholders in respect of
interest;
(iii) the outstanding principal balance and the amount provided in the
Expected Amortization Schedule, in each case for such Series and as of the
most recent Payment Date;
(iv) the amount on deposit in the Overcollateralization Subaccount and
the Calculated Overcollateralization Level, in each case for all Series and
as of the most recent Payment Date;
(v) the amount on deposit in the Capital Subaccount as of the most
recent Payment Date; and
(vi) the amount, if any, on deposit in the Reserve Subaccount as of
the most recent Payment Date.
MODIFICATION OF INDENTURE
Without the consent of any of the holders of the outstanding Transition
Bonds but with prior notice to the Rating Agencies, the Issuer and the Bond
Trustee may execute a Supplemental Indenture for any of the following purposes:
(i) to correct or amplify the description of the Collateral, or to
better assure, convey and confirm unto the Bond Trustee the Collateral, or
to subject to the lien of the Indenture additional property;
(ii) to evidence the succession, in compliance with the applicable
provisions of the Indenture, of another person to the Issuer, and the
assumption by any such successor of the covenants of the Issuer contained
in the Indenture and in the Transition Bonds;
(iii) to add to the covenants of the Issuer, for the benefit of the
Holders of the Transition Bonds, or to surrender any right or power therein
conferred upon the Issuer;
(iv) to convey, transfer, assign, mortgage or pledge any property to
or with the Bond Trustee;
(v) to cure any ambiguity, to correct or supplement any provision of
the Indenture or in any Supplemental Indenture which may be inconsistent
with any other provision of the Indenture or in any Supplemental Indenture
or to make any other provisions with respect to matters or questions
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arising under the Indenture or in any Supplemental Indenture; provided,
however, that (x) such action shall not, as evidenced by an opinion of
counsel, adversely affect in any material respect the interests of any
Transition Bondholder or any swap or hedge counterparty and (y) the Rating
Agency Condition shall have been satisfied with respect thereto by all
Rating Agencies other than Moody's (however, notice of such action shall be
provided to Moody's);
(vi) to evidence and provide for the acceptance of the appointment
under the Indenture by a successor bond trustee with respect to the
Transition Bonds and to add to or change any of the provisions of the
Indenture as shall be necessary to facilitate the administration of the
trusts under the Indenture by more than one bond trustee, pursuant to
certain requirements of the Indenture;
(vii) to modify, eliminate or add to the provisions of the Indenture
to such extent as shall be necessary to effect the qualification of the
Indenture under the Trust Indenture Act of 1939, as amended, or under any
similar federal statute hereafter enacted and to add to the Indenture such
other provisions as may be expressly required by the Trust Indenture Act of
1939, as amended;
(viii) to set forth the terms of any Series that has not theretofore
been authorized by a Supplemental Indenture; or
(ix) to provide for any hedge or swap transactions with respect to any
floating rate Series or Class of Transition Bonds or any Series or Class
specific credit enhancement; provided, however, that (x) such action shall
not, as evidenced by an opinion of counsel, adversely affect in any
material respect the interests of any Transition Bondholder and (y) the
Rating Agency Condition shall have been satisfied with respect thereto by
all Rating Agencies other than Moody's (however, notice of such action
shall be provided to Moody's).
Additionally, without the consent of any of the Transition Bondholders, the
Issuer and Bond Trustee may execute a Supplemental Indenture to add provisions
to, or change in any manner or eliminate any provisions of, the Indenture, or to
modify in any manner the rights of the Transition Bondholders under the
Indenture; provided, however, that (i) such action shall not, as evidenced by an
opinion of counsel, adversely affect in any material respect the interests of
any Transition Bondholder and (ii) the Rating Agency Condition shall have been
satisfied with respect thereto by all Rating Agencies other than Moody's
(however, notice of such action shall be provided to Moody's).
The Issuer and the Bond Trustee also may, with prior notice to the Rating
Agencies and with the consent of the holders of not less than a majority of the
outstanding amount of the Transition Bonds of each Series or Class to be
affected, execute a Supplemental Indenture for the purpose of adding any
provisions to, or changing in any manner or eliminating of any of the provision
of, the Indenture or modifying in any manner the rights of the Transition
Bondholders under the Indenture; provided, however, that no such Supplemental
Indenture shall, without the consent of the holder of each outstanding
Transition Bond of each Series or Class affected thereby and each swap or hedge
counterparty, if any, affected thereby:
(i) change the date of payment of any installment of principal of or
premium, if any, or interest on any Transition Bond, or reduce the
principal amount thereof, the interest rate specified thereon or the
redemption price or the premium, if any, with respect thereto, change the
provisions of the Indenture and the related applicable Supplemental
Indenture relating to the application of collections on, or the proceeds of
the sale of, the Collateral to payment of principal of or premium, if any,
or interest on the Transition Bonds, or change any place of payment where,
or the coin or currency in which, any Transition Bond or any interest
thereon is payable;
(ii) impair the right to institute suit for the enforcement of certain
provisions of the Indenture regarding payment;
(iii) reduce the percentage of the aggregate amount of the outstanding
Transition Bonds, or of a Series or Class thereof, the consent of the
holders of which is required for any such Supplemental Indenture, or the
consent of the holders of which is required for any waiver of
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compliance with certain provisions of the Indenture or of certain defaults
thereunder and their consequences provided for in the Indenture;
(iv) reduce the percentage of the outstanding amount of the Transition
Bonds required to direct the Bond Trustee to direct the Issuer to sell or
liquidate the Collateral;
(v) modify any provision of the section of the Indenture relating to
the consent of Transition Bondholders with respect to Supplemental
Indentures, except to increase any percentage specified therein or to
provide that certain additional provisions of the Indenture or the Basic
Documents cannot be modified or waived without the consent of the holder of
each outstanding Transition Bond affected thereby;
(vi) modify any of the provisions of the Indenture in such a manner as
to affect the amount of any payment of interest, principal or premium, if
any, payable on any Transition Bond on any Payment Date or to affect the
rights of Transition Bondholders to the benefit of any provisions for the
mandatory redemption of the Transition Bonds contained in the Indenture or
change the redemption dates, Expected Amortization Schedule or Series
Termination Dates or Class Termination Dates of any Transition Bonds;
(vii) decrease the Required Capital Amount with respect to any Series,
the Overcollateralization Amount or the Calculated Overcollateralization
Level with respect to any Payment Date;
(viii) modify or alter the provisions of the Indenture regarding the
voting of Transition Bonds held by the Issuer, the Seller, an affiliate of
either of them or any obligor on the Transition Bonds;
(ix) decrease the percentage of the aggregate principal amount of the
Transition Bonds required to amend the sections of the Indenture which
specify the applicable percentage of the aggregate principal amount of the
Transition Bonds necessary to amend the Indenture or certain other related
agreements; or
(x) permit the creation of any lien ranking prior to or on a parity
with the lien of the Indenture with respect to any of the Collateral for
the Transition Bonds or, except as otherwise permitted or contemplated in
the Indenture, terminate the lien of the Indenture on any property at any
time subject thereto or deprive the holder of any Transition Bond of the
security provided by the lien of the Indenture.
ENFORCEMENT OF THE SALE AGREEMENT AND MASTER SERVICING AGREEMENT
The Indenture will provide that the Issuer will take all lawful actions to
enforce its rights under the Sale Agreement and the Master Servicing Agreement
and to compel or secure the performance and observance by the Seller and the
Servicer of each of their respective obligations to the Issuer under or in
connection with the Sale Agreement and the Master Servicing Agreement. So long
as no Event of Default occurs and is continuing, the Issuer may exercise any and
all rights, remedies, powers and privileges lawfully available to the Issuer
under or in connection with the Sale Agreement and the Master Servicing
Agreement. However, if the Issuer and the Seller or Servicer propose to amend,
modify, waive, supplement, terminate or surrender, or agree to any amendment,
modification, supplement, termination, waiver or surrender of, the process for
adjusting Intangible Transition Charges, the Issuer shall notify the Bond
Trustee and the Bond Trustee shall notify Transition Bondholders of such
proposal and the Bond Trustee shall consent thereto only with the consent of the
holder of each Outstanding Transition Bond of each Series or Class affected
thereby.
If an Event of Default occurs and is continuing, the Bond Trustee may, and,
at the direction of the holders of a majority of the outstanding amount of the
Transition Bonds of all Series shall, exercise all rights, remedies, powers,
privileges and claims of the Issuer against the Seller or the Servicer under or
in connection with the Sale Agreement and the Master Servicing Agreement, and
any right of the Issuer to take such action shall be suspended.
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MODIFICATIONS TO THE SALE AGREEMENT AND THE MASTER SERVICING AGREEMENT
With the consent of the Bond Trustee, the Sale Agreement and the Master
Servicing Agreement may be amended at any time and from time to time, without
the consent of the Transition Bondholders, provided that such amendment shall
not, as evidenced by an officer's certificate, adversely affect the interest of
any Transition Bondholder or change the adjustment process for the Intangible
Transition Charges. The Bond Trustee shall not withhold its consent to such
amendment so long as the Rating Agency Condition is satisfied in connection
therewith by each Rating Agency other than Moody's (and the Issuer shall have
furnished Moody's with written notice of such amendment prior to the
effectiveness thereof) and the foregoing officer's certificate is provided.
No amendment, modification, waiver, supplement, termination or surrender of
the terms of the Sale Agreement or Master Servicing Agreement, or waiver of
timely performance or observance by the Seller or the Servicer under the Sale
Agreement or Master Servicing Agreement, respectively, in each case in such a
way as would adversely affect the interests of Transition Bondholders or the
counterparty to any hedge or swap transaction is permitted nor shall the Bond
Trustee consent thereto. If the Issuer, the Seller or the Servicer shall
otherwise propose to amend, modify, waive, supplement, terminate or surrender,
or agree to any amendment, modification, waiver, supplement, termination or
surrender of the terms of the Sale Agreement or the Master Servicing Agreement
or waive timely performance or observance by the Seller or the Servicer under
the Sale Agreement or Master Servicing Agreement, respectively, the Issuer shall
notify the Bond Trustee and the Bond Trustee shall notify the Transition
Bondholders thereof. The Bond Trustee shall consent thereto only with the
consent of the holders of at least a majority of the outstanding Transition
Bonds of each Series or Class.
The Issuer shall furnish to each of the Rating Agencies (i) prior to the
execution of any such amendment or consent, written notification of the
substance thereof and (ii) promptly after the execution of any such amendment or
consent, a copy thereof.
EVENTS OF DEFAULT; RIGHTS UPON EVENT OF DEFAULT
An "Event of Default" is defined in the Indenture as being:
(i) a default for five days or more in the payment of any interest on
any Transition Bond;
(ii) a default in the payment of the then unpaid principal of any
Transition Bond of any Series on the Series Termination Date for such
Series or, if applicable, any Class on the Class Termination Date for such
Class;
(iii) a default in the payment of the redemption price for any
Transition Bond on the redemption date therefor;
(iv) a default in the observance or performance of any covenant or
agreement of the Issuer made in the Indenture (other than those
specifically dealt with in (i), (ii) or (iii) above) and the continuation
of any such default for a period of thirty days after notice thereof is
given to the Issuer by the Bond Trustee or to the Issuer and the Bond
Trustee by the holders of at least 25% in principal amount of the
Transition Bonds of any Series; and
(v) certain events of bankruptcy, insolvency, receivership or
liquidation of the Issuer.
If an Event of Default occurs and is continuing, the Bond Trustee or
holders of a majority in principal amount of the Transition Bonds of all Series
then outstanding may declare the principal of all Series of the Transition Bonds
to be immediately due and payable. Such declaration may, under certain
circumstances, be rescinded by the holders of a majority in principal amount of
all Series of the Transition Bonds then outstanding.
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
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following an Event of Default other than a default in the payment of any
principal, a default for five days or more in the payment of any interest on any
Transition Bond of any Series or a default on the payment of the price set for
redemption in the related Supplemental Indenture for any Transition Bond on the
date for redemption therefor set in the related Supplemental Indenture unless:
(i) the holders of 100% of the principal amount of all Series of
Transition Bonds consent thereto;
(ii) the proceeds of such sale or liquidation are sufficient to pay in
full the principal of and premium, if any, and accrued interest on the
outstanding Transition Bonds; or
(iii) the Bond Trustee determines that funds provided by the
Collateral would not be sufficient on an ongoing basis to make all payments
on the Transition Bonds of all Series as such payments would have become
due if the Transition Bonds had not been declared due and payable, and the
Bond Trustee obtains the consent of the holders of 66 2/3% of the aggregate
outstanding amount of the Transition Bonds of each Series.
Subject to the provisions of the Indenture relating to the duties of the
Bond Trustee, in case an Event of Default occurs and is continuing, the Bond
Trustee will be under no obligation to exercise any of the rights or powers
under the Indenture at the request or direction of any of the holders of
Transition Bonds of any Series if the Bond Trustee reasonably believes it will
not be adequately indemnified against the costs, expenses and liabilities which
might be incurred by it in complying with such request. Subject to such
provisions for indemnification and certain limitations contained in the
Indenture, the holders of a majority in principal amount of the outstanding
Transition Bonds of all Series will have the right to direct the time, method
and place of conducting any proceeding or any remedy available to the Bond
Trustee; provided that, among other things:
(i) such direction shall not conflict with any rule of law or with the
Indenture;
(ii) subject to certain provisions in the Indenture, any direction to
the Bond Trustee to sell or liquidate the Collateral shall be by the
holders of 100% of the principal amount of all Series of Transition Bonds
then outstanding; and
(iii) the Bond Trustee may take any other action deemed proper by the
Bond Trustee that is not inconsistent with such direction.
The holders of a majority in principal amount of the Transition Bonds of
all Series then outstanding may, in certain cases, waive any default with
respect thereto, except a default in the payment of principal of or premium, if
any, or interest on any of the Transition Bonds or a default in respect of a
covenant or provision of the Indenture that cannot be modified without the
waiver or consent of all of the holders of the outstanding Transition Bonds of
all Series and Classes affected.
No Transition Bondholder of any Series will have the right to institute any
proceeding, judicial or otherwise, or to avail itself of the remedies provided
in Section 2812(d)(3)(v) of the Competition Act, with respect to the Indenture,
unless:
(i) such holder previously has given to the Bond Trustee written
notice of a continuing Event of Default;
(ii) the holders of not less than 25% in principal amount of the
outstanding Transition Bonds of each Series have made written request of
the Bond Trustee to institute such proceeding in its own name as Bond
Trustee;
(iii) such holder or holders have offered the Bond Trustee security or
indemnity reasonably satisfactory to the Bond Trustee against the costs,
expenses, and liabilities to be incurred in complying with such request;
(iv) the Bond Trustee for 60 days after its receipt of such notice,
request and offer has failed to institute such proceeding; and
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(v) no direction inconsistent with such written request has been given
to the Bond Trustee during such 60-day period by the holders of a majority
in principal amount of the outstanding Transition Bonds of all Series.
CERTAIN COVENANTS
The Issuer will keep in effect its existence, rights and franchises as a
statutory business trust under Delaware law, provided that the Issuer may
consolidate with or merge into another entity or sell substantially all of its
assets to another entity and dissolve if:
(i) the entity formed by or surviving such consolidation or merger or
to whom substantially all of such assets are sold is organized under the
laws of the United States or any state thereof and shall expressly assume
by a Supplemental Indenture the due and punctual payment of the principal
of and premium, if any, and interest on all Transition Bonds and the
performance of the Issuer's obligations under the Indenture;
(ii) such entity expressly assumes all obligations and succeeds to all
rights of the Issuer under the Sale Agreement and the Master Servicing
Agreement pursuant to an assignment and assumption agreement executed and
delivered to the Bond Trustee;
(iii) no default or Event of Default will have occurred and be
continuing immediately after giving effect such merger, consolidation or
sale;
(iv) the Rating Agency Condition will have been satisfied with respect
to such consolidation or merger or sale by each Rating Agency, except
Moody's (and the Issuer shall have furnished Moody's with prior written
notice of such consolidation, merger or sale);
(v) the Issuer has received an opinion of counsel to the effect that
such consolidation or merger or sale of assets would have no material
adverse tax consequence to the Issuer or any Transition Bondholder, such
consolidation or merger or sale complies with the Indenture and all
conditions precedent therein provided relating to such consolidation or
merger or sale and will result in the Bond Trustee maintaining a continuing
valid first priority security interest in the Collateral;
(vi) none of the Intangible Transition Property, the QRO or PECO
Energy's, the Seller's, the Servicer's or the Issuer's rights under the
Competition Act or the QRO are impaired thereby; and
(vii) any action that is necessary to maintain the lien and security
interest created by the Indenture will have been taken.
The Issuer will from time to time execute and deliver such documents, make
all filings and take any other action necessary or advisable to, among other
things, maintain and preserve the lien and security interest (and priority
thereof) of the Indenture and will not permit the validity of the Indenture to
be impaired, the lien to be amended, hypothecated, subordinated or terminated or
discharged, or any person to be released from any covenants or obligations
except as expressly permitted by the Indenture, nor will it permit any lien,
charge, excise, claim, security interest, mortgage or other encumbrance, other
than the lien and security interest created by the Indenture, to be created on
or extend to or otherwise arise upon or burden the Collateral or any part
thereof or any interest therein or the proceeds thereof, or permit the lien of
the Indenture not to constitute a continuing valid first priority security
interest in the Collateral.
The Issuer may not, among other things:
(i) except as expressly permitted by the Indenture, the Sale Agreement
or the Master Servicing Agreement sell, transfer, exchange or otherwise
dispose of any of the Collateral unless directed to do so by the Bond
Trustee in accordance with the Indenture; or
(ii) claim any credit on, or make any deduction from the principal or
premium, if any, or interest payable in respect of, the Transition Bonds
(other than amounts properly withheld under the Code), or assert any claim
against any present or former Transition Bondholder because of the payment
of taxes levied or assessed upon the Issuer.
The Issuer may not engage in any business other than purchasing and owning
the Transferred Intangible Transition Property, issuing Transition Bonds from
time to time, pledging its interest in the
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Collateral to the Bond Trustee under the Indenture in order to secure the
Transition Bonds, and performing activities that are necessary, suitable or
convenient to accomplish the foregoing or are incidental thereto.
The Issuer may not issue, incur, assume or guarantee any indebtedness
except for the Transition Bonds or guarantee or otherwise become contingently
liable in connection with the obligations, stocks or dividends of, or own,
purchase, repurchase or acquire (or agree contingently to do so) any stock,
obligations, assets or securities of, or any other interest in, or make any
capital contribution to, any other person. The Issuer may not, except as
contemplated by the Indenture, the Sale Agreement, the Master Servicing
Agreement and certain related documents, including the Trust Agreement, make any
loan or advance or credit to any person. The Issuer will not make any
expenditure (by long-term or operating lease or otherwise) for capital assets
(either realty or personalty) other than Intangible Transition Property
purchased from the Seller pursuant to, and in accordance with, the Sale
Agreement. The Issuer may not make any payments, distributions or dividends to
any holder of beneficial interests in the Issuer in respect of such beneficial
interest, except in accordance with the Indenture.
The Issuer is also obligated to duly and punctually perform all of its
obligations pursuant to any hedge or swap agreement to which it is a party.
Further, the Issuer may not terminate or amend any hedge or swap agreement to
which it is a party while any floating rate Transition Bonds of a Class related
thereto remain outstanding except pursuant to the terms of such hedge or swap
agreement and then only with the consent of holders of a super majority of the
aggregate outstanding amount of such Class.
The Issuer will cause the Servicer to deliver to the Bond Trustee the
Annual Accountant's Report, compliance certificates and monthly reports
regarding distributions and other statements required by the Master Servicing
Agreement. See "The Master Servicing Agreement" in this Prospectus.
LIST OF TRANSITION BONDHOLDERS
Any Transition Bondholder or group of Transition Bondholders (each of whom
has owned a Transition Bond for at least six months) may, by written request to
the Bond Trustee, obtain access to the list of all Transition Bondholders
maintained by the Bond Trustee for the purpose of communicating with other
Transition Bondholders with respect to their rights under the Indenture or the
Transition Bonds. The Bond Trustee may elect not to afford the requesting
Transition Bondholders access to the list of Transition Bondholders if it agrees
to mail the desired communication or proxy, on behalf and at the expense of the
requesting Transition Bondholders, to all Transition Bondholders.
ANNUAL COMPLIANCE STATEMENT
The Issuer will be required to file annually with the Bond Trustee a
written statement as to the fulfillment of its obligations under the Indenture.
In addition, the Issuer shall furnish to the Bond Trustee an opinion of counsel
concerning filings made by the Issuer on an annual basis and before the
effectiveness of any amendment to the Sale Agreement or the Master Servicing
Agreement.
BOND TRUSTEE'S ANNUAL REPORT
If required by the Trust Indenture Act of 1939, as amended, the Bond
Trustee will be required to mail each year to all Transition Bondholders a brief
report relating to, among other things, its eligibility and qualification to
continue as the Bond Trustee under the Indenture, any amounts advanced by it
under the Indenture, the amount, interest rate and maturity date of certain
indebtedness owing by the Issuer to it in the Bond Trustee's individual
capacity, the property and funds physically held by the Bond Trustee as such,
any additional issue of a Series of Transition Bonds not previously reported and
any action taken by it that materially affects the Transition Bonds of any
Series and that has not been previously reported.
SATISFACTION AND DISCHARGE OF INDENTURE
The Indenture will be discharged with respect to the Transition Bonds of
any Series upon the delivery to the Bond Trustee for cancellation of all the
Transition Bonds of such Series or upon the Expected Final Payment Date or the
date of redemption therefor, provided that the Issuer has deposited funds
sufficient for the payment in full of all of the Transition Bonds of such Series
with the Bond
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Trustee and the Issuer has delivered to the Bond Trustee the officer's
certificate and opinion of counsel specified in the Indenture. Such deposited
funds will be segregated and held apart solely for paying such Transition Bonds,
and such Transition Bonds shall not be entitled to any amounts on deposit in the
Collection Account other than amounts on deposit in the Defeasance Subaccount
for such Transition Bonds.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Issuer may, at any time, terminate (i) all of its obligations under the
Indenture with respect to the Transition Bonds of any Series ("Legal Defeasance
Option") or (ii) its obligations to comply with certain covenants, including
certain of the covenants described under "The Indenture--Certain Covenants" (the
"Covenant Defeasance Option"). The Issuer may exercise the Legal Defeasance
Option with respect to any Series of Transition Bonds notwithstanding its prior
exercise of the Covenant Defeasance Option with respect to such Series.
If the Issuer exercises the Legal Defeasance Option with respect to any
Series, such Series of Transition Bonds shall be entitled to payment only from
the funds or other obligations set aside under the Indenture for payment thereof
on the Expected Final Payment Date or redemption date therefor as described
below. Such Series of Transition Bonds shall not be subject to payment through
redemption or acceleration prior to such Expected Final Payment Date or
redemption date, as applicable. If the Issuer exercises the Covenant Defeasance
Option with respect to any Series, the Transition Bonds of such Series may not
be accelerated because of an Event of Default relating to a default in the
observance or performance of any covenant or agreement of the Issuer made in the
Indenture.
The Issuer may exercise the Legal Defeasance Option or the Covenant
Defeasance Option with respect to any Series of Transition Bonds only if:
(i) the Issuer irrevocably deposits or causes to be deposited in trust
with the Bond Trustee cash or U.S. Government Obligations for the payment
of principal of and premium, if any, and interest on such Transition Bonds
to the Expected Final Payment Date or redemption date therefor, as
applicable, such deposit to be made in the Defeasance Subaccount for such
Series of Transition Bonds;
(ii) the Issuer delivers to the Bond Trustee a certificate from a
nationally recognized firm of independent accountants expressing its
opinion that the payments of principal and interest when due and without
reinvestment will provide cash at such times and in such amounts as will be
sufficient to pay in respect of the Transition Bonds of such Series:
(x) principal in accordance with the Expected Amortization Schedule
therefor, or if such Series is to be redeemed, the redemption price of
such redemption on the redemption date therefor, and
(y) interest when due;
(iii) in the case of the Legal Defeasance Option, 95 days pass after
the deposit is made and during the 95-day period no default relating to
events of bankruptcy, insolvency, receivership or liquidation of the Issuer
occurs and is continuing at the end of the period;
(iv) no default has occurred and is continuing on the day of such
deposit and after giving effect thereto;
(v) in the case of the Legal Defeasance Option, the Issuer delivers to
the Bond Trustee an opinion of counsel stating that:
(x) the Issuer has received from, or there has been published by,
the Internal Revenue Service a ruling; or
(y) since the date of execution of the Indenture, there has been a
change in the applicable federal income tax law;
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
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income tax on the same amounts, in the same manner and at the same times as
would have been the case if such Legal Defeasance had not occurred;
(vi) in the case of the Covenant Defeasance Option, the Issuer
delivers to the Bond Trustee an opinion of counsel to the effect that the
holders of the Transition Bonds of such Series will not recognize income,
gain or loss for federal income tax purposes as a result of the exercise of
such Covenant Defeasance Option and will be subject to federal income tax
on the same amounts, in the same manner and at the same times as would have
been the case if such Covenant Defeasance had not occurred; and
(vii) the Issuer delivers to the Bond Trustee a certificate of an
authorized officer of the Issuer and an opinion of counsel, each stating
that all conditions precedent to the satisfaction and discharge of the
Transition Bonds of such Series have been complied with as required by the
Indenture.
There will be no other conditions to the exercise by the Issuer of its
Legal Defeasance Option or its Covenant Defeasance Option.
"U.S. Government Obligations" means direct obligations (or certificates
representing an ownership interest in such obligations) of the United States of
America (including any agency or instrumentality thereof) for the payment of
which the full faith and credit of the United States of America is pledged and
which are not callable at the issuer's option.
THE BOND TRUSTEE
The Bank of New York will be the Bond Trustee under the Indenture. The Bond
Trustee may resign at any time by so notifying the Issuer. The holders of a
majority in principal amount of the Transition Bonds of all Series then
outstanding may remove the Bond Trustee by so notifying the Bond Trustee and may
appoint a successor bond trustee. The Issuer will remove the Bond Trustee if the
Bond Trustee ceases to be eligible to continue as such under the Indenture, the
Bond Trustee becomes insolvent, a receiver or other public officer takes charge
of the Bond Trustee or its property or the Bond Trustee becomes incapable of
acting. If the Bond Trustee resigns or is removed or a vacancy exists in the
office of bond trustee for any reason, the Issuer will be obligated to appoint a
successor bond trustee eligible under the Indenture. Any resignation or removal
of the Bond Trustee and appointment of a successor bond trustee will not become
effective until acceptance of the appointment by a successor bond trustee. The
Issuer is required under the Indenture to provide the Rating Agencies with
written notice of any successor bond trustee.
The Bond Trustee shall at all times satisfy the requirements of the Trust
Indenture Act and have a combined capital and surplus of at least $50 million
and a long term debt rating of "Baa3" or better by Moody's and "BBB-" by Fitch
IBCA (if currently rated by Fitch IBCA). If the Bond Trustee consolidates with,
merges or converts into, or transfers all or substantially all of its corporate
trust business or assets to, another entity, the resulting, surviving or
transferee entity shall without any further action be the successor Bond
Trustee.
GOVERNING LAW
The Indenture will be governed by and construed under the laws of the
Commonwealth of Pennsylvania.
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MATERIAL TAX MATTERS
U.S. FEDERAL INCOME TAX CONSEQUENCES
This summary deals only with initial purchasers of Transition Bonds where
such Transition Bonds are held as capital assets within the meaning of Section
1221 of the Code. It does not address all of the tax consequences that may be
relevant to a particular holder of Transition Bonds in light of the holder's
personal circumstances, or to certain types of holders, such as certain
financial institutions, dealers in securities or commodities, insurance
companies, regulated investment companies, personal holding companies,
corporations subject to the alternative minimum tax, tax-exempt organizations or
persons who hold Transition Bonds as positions in a "straddle" or as part of a
"hedging," "conversion" or "constructive sale" transaction for United States
federal income tax purposes, or persons whose functional currency is not the
United States dollar. This summary is based on the Code, Treasury regulations
thereunder and administrative and judicial interpretations thereof, as of the
date hereof, all of which are subject to change. Prospective purchasers should
particularly note that any such change could have retroactive application to
Transitions Bonds acquired through this offering. This summary also generally
does not address the consequences to Transition Bondholders under state, local
and foreign tax laws or the tax consequences to subsequent holders. Except to
the extent discussed below under "--Taxation of Foreign Transition Bondholders,"
this discussion may not apply to foreign persons who are not subject to United
States federal income tax on a net income basis.
For purposes of the discussion below, "United States Person" means (i) a
citizen or resident of the United States, (ii) a corporation, partnership or
other specified entity created or organized in or under the laws of the United
States, or any state or any political subdivision thereof, (iii) an estate the
net income of which is subject to United States federal income taxation
regardless of its source or (iv) a trust (x) over the administration of which a
court within the United States is able to exercise primary supervision and (y)
all substantial decisions of which one or more United States Persons have the
authority to control, and "Foreign Person" means a person other than a United
States Person.
IT IS RECOMMENDED THAT ALL PROSPECTIVE INVESTORS CONSULT THEIR TAX ADVISERS
REGARDING THE FEDERAL INCOME TAX CONSEQUENCES OF THE OWNERSHIP AND DISPOSITION
OF TRANSITION BONDS IN LIGHT OF THEIR PARTICULAR CIRCUMSTANCES, AS WELL AS THE
EFFECT OF ANY FOREIGN, STATE, LOCAL OR OTHER LAWS.
TAX STATUS OF THE TRUST AND OF THE TRANSITION BONDS
The Issuer is a wholly owned subsidiary of PECO Energy which has not
elected to be taxed as a corporation for federal income tax purposes. Tax
Counsel has advised PECO Energy that, as such, the Issuer will be treated as a
division of PECO Energy and will not, in its opinion, 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 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
In the opinion of Ballard Spahr Andrews & Ingersoll, LLP, special tax
counsel to PECO Energy ("Tax Counsel"), 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
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holder. A Transition Bondholder who uses the accrual method of accounting may be
required to accrue and pay tax on interest income prior to the receipt of such
income. Tax Counsel is of the opinion that the holder of Transition Bonds will
not be required to include in taxable income from the Issuer any original issue
discount ("OID") income, assuming that the Transition Bonds are issued at or
very close to par value. If any Transition Bonds are issued with OID, the
related Prospectus Supplement will describe the material tax consequences of any
such issuance. See "Material Tax Matters" in the Prospectus Supplement.
In the opinion of Tax Counsel, 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 nominal United States federal income tax
rate of (i) 39.6% if the United States Person held the Transition Bond for one
year or less before sale or (ii) 20% if the United States Person held the
Transition Bond for more than one year.
INFORMATION REPORTING AND BACKUP WITHHOLDING
The Bond Trustee or other responsible person will be required to report
annually to the Internal Revenue Service, and to each holder of Transition Bonds
of record, certain information, including the name, address and taxpayer
identification number of the holder, the aggregate amount of principal and
interest paid and the amount of tax withheld, if any. This obligation, however,
does not apply with respect to certain United States Persons, including
corporations, tax-exempt organizations, qualified pension and profit-sharing
trusts and individual retirement accounts.
In the event a United States Person subject to the reporting requirements
described above fails to supply its correct taxpayer identification number in
the manner required by applicable law or underreports 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.
TAXATION OF FOREIGN TRANSITION BONDHOLDERS
In the opinion of Tax Counsel, 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,
105
<PAGE>
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.
Subject to certain transition rules set forth in Internal Revenue Notice
98-16, payments of interest income on the Transition Bonds received by a Foreign
Person after December 31, 1999, will not be subject to United States federal
withholding tax (or to backup withholding and information reporting) provided
that requirements (i) and (ii) of the preceding paragraph are satisfied and, in
general, PECO Energy or its paying agent has received (i) appropriate
documentation to treat the payment as made to a foreign beneficial owner under
Treasury regulations issued under Section 1441 of the Code, (ii) a withholding
certificate from a person claiming to be a foreign partnership and the foreign
partnership has received appropriate documentation to treat the payment as made
to a foreign beneficial owner in accordance with such Treasury regulations,
(iii) a withholding certificate from a person representing to be a "qualified
intermediary" that has assumed primary withholding responsibility under such
Treasury regulations and the qualified intermediary has received appropriate
documentation from a foreign beneficial owner in accordance with its agreement
with the Internal Revenue Service, or (iv) a statement, under penalties of
perjury from an authorized representative of a Financial Institution, stating
that the Financial Institution has received from the beneficial owner a
withholding certificate described in such Treasury regulations or that it has
received a similar statement from another Financial Institution acting on behalf
of the foreign beneficial owner. In general, it will not be necessary for a
Transition Bondholder that is a Foreign Person to obtain or furnish a United
States taxpayer identification number to PECO Energy or its paying agent in
order to claim any of the foregoing exemptions from United States withholding
tax on payments of interest.
Interest paid to a holder of Transition Bonds that is a Foreign Person will
be subject to a United States withholding tax of 30% upon the actual payment of
interest income, except as described above and except where an applicable tax
treaty provides for the reduction or elimination of such withholding tax. A
Transition Bondholder that is a Foreign Person generally will be taxable in the
same manner as a United States corporation or resident with respect to interest
income if such income is effectively connected with the conduct of a trade or
business in the United States. Such effectively connected income received by a
Foreign Person that is a corporation may in certain circumstances be subject to
an additional "branch profits tax" at a 30% rate, or if applicable, a lower
treaty rate.
In the opinion of Tax Counsel, 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.
106
<PAGE>
MATERIAL STATE TAX MATTERS
In the opinion of Tax Counsel, interest from Transition Bonds received by a
person who is not otherwise subject to corporate or personal income or
intangible personal property tax in the Commonwealth will not be subject to such
taxes. Neither the Commonwealth nor any of its political subdivisions presently
impose intangible personal property taxes and therefore Commonwealth residents
will not be subject to such taxes.
ERISA CONSIDERATIONS
ERISA and/or Section 4975 of the Code impose certain requirements on
employee benefit plans and certain other plans and arrangements, including
individual retirement accounts and annuities, Keogh plans and certain collective
investment funds or insurance company general or separate accounts in which such
plans, accounts or arrangements are invested, that are subject to the fiduciary
responsibility and prohibited transaction provisions of ERISA and/or Section
4975 of the Code (collectively, "Plans"), and on persons who are fiduciaries
with respect to Plans, in connection with the investment of assets that are
treated as "plan assets" of any Plan for purposes of applying Title I of ERISA
and Section 4975 of the Code ("Plan Assets"). ERISA imposes on Plan fiduciaries
certain general fiduciary requirements, including those of investment prudence
and diversification and the requirement that a Plan's investments be made in
accordance with the documents governing the Plan. Generally, any person who has
discretionary authority or control respecting the management or disposition of
Plan Assets, and any person who provides investment advice with respect to Plan
Assets for a fee or other consideration, is a fiduciary with respect to such
Plan Assets.
ERISA and Section 4975 of the Code prohibit a broad range of transactions
involving Plan Assets and persons who have certain specified relationships to a
Plan or its Plan Assets ("parties in interest" under ERISA and "disqualified
persons" under the Code (collectively, "Parties in Interest")), unless a
statutory or administrative exemption is available. Parties in Interest and Plan
fiduciaries that participate in a prohibited transaction may be subject to
penalties imposed under ERISA and/or excise taxes imposed pursuant to Section
4975 of the Code, unless a statutory or administrative exemption is available.
These prohibited transactions generally are set forth in Section 406 of ERISA
and Section 4975 of the Code.
Any fiduciary or other Plan investor considering whether to purchase the
Transition Bonds of any Class or Series on behalf of or with Plan Assets of any
Plan should consult with its legal advisors and refer to the related Prospectus
Supplement for guidance regarding the ERISA Considerations applicable to the
Transition Bonds offered thereby.
Certain employee benefit plans, such as governmental plans (as defined in
Section 3(32) of ERISA) and certain church plans (as defined in Section 3(33) of
ERISA), are not subject to the requirements of ERISA or Section 4975 of the
Code. Accordingly, assets of such plans may be invested in the Transition Bonds
of any Class or Series without regard to the ERISA considerations described in
this Section, subject to the provisions of other applicable federal and state
law and subject to the possibility that the applicable Prospectus Supplement
will provide alternate rules as specified in such Prospectus Supplement.
However, any such plan that is qualified and exempt from taxation under Sections
401(a) and 501(a) of the Code is subject to the prohibited transaction rules set
forth in Section 503 of the Code.
107
<PAGE>
PLAN OF DISTRIBUTION
The Transition Bonds of each Series may be sold to or through underwriters
named in the related Prospectus Supplement (the "Underwriters") by a negotiated
firm commitment underwriting and public reoffering by the Underwriters or such
other underwriting arrangement as may be specified in the related Prospectus
Supplement or may be offered or placed either directly or through agents. The
Issuer and the Bond Trustee intend that Transition Bonds will be offered through
such various methods from time to time and that offerings may be made
concurrently through more than one of such methods or that an offering of a
particular Series of Transition Bonds may be made through a combination of such
methods.
The distribution of Transition Bonds may be effected from time to time in
one or more transactions at a fixed price or prices, which may be changed, or at
market prices prevailing at the time of sale, at prices related to such
prevailing market prices or in negotiated transactions or otherwise at varying
prices to be determined at the time of sale.
In connection with the sale of the Transition Bonds, Underwriters or agents
may receive compensation in the form of discounts, concessions or commissions.
Underwriters may sell Transition Bonds to certain dealers at prices less a
concession. Underwriters may allow, and such dealers may reallow, a concession
to certain other dealers. Underwriters, dealers and agents that participate in
the distribution of the Transition Bonds of a Series may be deemed to be
underwriters, and any discounts or commissions received by them from the Issuer
and any profit on the resale of the Transition Bonds by them may be deemed to be
underwriting discounts and commissions under the Securities Act. Any such
Underwriters or agents will be identified, and any such compensation received
from the Issuer will be described, in the related Prospectus Supplement.
Under agreements which may be entered into by the Seller, the Issuer and
the Bond Trustee, Underwriters and agents who participate in the distribution of
the Transition Bonds may be entitled to indemnification by the Seller and the
Issuer against certain liabilities, including under the Securities Act.
The Underwriters may, from time to time, buy and sell Transition Bonds, but
there can be no assurance that an active secondary market will develop and there
is no assurance that any such market, if established will continue.
RATINGS
It is a condition of any Underwriter's obligation to purchase the
Transition Bonds that each Class receive the rating indicated in the related
Prospectus Supplement, which will be in one of the four highest categories, from
at least one Rating Agency.
A security rating is not a recommendation to buy, sell or hold securities
and may be subject to revision or withdrawal at any time by the assigning Rating
Agency. No person is obligated to maintain the rating on any Transition Bonds,
and, accordingly, there can be no assurance that the ratings assigned to any
Class of Transition Bonds upon initial issuance will not be lowered or withdrawn
by a Rating Agency at any time thereafter. If a rating of any Class of
Transition Bonds is revised or withdrawn, the liquidity of such Class of
Transition Bonds may be adversely affected. In general, ratings address credit
risk and do not represent any assessment of any particular rate of principal
payments on the Transition Bonds other than the payment in full of each Series
or Class of Transaction Bonds by the applicable Series Termination Date or Class
Termination Date.
LEGAL MATTERS
Certain legal matters relating to the issuance of the Transition Bonds will
be passed upon for the Issuer by Ballard Spahr Andrews & Ingersoll, LLP,
Philadelphia, Pennsylvania and for the Underwriters by Cravath, Swaine & Moore,
New York, New York. Certain legal matters relating to the Issuer and issuance of
the Transition Bonds under the laws of the State of Delaware will be passed upon
for the Issuer by Richards, Layton & Finger, P.A., Wilmington, Delaware. Certain
legal matters relating to the federal and state tax consequences of the issuance
of the Transition Bonds will be passed upon for the Issuer by Ballard Spahr
Andrews & Ingersoll, LLP.
108
<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.
<TABLE>
<CAPTION>
TERM PAGE
- ---- ----------
<S> <C>
Adjustment Date............................................. 11
Adjustment Request.......................................... 11
Annual Accountant's Report.................................. 86
Basic Documents............................................. 80
Beneficiary Trustees........................................ 67
Bond Rate................................................... 13
Bond Trustee................................................ Cover
Book-Entry Transition Bonds................................. 71
Business Day................................................ 14
Calculated Overcollateralization Level...................... 14
Calculation Date............................................ 11
CAP Program................................................. 59
Capital Subaccount.......................................... 14
Cede........................................................ 3
CEDEL....................................................... 71
CEDEL Participants.......................................... 73
Class....................................................... Cover
Class Subaccount............................................ 14
Class Termination Date...................................... 4
Code........................................................ 24
Collateral.................................................. Cover
Collection Period........................................... 24
Commonwealth................................................ 11
Commonwealth Court.......................................... 43
Competition Act............................................. Cover
Competitive Default Service................................. 46
Competitive Default Supplier................................ 46
Competitive Transition Charges.............................. 43
Cooperative................................................. 73
Covenant Defeasance Option.................................. 102
Customer.................................................... 12
Customer Category........................................... 12
De Minimis Loss Amount...................................... 22
Defeasance Subaccount....................................... 14
Delaware Trustee............................................ 66
Depositaries................................................ 71
DTC......................................................... 3
Eastern District Court...................................... 43
electric distribution companies............................. 7
electric generation suppliers............................... 7
Eligible Institution........................................ 90
</TABLE>
109
<PAGE>
<TABLE>
<CAPTION>
TERM PAGE
- ---- ----------
<S> <C>
Eligible Investments........................................ 90
ERISA....................................................... 24
Euroclear................................................... 71
Euroclear Operator.......................................... 73
Euroclear Participants...................................... 73
Event of Default............................................ 98
Exchange Act................................................ 3
Expected Amortization Schedule.............................. 13
Expected Final Payment Date................................. 21
Final Order................................................. 27
Financial Institution....................................... 105
Financing Issuance.......................................... 89
Fitch IBCA.................................................. 23
Foreign Person.............................................. 104
General Subaccount.......................................... 14
H.R. 1230................................................... 28
Indemnity Amounts........................................... 14
Indenture................................................... 68
Independent Trustee......................................... 66
Initial Intangible Transition Property...................... 76
Initial Loss Calculation Date............................... 22
Initial Transfer Date....................................... 76
Insolvency Laws............................................. 88
Intangible Transition Charges............................... Cover
Intangible Transition Property.............................. Cover
Interest.................................................... 19
Interest Deposit Amounts.................................... 91
Interest Deposit Subaccount................................. 14
IP&L........................................................ 43
Issuer...................................................... Cover
Issuer Trustee.............................................. 8
ITC Collections............................................. 9
Joint Petition.............................................. 43
Legal Defeasance Option..................................... 102
Liquidated Damages.......................................... 21
Liquidated Damages Redemption Date.......................... 94
Loss Amounts................................................ 91
Loss Subaccount............................................. 14
Master Servicing Agreement.................................. Cover
Monthly Allocated Interest Balance.......................... 19
Monthly Allocated Overcollateralization Balance............. 20
Monthly Allocated Principal Balance......................... 19
Monthly Allocation Date..................................... 14
Monthly Servicing Fee....................................... 24
Moody's..................................................... 23
</TABLE>
110
<PAGE>
<TABLE>
<CAPTION>
TERM PAGE
- ---- ----------
<S> <C>
OID......................................................... 105
Other Issuer................................................ 76
Overcollateralization....................................... 19
Overcollateralization Amount................................ 14
Overcollateralization Subaccount............................ 14
Participants................................................ 71
Parties in Interest......................................... 107
Payment Date................................................ 4
PECO Energy................................................. Cover
Percentage.................................................. 76
Plan Assets................................................. 107
Plans....................................................... 107
Principal................................................... 19
Prior Trust Agreement....................................... 66
Pro Rata.................................................... 19
Prospectus Supplement....................................... Cover
PUC......................................................... Cover
PUC Restructuring Order..................................... 43
QRO......................................................... Cover
Qualified Transition Expenses............................... 8
Rate BLI.................................................... 55
Rate Class.................................................. 12
Rate EP..................................................... 55
Rate GS..................................................... 54
Rate HT..................................................... 55
Rate OP..................................................... 54
Rate PD..................................................... 55
Rate POL.................................................... 54
Rate R...................................................... 54
Rate R-H.................................................... 54
Rate SL-E................................................... 55
Rate SL-P................................................... 55
Rate SL-S................................................... 55
Rate TL..................................................... 55
Rating Agency............................................... 4
Rating Agency Condition..................................... 4
Record Date................................................. 13
Refunding Issuance.......................................... 89
Registration Statement...................................... 3
Required Capital Amount..................................... 15
Reserve Subaccount.......................................... 14
Restructuring Plan.......................................... 27
Rules....................................................... 72
S&P......................................................... 23
Sale Agreement.............................................. Cover
SEC......................................................... 3
Securities Act.............................................. 3
Seller...................................................... Cover
Series...................................................... Cover
Series Issuance Date........................................ Cover
Series Subaccount........................................... 14
Series Termination Date..................................... 4
Serviced Intangible Transition Property..................... Cover
Servicer.................................................... Cover
Servicer Defaults........................................... 87
Settlement.................................................. 27
stranded costs.............................................. 7
Subsequent Intangible Transition Property................... 76
</TABLE>
111
<PAGE>
TERM PAGE
- ---- ----------
Subsequent Sale............................................. 76
Subsequent Transfer Date.................................... 76
Successor Servicer.......................................... 88
Supplemental Indenture...................................... 68
Tax Counsel................................................. 104
Terms and Conditions........................................ 73
Transferred Intangible Transition Property.................. Cover
Transition Bondholder....................................... 3
Transition Bonds............................................ Cover
Trust Agreement............................................. 66
Trustees.................................................... 67
U.S. Government Obligations................................. 103
Underwriters................................................ 108
United States Person........................................ 104
Winter Moratorium........................................... 64
112
<PAGE>
PECO ENERGY TRANSITION TRUST
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Report of Independent Accountants........................... F-2
Financial Statements:
Statement of Net Assets Available for
Trust Activities at December 31, 1998.................. F-3
Statement of Changes in Net Assets Available
for Trust Activities from June 23, 1998 (date of
Inception)
to December 31, 1998................................... F-4
Notes to Financial Statements............................. F-5
F-1
<PAGE>
Report of Independent Accountants
To the Trustees
PECO Energy Transition Trust
Wilmington, DE:
In our opinion, the accompanying statement of net assets available for trust
activities of PECO Energy Transition Trust (PETT) and the related statement of
changes in net assets available for trust activities present fairly, in all
material respects, the net assets available for trust activities of PECO Energy
Transition Trust as of December 31, 1998, and the changes in net assets
available for trust activities for the period from June 23, 1998 (date of
Inception) to December 31, 1998, in conformity with generally accepted
accounting principles. 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 of these statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
February 19, 1999
F-2
<PAGE>
PECO ENERGY TRANSITION TRUST
STATEMENT OF NET ASSETS AVAILABLE FOR TRUST ACTIVITIES
DECEMBER 31, 1998
ASSETS
Cash........................................................ $ 5,000
Unamortized debt issuance costs............................. 2,058,476
----------
Total Assets........................................... $2,063,476
==========
LIABILITIES
Due to related party (See Note 4)........................... $1,894,321
Accrued debt issuance cost.................................. 164,155
----------
Total Liabilities...................................... 2,058,476
==========
Net Assets Available for Trust Activities................... $ 5,000
==========
See notes to financial statements.
F-3
<PAGE>
PECO ENERGY TRANSITION TRUST
STATEMENT OF NET ASSETS AVAILABLE FOR TRUST ACTIVITIES
FOR THE PERIOD FROM JUNE 23, 1998 TO DECEMBER 31, 1998
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 June 23, 1998
(date of Inception).................................... --
----------
Net Assets Available for Trust Activities at December 31,
1998................................................... $ 5,000
==========
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
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-bypassable 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
("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
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 the Competition Act.
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.
F-5
<PAGE>
PECO ENERGY TRANSITION TRUST
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
INCOME TAXES
PETT is a wholly owned subsidiary of PECO Energy which has not elected to
be taxed as a corporation for federal income tax purposes. PETT will be treated
as a division of PECO Energy and will not be treated as a separate taxable
entity.
3. THE BONDS
The purpose of PETT is to issue Bonds pursuant to authority granted by the
PUC in the QRO. PETT intends to issue up to $4 billion of 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. To the extent that PETT
issues floating rate Bonds, PETT may arrange for one or more transactions to
hedge its exposure to interest rate risk. 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. Under the Competition Act,
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 the QRO, which charges will be collected from PECO
Energy customers by PECO Energy, as servicer.
ITC collections will be deposited daily by PECO Energy with PETT and used
to pay the expenses of PETT, debt service on the Bonds and to 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, a Reserve
Account and a Capital 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 Agreement and the Master Servicing Agreement to be entered
into by PETT and PECO Energy concurrently with the issuance of the first Series
of Bonds, PECO Energy, the servicer, will be required to manage and administer
the ITP sold to PETT and to collect the ITC related thereto on behalf of PETT.
PETT shall pay an annual servicing fee equal to a percentage, which will be
determined when the Bonds are issued, of the outstanding principal amount of the
Bonds.
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.
5. LITIGATION
Indianapolis Power and Light Company (IPL) has filed an action which seeks
to invalidate the Competition Act and thereby preclude PECO Energy from
recovering and securitizing stranded costs. IPL asserts 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 has sought review of this dismissal by the United States
Supreme Court. PECO Energy does not believe that the United States Supreme Court
will reverse the Opinion of the Commonwealth Court of Pennsylvania.
F-6
<PAGE>
[This Page Intentionally Left Blank]
<PAGE>
PECO ENERGY TRANSITION TRUST
ISSUER
PECO ENERGY COMPANY
SELLER AND SERVICER
SERIES 1999-A
$
TRANSITION BONDS
$ CLASS A-1
$ CLASS A-2
$ CLASS A-3
$ CLASS A-4
$ CLASS A-5
$ CLASS A-6
$ CLASS A-7
------------------------
PROSPECTUS SUPPLEMENT
------------------------
UNDERWRITERS
SALOMON SMITH BARNEY
GOLDMAN, SACHS & CO.
LEHMAN BROTHERS
FIRST CHICAGO CAPITAL MARKETS, INC.
FIRST UNION CAPITAL MARKETS CORP.
COMMERCE CAPITAL MARKETS, INC.
JANNEY MONTGOMERY SCOTT INC.
PRYOR, MCCLENDON, COUNTS & CO., INC.
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED OR INCORPORATED BY REFERENCE
IN THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS. WE HAVE NOT AUTHORIZED ANYONE
TO PROVIDE YOU WITH DIFFERENT INFORMATION.
WE ARE NOT OFFERING THE TRANSITION BONDS IN ANY STATE WHERE THE OFFER IS NOT
PERMITTED.
WE DO NOT CLAIM THE ACCURACY OF THE INFORMATION IN THIS PROSPECTUS SUPPLEMENT
AND THE PROSPECTUS AS OF ANY DATE OTHER THAN THE DATES STATED ON THEIR
RESPECTIVE COVERS.
DEALERS WILL DELIVER A PROSPECTUS SUPPLEMENT AND PROSPECTUS WHEN ACTING AS
UNDERWRITERS OF THESE SECURITIES AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS. IN ADDITION, ALL DEALERS SELLING THESE SECURITIES WILL DELIVER A
PROSPECTUS SUPPLEMENT AND PROSPECTUS UNTIL , 1999.
<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................................................. $1,112,000
Printing and Engraving Expenses.................................. 75,000
Trustees' Fees and Expenses...................................... 26,500
Legal Fees and Expenses.......................................... 2,100,000
Blue Sky Fees and Expenses....................................... 10,000
Accountants' Fees and Expenses................................... 76,000
Rating Agency Fees............................................... 800,000
Miscellaneous Fees and Expenses.................................. 75,000
-----------
Total................................................... $ 4,274,500
===========
Item 15. Indemnification of Directors and Officers.
Section 3817 of the Delaware Business Trust Act (the "Delaware Trust
Act") provides that subject to such standards and restrictions, if any, as are
set forth in the governing instrument of a business trust, a business trust
shall have the power to indemnify and hold harmless any trustee or beneficial
owner or other person from and against any and all claims and demands
whatsoever. The Delaware Trust Act also provides that the absence of a provision
for indemnity in the governing instrument of a business trust shall not be
construed to deprive any trustee or beneficial owner or other person of any
right to indemnify which is otherwise available to such person under the laws of
the State of Delaware.
The Amended and Restated Trust Agreement (the "Trust Agreement") of
PECO Energy Transition Trust (the "Trust") provides that, to the fullest extent
permitted by law, the Trust shall indemnify its trustees against any liability
incurred in connection with any proceeding in which the trustees may be involved
as a party or otherwise by reason of the fact that such trustee is or was
serving in its capacity as a trustee, unless such liability is based on or
arises in connection with the trustee's own willful misconduct or gross
negligence, the failure to perform the obligations set forth in the Trust
Agreement, or taxes, fees or other charges on, based on or measured by any fees,
commissions or compensation received by the trustees in connection with any of
the transactions contemplated by the Trust Agreement and related agreements.
Item 16. Exhibits
Exhibit No. Description
1.1 Form of Underwriting Agreement.*
4.1.1 Trust Agreement for PECO Energy Transition Trust.*
4.1.2 Form of Amended and Restated Trust Agreement for PECO Energy
Transition Trust.*
4.2 Certificate of Trust for PECO Energy Transition
Trust.*
4.3.1 Form of Indenture (supersedes Exhibit 4.3 to Amendment No. 1
to the Issuer's Registration Statement on Form S-3 filed
with the Securities and Exchange Commission on
September 18, 1998).*
4.3.2 Form of Series Supplement.*
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* Previously filed.
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<PAGE>
4.4 Form of Transition Bonds.*
5.1 Opinion of Richards, Layton & Finger, P.A., relating to
legality of the Transition Bonds (supersedes Exhibit 5.1 to
Amendment No. 1 to the Issuer's Registration Statement on
Form S-3 filed with the Securities and Exchange Commission
on September 18, 1998).*
5.2 Opinion of Ballard Spahr Andrews & Ingersoll, LLP, relating
to legality of the Transition Bonds (supersedes Exhibit 5.2
to Amendment No. 2 to the Issuer's Registration Statement on
Form S-3 filed with the Securities and Exchange Commission
on February 22, 1999).*
8.1 Opinion of Ballard Spahr Andrews & Ingersoll, LLP with
respect to material federal and state tax matters
(supersedes Exhibit 8.1 to Amendment No. 1 to the Issuer's
Registration Statement on Form S-3 filed with the Securities
and Exchange Commission on September 18, 1998).*
10.1 Form of Sale Agreement.*
10.2 Form of Master Servicing Agreement.*
10.3 Joint Petition for Full Settlement of PECO Energy Company's
Restructuring Plan and Related Appeals and Application for a
Qualified Rate Order and Application for Transfer of
Generation Assets dated April 29, 1998.*
23.1 Consent of Ballard Spahr Andrews & Ingersoll, LLP (included
in its opinions filed as Exhibit 5.2 and Exhibit 8.1, which
were previously filed).*
23.2 Consent of Richards, Layton & Finger, P.A. (included in its
opinion filed as Exhibit 5.1).*
23.3 Consent of PricewaterhouseCoopers LLP (previously known as
Coopers & Lybrand, L.L.P.).
24.1 Power of Attorney (included on page II-4 of the original
Registration Statement).*
25.1 Statement of Eligibility under the Trust Indenture Act of
1939, as amended, of The Bank of New York, as Bond Trustee
under the Indenture.*
27.1 Financial Data Schedule.*
99.1 Qualified Rate Order issued May 14, 1998.*
99.2 Internal Revenue Service Private Letter Ruling pertaining to
Transition Bonds.*
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* Previously filed.
Item 17. Undertakings
The undersigned Registrant on behalf of the PECO Energy Transition
Trust (the "Trust") hereby undertakes as follows:
(a) (1) to file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement; (i) to include
any prospectus required by Section 10(a)(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.
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<PAGE>
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, as amended, each such post-effective amendment shall be
deemed to be a new Registration Statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering hereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
(b) That, for purposes of determining any liability under the
Securities Act of 1933, as amended, each filing of the Registrant's annual
report pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of
1934, as amended (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of
1934, as amended) with respect to the Trust that is incorporated by reference in
the Registration Statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
(c) That insofar as indemnification for liabilities arising under the
Securities Act of 1933, as amended, may be permitted to directors, officers and
controlling persons of the registrant pursuant to the provisions described under
Item 15 above, or otherwise, the Registrant has been advised that in the opinion
of the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, theretofore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer of
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by 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)(1) 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.
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<PAGE>
INDEX TO EXHIBITS
23.3 Consent of PricewaterhouseCoopers LLP (previously known as
Coopers & Lybrand, L.L.P.)
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
the Registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form S-3 and that the security rating
requirement of Form S-3 will be met by the time of sale, and has duly caused
this Amendment No. 4 of the Registration Statement to be signed on its behalf by
the undersigned, thereunto duly authorized, in the City of Philadelphia,
Commonwealth of Pennsylvania, on March 10, 1999.
PECO ENERGY TRANSITION TRUST
By: /s/ Diana Moy Kelly
------------------------------------
Diana Moy Kelly, Beneficiary Trustee
Pursuant to the requirements of the Securities Act of 1933, this
Amendment No. 4 to the Registration Statement has been signed by the following
persons in the capacities and on the date indicated.
* Beneficiary Trustee March 10, 1999
- ---------------------
* By: /s/ Diana Moy Kelly
-------------------------
Diana Moy Kelly, Beneficiary Trustee
Pursuant to a power of attorney previously held
II-5
PricewaterhouseCoopers LLP Letterhead
PricewaterhouseCoopers LLP
2400 Eleven Penn Center
Philadelphia PA 19103-2962
Telephone (215) 963 8000
Facsimile (215) 963 8700
Exhibit 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in the registration statement of PECO Energy
Transition Trust (PETT) on Amendment No. 4 to Form S-3 (File No. 333-58055) of
our report dated February 19, 1999, on our audit of the financial statements of
PETT as of December 31, 1998 and for the period from June 23, 1998 (date of
Inception) to December 31, 1998.
PricewaterhouseCoopers LLP
March 10, 1999
